VeriSign, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless stated otherwise. VeriSign operates internet infrastructure and domain-name registry services, principally for .com and .net. Its .com and .net domain-name base was 168.0 million, up 5% year over year and 2.8 million from year-end 2020.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Revenue | $323.6 million | $312.5 million | Up 4%; primarily .com growth |
| Operating income | $210.4 million | $206.3 million | Up 2%; operating margin 65.0% vs. 66.0% |
| Net income | $150.4 million | $334.1 million | Lower largely because Q1 2020 included a substantial tax benefit |
| Diluted EPS | $1.33 | $2.86 | Prior period benefited from the tax item |
| Operating cash flow | $198.3 million | $180.1 million | Higher customer receipts, partly offset by increased payments |
Operating expenses totaled $113.2 million, up 7%. Sales and marketing rose 28% to $8.5 million and research and development rose 17% to $20.3 million; cost of revenue increased 3% to $47.0 million and general and administrative expense increased 2% to $37.5 million. Net margin was 46.5%, compared with 106.9% in Q1 2020, when tax benefits made the comparison unusually favorable. The 2021 effective tax rate was 20%, versus a 75% tax benefit rate in 2020.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $246.8 million and marketable securities were $934.4 million at March 31, 2021, totaling $1.181 billion. The securities were primarily U.S. Treasury obligations, all with maturities under one year.
- Senior notes had $1.791 billion carrying value; principal outstanding was $1.800 billion: $750 million due 2023, $500 million due 2025 and $550 million due 2027. No borrowings were outstanding on the $200 million revolving credit facility.
- Management said available liquidity, operating cash generation and borrowing capacity should cover working capital, capital expenditures and debt service for at least the next 12 months.
- Operating cash flow was $198.3 million; investing activities used $175.2 million, mainly reflecting net purchases of marketable securities; financing activities used $177.3 million, including $172.6 million of share repurchases. Cash, cash equivalents and restricted cash decreased $154.4 million.
- The board authorized an additional $747 million of repurchases in February, bringing program authorization to $1.0 billion. Approximately $910 million remained available at quarter-end. The company repurchased 0.9 million shares at an average $197.02 per share.
Changes, outlook and risks
- Revenue growth was driven mainly by a 5% increase in the .com domain base. New .com and .net registrations were 11.6 million, up from 10.0 million. The final Q4 2020 renewal rate was 73.5%, versus 73.8% for Q4 2019.
- China revenue declined 16% to $25.4 million, attributed to lower new registrations and renewal rates; revenue increased in the other reported regions.
- The .com wholesale fee is scheduled to rise from $7.85 to $8.39 on September 1, 2021. Management expected revenue growth for the remainder of 2021 to remain consistent with Q1, citing domain-base growth and the price increase. It expected expense ratios, interest expense and non-operating income to remain generally consistent with Q1; the expected full-year effective tax rate was 20%–23%.
- COVID-19 had contributed to increased demand for domain names, but management cautioned that future effects on growth and operations were uncertain. Competition from other domains and alternatives to domain names, economic conditions, and changing internet practices may constrain growth.
- Q1 2020 net income included a $167.8 million tax benefit from remeasurement of previously unrecognized tax benefits, along with other tax benefits. Despite IRS written confirmation, 2010–2014 federal returns remained under examination. Q1 2021 non-operating income also fell to $0.4 million from $7.1 million, reflecting lower investment interest and the end of transition-services income.
- Afilias’s .web-related independent review proceeding had closed on April 7, 2021; the panel was expected to issue a decision within 60 days. VeriSign reported no material adverse effect expected from other ordinary-course claims, but litigation may entail expense and management distraction. The company reported no material changes to its risk factors since its 2020 Form 10-K.
Important facts for investors to verify
- Whether .com/.net domain-base growth and renewal rates support management’s 2021 revenue outlook, including the effect of the September .com price increase.
- How China registrations and renewals develop, and whether the reported regional trend persists.
- The outcome and potential consequences of the .web proceeding and the IRS examination of 2010–2014 returns.
- Debt-service needs and liquidity after continued share repurchases; note the large repurchase authorization and quarter-end cash decrease.
- That Q1 2020’s tax benefit materially distorts year-over-year comparisons of net income and EPS.