Business context and reporting period
VeriSign, Inc. filed this Form 10-K for the fiscal year ended December 31, 2014. It operates one reportable segment: Registry Services and Network Intelligence and Availability (NIA) Services. Registry Services, primarily .com and .net domain registrations and renewals, generated substantially all revenue; NIA revenue was not significant relative to total revenue. At year-end, the .com and .net domain base was 130.6 million.
Financial performance and position
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Revenue | $1,010.1 million | $965.1 million | +5% |
| Operating income | $564.4 million | $528.2 million | +7% |
| Operating margin | 55.9% | 54.7% | +1.2 percentage points |
| Net income | $355.3 million | $544.5 million | -35% |
| Diluted EPS | $2.52 | $3.49 | -28% |
| Operating cash flow | $600.9 million | $579.4 million | +4% |
Gross profit was $821.7 million, or 81.3% of revenue, versus $778.1 million, or 80.6%, in 2013. Net margin was 35.2%, compared with 56.4% in 2013; the prior-year result included a substantial tax benefit. Interest expense rose to $86.0 million from $74.8 million.
Cash, cash equivalents and marketable securities totaled $1.425 billion at year-end, down from $1.723 billion. Marketable securities were $1.233 billion, primarily short-term U.S. Treasury securities. Cash flow from investing activities was $112.7 million; financing activities used $859.8 million, principally reflecting share repurchases. VeriSign repurchased 16.3 million shares for $867.1 million during 2014. Deferred revenue was $890.4 million.
Debt included $750 million of 4.625% senior notes due 2023 and $1.25 billion principal amount of 3.25% subordinated convertible debentures due 2037; the latter had a $631.2 million balance-sheet carrying amount, including the contingent-interest derivative. The $200 million revolving credit facility was undrawn. About $939 million of cash, cash equivalents and marketable securities was held by foreign subsidiaries and intended to remain indefinitely reinvested; repatriation could trigger additional U.S. tax.
Material changes versus the prior comparable period
- Revenue growth slowed to 5% from 10% in 2013. The domain base grew 3% to 130.6 million, versus 5% growth in 2013; new .com and .net registrations remained 34 million.
- Operating margin improved as operating income rose faster than revenue. Operating expenses increased modestly overall.
- Net income fell despite higher operating income, mainly because 2013 included a $375.3 million tax benefit from a worthless-stock deduction, partly offset by $167.1 million tax expense related to the planned repatriation of foreign cash.
- Cash and marketable securities declined, in large part reflecting substantial buybacks. The company completed a $740.9 million repatriation of foreign cash, net of withholding taxes.
Outlook, commentary, risks and unusual items
Management expected domain-base growth and revenue to continue increasing in 2015, but revenue growth to be slower than in 2014. It expected cost of revenue, sales and marketing, R&D, and general and administrative expenses to remain broadly stable as percentages of revenue. Planned 2015 capital expenditures were $40 million to $50 million, primarily for infrastructure and product enhancements. The annual .net fee increased from $6.18 to $6.79 effective February 1, 2015. Management stated that available liquidity, operating cash flow and potential financing should meet working-capital, capital-expenditure and debt-service needs for the next 12 months.
Notable items include a $26.4 million fourth-quarter 2014 tax expense related to international reorganization and changes in tax estimates. Fourth-quarter net income was $65.5 million, versus $292.1 million in fourth-quarter 2013, which included the large tax benefit. The 2014 full-year effective tax rate was 26%, compared with a negative 19% in 2013. The IRS was examining the 2010–2012 federal returns; the company reported $219.9 million of gross unrecognized tax benefits and said the audit outcome and timing were uncertain.
Key risks include heavy reliance on .com and .net and the renewal and terms of agreements with ICANN and the U.S. Department of Commerce; limits on .com pricing; competition from new gTLDs and alternative Internet navigation; cyberattacks, DDoS events and service interruptions affecting critical DNS infrastructure; and the possibility that foreign cash may not be readily available domestically without tax cost. The company reported domain-name collisions associated with new gTLDs and related security, usability and operational concerns. It also disclosed ongoing litigation and indemnification obligations tied to divested businesses; management did not expect current legal matters to have a material adverse effect. The Symantec indemnification for certain former Authentication Services claims is capped at $50 million, subject to its contractual terms.
Important facts for investors to verify
- Whether domain-base growth and renewal rates sustain the revenue outlook; the third-quarter 2014 renewal rate was 72.0%, versus 72.7% a year earlier.
- How pricing limits and contract renewals affect .com and .net economics, including the .com agreement term through November 2018 and .net term through June 2017.
- The quality and accessibility of liquidity, particularly the $939 million held by foreign subsidiaries, and capacity to meet debt and potential convertible-debt settlement obligations.
- The final tax treatment of the 2013 worthless-stock deduction, the IRS examination, and the effects of foreign tax holidays and the international reorganization.
- Whether share repurchases, potential conversion-related dilution, and the company’s substantial debt remain consistent with its cash-flow and capital-allocation plans.
- Progress, costs and potential liabilities related to new gTLDs, DNS security and stability, and any material developments in litigation or divestiture-related indemnities.