VeriSign, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. VeriSign operates domain-name registry services, principally .com and .net; Security Services were not significant to consolidated revenue. Its .com and .net domain-name base was 133.5 million at quarter-end.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $262.5 million | $250.4 million | $521.0 million | $499.2 million |
| Operating income | $149.0 million | $143.1 million | $293.2 million | $282.7 million |
| Operating margin | 57% | 57% | 56% | 57% |
| Net income | $93.0 million | $100.2 million | $181.2 million | $194.6 million |
| Diluted EPS | $0.70 | $0.71 | $1.36 | $1.34 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $307.6 million | $262.7 million |
Q2 basic EPS was $0.80 versus $0.77; net margin was 35% versus 40%. Six-month net margin was 35% versus 39%. Interest expense rose to $28.5 million in Q2 from $21.5 million and to $50.5 million for the first half from $42.9 million, principally reflecting the 2025 notes.
At June 30, cash and cash equivalents were $187.3 million and marketable securities were $1.698 billion, for $1.885 billion combined. Substantially all marketable securities were U.S. Treasury securities with maturities under one year. Total liabilities were $3.565 billion and stockholders’ deficit was $994.3 million. Debt included $750 million principal of 2023 senior notes, $500 million principal of 2025 senior notes, and $1.25 billion principal of subordinated convertible debentures. The $200 million revolving facility had no borrowings outstanding.
Changes versus prior comparable periods
- Revenue increased 5% in Q2 and 4% for the first half. Management attributed growth mainly to a 3% increase in the .com/.net domain base and .net fee increases.
- The domain base grew from 129.5 million to 133.5 million year over year. Q2 net additions were 0.5 million; 8.7 million new .com/.net registrations were processed versus 8.5 million. The first-quarter renewal rate was 73.4% versus 72.6%.
- Operating income increased 4% in both periods, while net income declined 7% in Q2 and 7% for the first half. Higher interest expense, higher Q2 tax expense and first-half non-operating losses contributed; 2014 included a $5.2 million discrete tax benefit.
- First-half operating cash flow increased by $44.9 million. Investing cash flow was a $489.3 million outflow, largely reflecting net purchases of marketable securities; financing cash flow was a $176.7 million inflow, including note proceeds and share repurchases.
- The company issued $500 million of 5.25% senior notes due 2025 and repurchased 5.2 million shares for $315.7 million in the first half. Long-term senior notes increased from $740.2 million to $1.234 billion on the balance sheet.
Outlook, commentary and risks
- Management expected revenue to increase during fiscal 2015, citing continued .com/.net domain-base growth and .net fee increases. It expected domain-base growth to continue, but at a limited rate; it gave no specific full-year revenue or earnings target.
- The .net annual registration fee rose to $6.79 in February 2015; a further increase to $7.46 was announced for February 1, 2016. The .com fee remained $7.85 under the current agreement, subject to limited contractual exceptions.
- Management expected interest expense as a percentage of revenue to increase during the rest of 2015 because of the 2025 notes. It expected the principal operating expense categories as a percentage of revenue to remain generally consistent.
- The subordinated debentures were convertible at holders’ option through September 30, 2015 after the stock-price trigger was met. The company said it intended and had the ability to settle principal in cash based on then-current circumstances, but conversion could require financing or stock settlement and create dilution. A $5.5 million contingent-interest payment was due in August 2015.
- $1.0 billion of cash, cash equivalents and marketable securities was held by foreign subsidiaries and intended to be indefinitely reinvested; repatriation could trigger additional U.S. taxes. Management considered available liquidity and operating cash flows sufficient for working capital, capital expenditures and debt service for at least 12 months.
- Key risks include dependence on .com/.net registry revenue, competition from ccTLDs and new gTLDs, renewal and registration trends, ICANN and government agreements or regulation, cybersecurity and service interruptions, and substantial debt. Management disclosed no significant change in market-risk exposure and said pending legal matters were not expected to have a material adverse effect, while noting litigation outcomes are uncertain.
- Controls and procedures were assessed as effective at June 30, 2015; no material change in internal control over financial reporting was reported for the quarter.
Investor verification checklist
- Track .com/.net registrations, renewal rates, domain-base growth and the effect of .net pricing changes.
- Verify the timing and terms of the August contingent-interest payment and the outcome of the debentures’ conversion window, including any cash, financing or dilution effects.
- Assess the availability of foreign-held liquidity after potential tax costs, alongside debt maturities, interest costs and credit-facility covenant compliance.
- Monitor share repurchases: $760.6 million remained authorized at June 30, and the filing reported additional repurchases through July 22.
- Review developments in new gTLD competition, Internet governance, China licensing requirements, security threats and material litigation or indemnification claims.