Business context and reporting period
VeriSign, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2018. Its principal business is operating domain-name registries, particularly .com and .net; Security Services revenue is not significant. The .com and .net domain-name base was 149.7 million at quarter-end, up 4% year over year.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $302.5 million | $288.6 million | $601.7 million | $577.2 million |
| Operating income | $193.0 million | $175.0 million | $378.4 million | $350.2 million |
| Net income | $128.4 million | $123.1 million | $262.6 million | $239.5 million |
| Diluted EPS | $1.04 | $0.99 | $2.13 | $1.93 |
| Operating margin | 63.8% | 60.6% | 62.9% | 60.7% |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $291.8 million | $328.9 million |
First-half revenue rose 4%; operating income rose 8%. First-half net income benefited from a lower effective tax rate (17%, versus 22%), including $12.1 million of Tax Act-related tax benefits and $6.0 million of excess stock-compensation tax benefits and foreign-rate effects. Q2 effective tax rate was 22%. Q2 non-operating income was only $0.7 million, versus $14.0 million a year earlier, when the company recorded a $10.6 million gain on the iDefense sale.
Cash, debt and capital allocation
At June 30, cash and cash equivalents were $256.4 million and marketable securities were $914.9 million, totaling $1.171 billion. The marketable securities were primarily U.S. Treasury securities, all with contractual maturities under one year. First-half cash from operations was $291.8 million; investing activities provided $1.023 billion, largely reflecting securities maturities and sales net of purchases; financing activities used $1.524 billion. Cash, cash equivalents and restricted cash ended the period at $265.7 million.
VeriSign settled its $1.25 billion subordinated convertible debenture principal in cash on May 1, 2018, and issued 26.1 million shares for the conversion value above principal. The settlement generated a $6.6 million extinguishment loss. Remaining senior-note principal was $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. The company repurchased $249.9 million of shares in the first half; $813.3 million remained authorized at quarter-end.
Changes, outlook and risks
- Revenue growth reflected a 5% increase in the .com base and .net fee increases in February 2017 and February 2018, partly offset by a 6% decline in the .net base. The combined .com/.net base rose 4%; 9.6 million new registrations were processed in Q2 versus 9.2 million a year earlier. The finalized Q1 renewal rate was 75.3%, compared with 72.5%.
- Management expected revenue growth for the remainder of 2018 to remain consistent with the first-half rate. It expected quarterly interest expense to decline after the convertible-debenture settlement. Cost of revenue and R&D as a share of revenue were expected to remain broadly consistent; sales and marketing and general and administrative expense ratios were expected to increase slightly.
- The company repatriated $1.15 billion of foreign cash, net of $60.7 million of withholding taxes. Tax accounting for certain Tax Act effects remained provisional; management expected to complete it in Q4 2018.
- Material business risks include dependence on the .com and .net registry agreements, pricing constraints, and the Cooperative Agreement with the U.S. Department of Commerce scheduled to expire November 30, 2018 unless extended. The .com agreement required good-faith negotiations by October 20, 2018. Other stated risks include cybersecurity and service outages, changing domain-name demand and competition, evolving privacy and other regulation, and significant debt.
- Management believed available liquidity, operating cash generation and revolver capacity would be sufficient for working capital, capital expenditures and debt service for at least 12 months. It stated that ordinary-course legal matters were not expected to have a material adverse effect, while noting litigation can entail expense and management distraction.
Key facts for investors to verify
- Progress and outcome of the .com agreement negotiations and any extension or changes to the Cooperative Agreement.
- Subsequent .com/.net registration-base growth and renewal rates, including the effects of .net declines and competition.
- Final Tax Act accounting, cash-tax effects and the reported provisional tax liabilities.
- Cash generation after the convertible-debt settlement, and the balance between senior debt, share repurchases and liquidity.
- Whether forecast revenue and expense trends for the remainder of 2018 were achieved.