VeriSign, Inc. — FY2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing also presents unaudited quarterly results, including the fourth quarter. Unless stated otherwise, financial figures below are for continuing operations; divested businesses are generally reported as discontinued operations.
Business context
VeriSign provides Internet infrastructure services. Its sole reportable segment is Naming Services: Registry Services, which operates the .com, .net, .cc, .tv and .name registries and supports .jobs and .edu, and Network Intelligence and Availability (NIA) services. NIA revenue was not significant. The .com and .net registries are the principal business, with approximately 105.2 million active domain names at year-end.
In August 2010, VeriSign sold its Authentication Services business to Symantec. It also ceased its Content Portal Services business in November, completing its divestiture and wind-down program.
Financial performance and liquidity
| Metric | FY2010 | FY2009 | Change / context |
|---|---|---|---|
| Continuing-operations revenue | $680.6 million | $615.9 million | +10%; domain growth and .com/.net fee increases were key drivers |
| Operating income | $232.3 million | $160.0 million | +45%; operating margin was approximately 34.1%, versus 26.0% |
| Continuing-operations net income | $70.0 million | $91.6 million | Lower, principally reflecting substantially higher interest expense |
| Net income attributable to VeriSign stockholders | $831.0 million | $245.6 million | Includes $760.9 million of discontinued-operations income, largely related to the Authentication Services sale |
| Diluted EPS | $4.64 | $1.28 | Includes the large divestiture gain |
| Operating cash flow | $215.2 million | $395.2 million | Down 46%; affected by contingent interest, taxes and lower consolidated receipts |
| Cash, cash equivalents and marketable securities | $2.061 billion | $1.477 billion | At December 31; excludes restricted cash |
| Convertible debentures | $1.25 billion principal; $581.6 million carrying value | $574.4 million carrying value | 3.25% debentures due 2037; carrying value reflects accounting discount and derivative |
Gross margin on continuing revenue was approximately 77.0%, compared with 72.9% in 2009. Total current assets were $2.178 billion and current liabilities $652.7 million at year-end. VeriSign reported no significant off-balance-sheet arrangements.
Material changes and unusual items
- Revenue increased 10%; .com and .net domain names grew 9% year over year, to 105.2 million. Fees rose July 1, 2010: .com from $6.86 to $7.34 and .net from $4.23 to $4.65.
- Operating expenses fell as a proportion of revenue, while restructuring charges in continuing operations were $16.9 million.
- The Authentication Services sale generated approximately $1.14 billion in cash consideration, net of transferred-subsidiary cash and transaction costs, and a reported gain of $726.2 million net of tax. Total 2010 discontinued-operations income attributable to stockholders was $760.9 million.
- Interest expense rose to $157.7 million from $47.4 million, including $109.1 million of contingent interest triggered by the special dividend.
- VeriSign paid a special dividend of $3.00 per share, totaling $518.2 million, and repurchased 15.7 million shares for $437.7 million. Approximately $1.37 billion remained available under its repurchase authorization at year-end.
- Fourth-quarter revenue was $178.8 million and operating income $67.5 million. The quarter recorded a $40.5 million net loss attributable to stockholders, including the $109.1 million contingent-interest charge.
Outlook, risks and contingencies
- Management expected 2011 revenue to increase, based on continued .com/.net domain growth and the full-year effect of the July 2010 fee increase as registrations renew. It expected cost of revenue and R&D as a share of revenue to remain broadly consistent, sales and marketing as a share to rise slightly, and G&A as a share to decline.
- Planned 2011 capital expenditures were $65–$75 million. Management expected existing liquidity and operating cash generation to cover working capital, capital expenditures, debt service and an intended return of approximately $650 million to stockholders in 2011.
- Project Apollo, announced in 2010 at an estimated cost of approximately $300 million, is intended to expand and strengthen .com infrastructure, including resilience to DDoS attacks. The filing does not provide a clear schedule of annual spending.
- Key business risks include dependence on .com and .net registry revenue, renewal and pricing terms of the .net agreement expiring in June 2011 and .com agreement expiring in November 2012, competition from existing and potential new TLDs, cyberattacks or service interruptions, and changes in Internet use.
- VeriSign disclosed ongoing consumer class-action matters and the CFIT antitrust case. On February 11, 2011, the court dismissed CFIT’s third amended complaint, with leave to amend certain claims; the dismissal did not eliminate all potential further proceedings. Management said it could not reasonably estimate possible losses for the matters described and did not expect the matters under review to materially affect financial condition or results.
- Under its Symantec sale agreement, VeriSign may owe indemnification for certain claims for 60 months after closing: obligations begin after aggregate claims exceed $4 million, cover 50% of qualifying claims thereafter, and are capped at $125 million. The company also retained certain divested-business liabilities and transition-service obligations.
- The filing identifies employee attrition and the transition of corporate functions to Virginia as execution risks. Management reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions.
Most important facts for investors to verify
- Separate recurring continuing-operations earnings and cash generation from the one-time Authentication Services disposal gain and discontinued-business results.
- Confirm .net renewal outcome and the terms and timing of the .com agreement renewal, along with the permitted registry fee increases.
- Track domain growth, renewal rates and the impact of new TLDs on .com/.net demand and pricing.
- Assess the debentures’ $1.25 billion principal, future cash obligations and potential conversion or fundamental-change provisions; distinguish principal from the much lower accounting carrying value.
- Monitor execution and costs of Project Apollo, 2011 capital spending, the planned stockholder return, and transition/restructuring costs.
- Review developments in litigation, Symantec indemnities and retained liabilities, and the company’s ability to sustain service availability and security.