Business context and reporting period
VeriSign, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. The company operates critical internet infrastructure and registry services, principally for the .com and .net top-level domains. Its domain name base was 174.3 million at quarter-end.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $351.9 million | $329.4 million | $698.8 million | $653.0 million |
| Operating income | $236.0 million | $213.0 million | $460.8 million | $423.4 million |
| Net income | $167.3 million | $147.7 million | $324.8 million | $298.1 million |
| Diluted EPS | $1.54 | $1.31 | $2.96 | $2.64 |
| Operating margin | 67.1% | 64.7% | 65.9% | 64.8% |
| Net margin | 47.5% | 44.9% | 46.5% | 45.7% |
Revenue rose 7% in both reported comparisons. Operating income increased 11% in Q2 and 9% for the first half. The effective tax rate was 24%, versus 21% in 2021; the increase primarily reflected a higher foreign effective tax rate following an intellectual-property transfer between certain non-U.S. subsidiaries in Q4 2021.
Cash, debt and liquidity
- Six-month operating cash flow was $352.0 million, compared with $340.8 million a year earlier.
- Cash, cash equivalents and marketable securities totaled $996.9 million at June 30, 2022, down from $1.206 billion at December 31, 2021. Cash and equivalents were $606.3 million; marketable securities were $390.6 million.
- Investing activities provided $579.4 million, mainly reflecting net maturities and sales of marketable securities. Financing activities used $547.9 million, primarily for share repurchases.
- Senior notes had a carrying value of $1.787 billion. Principal outstanding comprised $750 million of 2.70% notes due 2031, $550 million of 4.75% notes due 2027, and $500 million of 5.25% notes due 2025. No borrowings were outstanding under the $200 million revolving credit facility.
- Management said available liquidity, operating cash generation and potential financing were sufficient for working capital, capital expenditures and debt service for the next 12 months and beyond.
Material changes and operating trends
- Revenue growth was primarily driven by .com registry activity, a 3% increase in the .com domain name base and the September 2021 .com price increase.
- The combined .com and .net domain name base grew 2% year over year, but declined 0.4 million from March 31, 2022. Q2 new .com and .net registrations fell to 10.1 million from 11.7 million. The final Q1 2022 renewal rate was 75.9%, versus 76.0% a year earlier.
- Management said pandemic-related incremental demand had subsided and cited global economic uncertainty and reduced demand, particularly in China, as factors affecting registrations and renewals. It also identified competition from other domain extensions and alternative online-presence services as constraints on growth.
- The company repurchased 2.9 million shares for an aggregate $545.0 million during the first half; $543.1 million remained authorized at June 30. The board had increased total program authorization to $1.0 billion in February 2022.
Outlook, risks and contingencies
- No numerical earnings or revenue guidance was provided. Effective September 1, 2022, the annual wholesale fee for .com registrations and renewals was scheduled to rise from $8.39 to $8.97. On July 28, 2022, VeriSign announced a .net fee increase from $9.02 to $9.92, effective February 1, 2023.
- Key business risks discussed include weaker domain registration and renewal demand, macroeconomic uncertainty, competition and changing consumer and business internet practices. The company stated there had been no material changes to risk factors since its 2021 Form 10-K.
- In the .web auction dispute, ICANN’s accountability committee requested detailed claim submissions; initial submissions were due July 29, 2022, with replies due August 29, 2022. VeriSign said other ordinary-course investigations and litigation were not expected to have a material adverse effect, while noting litigation can involve expense and management distraction.
- Management reported effective disclosure controls as of June 30, 2022, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether domain-base contraction, fewer new registrations and softer China demand persist, and how renewal rates develop.
- The realized revenue and profitability impact of the announced .com and .net fee increases, subject to applicable agreements and approvals.
- Share repurchase pace and remaining authorization relative to cash generation, liquidity and outstanding debt.
- Developments in the .web arbitration and any effect on the company’s business or financial exposure.
- The ongoing effect of the higher foreign effective tax rate on reported earnings.