VeriSign, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. VeriSign provides domain-name registry services and internet infrastructure, primarily for the .com and .net top-level domains.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $306.4 million | $299.3 million | +2% |
| Operating income | $200.3 million | $185.4 million | +8% |
| Operating margin | 65.4% | 62.0% | +3.4 percentage points |
| Net income | $162.5 million | $134.3 million | +21% |
| Net margin | 53.0% | 44.9% | +8.1 percentage points |
| Diluted EPS | $1.35 | $1.09 | +24% |
| Operating cash flow | $187.3 million | $90.0 million | More than doubled |
Basic EPS was $1.36 versus $1.38. The filing attributes the difference in per-share trends in part to the May 2018 settlement of convertible debentures: those potential shares were included in 2018 diluted shares, while basic weighted-average shares also differed substantially between periods. Interest expense fell to $22.6 million from $40.8 million, principally because the debentures were settled. Q1 2019 also included $4.1 million of transition-services income related to the Security Services business.
Cost of revenue declined 5% to $45.5 million; sales and marketing declined 39% to $10.5 million, mainly from lower advertising and marketing and reduced headcount. R&D increased 5% to $16.1 million and G&A increased 3% to $34.0 million. The effective tax rate was 14%, compared with 12%; Q1 2019 benefited from $11.0 million of excess stock-compensation tax benefits.
Liquidity, debt, and capital allocation
At March 31, 2019, cash and cash equivalents were $779.6 million and marketable securities were $473.4 million, totaling $1.253 billion. Treasury securities held at quarter-end had maturities under one year. Operating cash flow was $187.3 million; capital expenditures were $9.1 million. Investing cash flow was $430.7 million, largely reflecting net maturities and sales of marketable securities. Financing cash use was $196.0 million, including $204.3 million of share repurchases.
Senior notes had a carrying value of $1.786 billion and aggregate principal of $1.8 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 12 months. Stockholders’ deficit was $1.406 billion.
The company repurchased 1.0 million shares for $175.0 million during the quarter and ended the period with $891.1 million remaining under its $1.0 billion authorization. It also completed repatriation of $249.0 million of foreign cash, net of withholding taxes; $568.0 million of cash and cash equivalents and marketable securities remained held by foreign subsidiaries.
Business trends, outlook, and risks
- The .com and .net domain-name base was 154.8 million, up 4% year over year and 1.8 million from December 31, 2018. New registrations were 9.8 million versus 9.6 million. The final Q4 2018 renewal rate was 74.3%, compared with 72.2% for Q4 2017.
- Revenue growth primarily reflected .com base growth and the February 2018 .net price increase, partly offset by a 4% decline in the .net base. U.S. revenue rose 4%, China 9%; EMEA declined 2% and other regions 3%.
- Management expected quarterly revenue for the remainder of 2019 to remain consistent with Q1, as .com growth offsets declining Security Services revenue while customer contracts transition to Neustar. It expected cost of revenue, R&D, G&A, and interest expense as a percentage or amount, as applicable, to remain generally consistent with Q1; sales and marketing as a percentage of revenue was expected to increase as more campaigns run.
- Key business risks include dependence on the .com and .net registry agreements and ICANN/DOC terms, competition and changes in domain-name demand, cybersecurity and service interruption risks, evolving privacy and foreign regulations, and substantial indebtedness. The filing notes ongoing discussions with ICANN concerning .com agreement changes following the 2018 Cooperative Agreement amendment; the final terms were not assured.
- Afilias’s arbitration against ICANN concerning the .web auction could potentially affect the .web TLD. VeriSign was not a party but sought to participate as an interested party. Management considered the claims without merit; the filing states that litigation outcomes are inherently uncertain. Other ordinary-course claims and lawsuits were not expected by management to have a material adverse effect.
- Adoption of the new lease standard resulted in an $8.1 million operating lease right-of-use asset and lease liabilities; management said adoption had no material impact on the consolidated financial statements. Disclosure controls were assessed as effective, with no material change in internal control reported.
Most important facts for investors to verify
- Whether .com/.net registration growth and renewal rates support the company’s expectation of stable quarterly revenue through the rest of 2019.
- Progress and final terms of ICANN and DOC agreements, including the permitted .com pricing changes and renewal arrangements.
- The pace and financial effect of the Security Services customer transition to Neustar, including the expected decline in related revenue and transition-services income.
- Cash deployment and leverage: the large repurchase authorization, $1.8 billion of note principal, and management’s stated 12-month liquidity coverage.
- Developments in the .web arbitration and material cybersecurity, regulatory, tax, or litigation events that could affect operations or cash flows.