VeriSign, Inc. — Q3 2012 Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2012; unaudited. VeriSign operates Internet infrastructure services, principally domain-name registry services. The .com and .net registries had 119.9 million active domain names, up 7% year over year; Network Intelligence and Availability services were not significant to consolidated revenue.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $223.5 million | $197.0 million | $643.4 million | $568.3 million |
| Operating income | $116.1 million | $88.9 million | $322.0 million | $236.5 million |
| Net income | $77.9 million | $58.9 million | $214.4 million | $89.1 million |
| Diluted EPS | $0.47 | $0.36 | $1.30 | $0.53 |
| Operating margin | 52% | 44% | 50% | 42% |
- Revenue increased 13% in both comparison periods, primarily from 7% growth in .com/.net domain names and registry fee increases, including the January 2012 price increases.
- Operating income rose 30% in Q3 and 36% for the nine months. Lower restructuring costs and, for the nine-month period, post-divestiture cost savings contributed alongside revenue growth.
- Nine-month operating cash flow was $366.9 million, versus $211.7 million. Cash paid for interest was $40.8 million, down from $140.0 million, largely because 2011 included $100.0 million of contingent interest related to a special dividend.
- Nine-month capital expenditures were $39.9 million. Share repurchases used $231.4 million of cash for the period; $610.3 million remained under the buyback authorization at September 30.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $270.5 million and marketable securities were $1.222 billion, totaling $1.492 billion, compared with $1.346 billion at December 31, 2011. The shift largely reflects purchases of Treasury and other U.S. government securities; $1.2 billion of cash and securities was held by foreign subsidiaries and intended to remain invested abroad.
- Outstanding debt included $1.25 billion principal amount of 3.25% convertible debentures due 2037 and $100 million borrowed under a $200 million credit facility. The debentures’ carrying amount and related derivative were classified as current because holders could convert through December 31, 2012; the debt’s disclosed fair value was $1.9 billion.
- Management said existing liquidity, operating cash generation and potential financing were expected to cover working capital, capital spending and debt service for the next 12 months. If debenture conversions exceed available cash and operating funds, additional financing may be needed; cash settlement is intended, but not assured.
Changes, outlook and significant risks
- Management expected fiscal 2012 revenue to increase from 2011, supported by domain-base growth and the January fee increase. It expected cost of revenue and R&D as a percentage of revenue to remain broadly consistent, and sales and marketing and G&A ratios to decline in the remainder of 2012. These are expectations, not guaranteed results.
- The Department of Commerce had not completed its review of the proposed .com agreement renewal for December 2012–November 2018 and, with the Department of Justice, was reviewing pricing terms. If approval was not completed before the existing agreement expired, the Cooperative Agreement required an extension of six months or another mutually agreed reasonable period. The financial impact was not estimable; pricing limits, changed terms or failure to renew could materially harm results.
- Domain-name growth faced economic weakness in Europe and reported Google search and pay-per-click changes that could reduce registrations and renewals. New gTLD applications and their timing, commercial success and competitive effects were uncertain; VeriSign applied for 14 and had agreements to provide back-end services for approximately 220 applicant gTLDs.
- Debenture conversion creates potential cash needs or dilution if the principal cannot be settled in cash. The filing also identifies substantial dependence on Registry Services, operational and cybersecurity risks, competition, regulatory uncertainty, and risks from international operations and divested-business liabilities.
- Q3 discontinued-operations income of $1.1 million primarily reflected reversal of retained litigation accruals. A $3.2 million Q3 unrealized loss on the debenture contingent-interest derivative was recorded in non-operating results. The Herbert settlement was completed and obligations discharged; a separate shareholder derivative suit challenging compensation-plan disclosures remained pending, with dismissal motions filed.
Important facts for investors to verify
- Whether the Department of Commerce approved or extended the .com agreement, and the final pricing terms and financial effect.
- Actual holder conversion activity and the company’s cash, financing and potential dilution exposure related to the convertible debentures.
- Subsequent .com/.net registration and renewal trends, including effects from economic conditions, search-policy changes and new gTLDs.
- Progress and costs of new gTLD applications and back-end service agreements, and the outcome of the pending derivative litigation.