VeriSign, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing also reports quarterly results, including the quarter ended December 31, 2019. Filed February 14, 2020.
Business context
VeriSign operates critical internet infrastructure, including the .com and .net domain registries, root zone maintenance, and two of the 13 global root servers. It reported one operating segment. Its .com and .net domain-name base reached 158.8 million at year-end, up 4%; it processed 40.3 million new .com and .net registrations in 2019, versus 38.2 million in 2018.
Financial performance
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue | $1,231.7 million | $1,215.0 million | +1% |
| Operating income | $806.1 million | $767.4 million | +5% |
| Operating margin | 65.5% | 63.2% | +2.3 percentage points |
| Net income | $612.3 million | $582.5 million | +5% |
| Diluted EPS | $5.15 | $4.75 | +8% |
| Operating cash flow | $753.9 million | $697.8 million | +8% |
Fourth-quarter 2019 revenue was $310.5 million, operating income $198.6 million, net income $148.3 million, and diluted EPS $1.26. FY 2019 cash and cash equivalents plus marketable securities were $1.218 billion, compared with $1.270 billion a year earlier. Long-term debt was $1.788 billion. The company had no borrowings on its $200 million revolving credit facility. Deferred revenue totaled approximately $1.034 billion.
Changes and capital allocation
- Revenue growth reflected a larger .com base and the .net fee increase effective February 2018; lower security-services revenue during the transition of customer contracts to Neustar partly offset growth.
- Operating expenses fell to 34.5% of revenue from 36.8%, contributing to operating-margin expansion. Lower cost of revenue and sales and marketing expenses were partly offset by higher R&D and general and administrative expenses.
- Operating cash flow increased, primarily from higher customer receipts and lower interest payments, partly offset by higher income-tax payments.
- VeriSign repurchased 3.9 million shares for $738.5 million under its program in 2019. The board authorized a total of up to $1.0 billion in repurchases effective February 6, 2020.
Outlook, risks, and unusual items
- Management expected revenue to grow in 2020, based on registration-base growth, partly offset by the remaining loss of security-services contract revenue. It expected cost of revenue, sales and marketing, R&D, and G&A as percentages of revenue to remain broadly consistent with 2019.
- Planned 2020 capital expenditures were $45–55 million. Management expected a 2020 effective tax rate of 18%–21%; the Swiss tax holiday ended in 2019, partly offset by a lower Swiss statutory rate.
- The .com Registry Agreement’s proposed amendment and a proposed ICANN Letter of Intent were still subject to public comment and final determination. The proposed terms would permit .com price increases of up to 7% in each of the final four years of each six-year period, subject to the agreement’s conditions. The proposed LOI contemplated $20 million of payments to ICANN over five years beginning in 2021.
- Key risks include dependence on .com and .net agreements and renewal approvals, cyberattacks and service outages, regulatory and privacy-law changes, competition and changing internet usage, and substantial debt. Afilias’s challenge concerning the .web auction remained pending; VeriSign had paid $145 million for the contractual rights, which remained recorded as a deposit pending transfer and ICANN approval.
- FY 2018 net income included a $52.0 million after-tax gain from the security-services contract sale, making the prior-year comparison less directly comparable. FY 2019 non-operating income also included $15.6 million of transition-services income.
Most important facts for investors to verify
- Final status and terms of the proposed .com amendment and ICANN Letter of Intent, including timing and conditions for any price increases and payments.
- Subsequent .com and .net registration growth and renewal rates; the final Q3 2019 renewal rate was 73.7%, versus 74.8% a year earlier.
- Progress and financial effects of transferring remaining security-services contracts to Neustar.
- Debt service, repurchase pace, and liquidity relative to the $1.788 billion of debt and planned capital expenditures.
- Outcome of the .web proceeding and resolution of tax uncertainties; gross unrecognized tax benefits were $231.3 million at year-end.
KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.