VeriSign, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. VeriSign operates critical internet infrastructure and registry services, principally for the .com and .net domains. At quarter-end, its domain name base was 162.1 million .com and .net registrations, up 4% year over year.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $314.4 million | $306.3 million | $626.9 million | $612.7 million |
| Operating income | $206.8 million | $201.7 million | $413.0 million | $401.9 million |
| Net income | $152.5 million | $147.5 million | $486.6 million | $310.1 million |
| Diluted EPS | $1.32 | $1.24 | $4.19 | $2.59 |
| Operating margin | 65.8% | 65.9% | 65.9% | 65.6% |
Q2 revenue increased 3% and operating income increased about 3% year over year. Six-month revenue rose 2%. Q2 net margin was 48.5%; six-month net income included a substantial tax benefit, so the year-over-year increase is not indicative of operating growth alone.
- Cash flow: Six-month operating cash flow was $395.4 million, versus $352.2 million in 2019. Investing activities used $174.4 million and financing activities used $421.5 million, including $429.8 million of share repurchases. Cash, cash equivalents and restricted cash totaled $316.1 million at June 30.
- Liquidity and debt: Cash and cash equivalents plus marketable securities totaled $1.195 billion. Senior notes had $1.8 billion principal outstanding, with maturities in 2023, 2025 and 2027. The $200 million revolving credit facility had no borrowings. Management stated available liquidity and operating cash generation should cover needs for at least 12 months.
- Deferred revenue: Current and long-term deferred revenue totaled approximately $1.064 billion, representing remaining performance obligations; substantially all current deferred revenue is expected to be recognized within 12 months.
Material changes and unusual items
- Six-month 2020 income tax included a $167.8 million benefit from remeasurement of previously unrecognized tax benefits related to a 2013 worthless-stock deduction. The six-month effective tax rate was a 27% benefit, compared with a 18% expense rate in 2019.
- Q2 sales and marketing expense declined 28%, primarily due to lower advertising and marketing programs. Research and development expense rose 22%, and general and administrative expense rose 11%.
- Non-operating income fell to $7.4 million in Q2 from $11.4 million, principally reflecting lower interest income and the end of transition-services income; a gain on contingent consideration from the divested security services business partly offset these declines.
- The company repurchased 2.0 million shares for $395.0 million in the first half and had $675.6 million remaining under its $1.0 billion authorization at June 30.
Outlook, commentary and risks
- Management expected revenue growth for the remainder of 2020 to remain consistent with the first-half rate, supported by continued growth in .com registrations. The filing does not provide a specific revenue forecast.
- On July 23, 2020, the company extended its freeze on registry prices, including .com and .net, through March 31, 2021, and extended the waiver of the wholesale restore fee for expired domains through year-end 2020. Management said it expected to implement a .com price increase by October 25, 2021, subject to contractual terms.
- Management reported no material adverse business impact from COVID-19 to date, but emphasized uncertainty around the pandemic, economic conditions, and future domain registration and renewal demand. Most employees were working remotely while critical services continued operating.
- Management expected its 2020 annual effective tax rate to be a net benefit of 2%–5%, reflecting the $167.8 million tax benefit. IRS examinations of 2010–2014 returns remain ongoing; the timing and outcome are uncertain, and unrecognized tax benefits could change.
- Principal risks include reliance on .com and .net agreements and ICANN/DOC oversight, competition and changing internet-use patterns, cybersecurity and service-continuity threats, regulatory and privacy requirements, COVID-19-related economic uncertainty, and the company’s substantial debt. Routine legal proceedings were not expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether domain-base growth, renewal rates and new registrations sustain the revenue outlook; Q2 new registrations were 11.1 million versus 10.3 million a year earlier.
- The eventual IRS audit outcome and whether the one-time tax benefit or related tax positions change.
- The effect of the price freeze and restore-fee waiver on registrations, renewals and future revenue.
- COVID-19 and broader economic effects on customer demand, operations and liquidity.
- Share-repurchase pace, remaining authorization and debt-service requirements.