VeriSign, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This annual filing includes fourth-quarter results but is not a standalone quarterly filing. VeriSign operates domain-name registry and Internet security services; Registry Services, principally .com and .net, generate substantially most revenue. Security Services revenue is not significant to consolidated revenue.
Financial results and liquidity
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $1,059.4 million | $1,010.1 million | +5% |
| Operating income | $605.9 million | $564.4 million | +7% |
| Operating margin | 57.2% | 55.9% | +1.3 percentage points |
| Net income | $375.2 million | $355.3 million | +6% |
| Diluted EPS | $2.82 | $2.52 | +12% |
| Operating cash flow | $651.5 million | $600.9 million | +8% |
| Cash, cash equivalents and marketable securities | $1,915.4 million | $1,424.7 million | +$490.7 million |
Gross profit was $866.6 million, an 81.8% gross margin; net margin was 35.4%. Cash used in investing activities was $496.9 million, principally reflecting net marketable-security purchases, while financing activities used $117.8 million. The company repurchased 9.3 million shares for $621.9 million during 2015 and paid no common-stock dividend.
At year-end, the balance sheet reported $634.3 million of carrying value for the subordinated convertible debentures, including the contingent-interest derivative, and $1,235.4 million of senior notes. Senior notes had $1.25 billion principal outstanding: $750 million due 2023 at 4.625% and $500 million due 2025 at 5.25%. A $200 million revolving facility had no borrowings outstanding. The convertible debentures’ $1.25 billion principal was potentially convertible during Q1 2016; settlement of principal in cash was management’s stated intent and ability, subject to available resources and financing needs.
Of the $1.915 billion in cash and marketable securities, $1.2 billion was held by foreign subsidiaries and intended to remain indefinitely reinvested offshore. Repatriation could require additional U.S. tax. The company stated existing liquidity and operating cash generation should cover working capital, capital expenditure needs and debt service for the next 12 months.
Material changes and fourth-quarter performance
- The .com/.net domain-name base reached 139.8 million, up 6% from 131.5 million at year-end 2014; net additions were 8.3 million. The reported base includes names on hold, with prior periods adjusted for comparison.
- Revenue growth reflected the larger .com/.net base and .net fee increases. .net’s annual fee rose from $6.79 to $7.46 effective February 1, 2016. Growth in registrations accelerated in APAC, particularly through Chinese registrars, in the second half; management said the pace appeared to normalize by year-end.
- FY2015 net income benefited from higher operating income but was affected by increased interest expense ($107.6 million versus $86.0 million) and a $10.7 million non-operating loss, including a $14.1 million unrealized loss on the convertible-debenture derivative.
- FY2014 net income included a $9.8 million non-U.S. tax charge related to an international reorganization and tax-estimate changes. FY2013 net income was unusually high due to a $375.3 million tax benefit from a worthless-stock deduction, partly offset by tax expense related to repatriation; comparisons of net income across years are therefore affected by tax items.
- In Q4 2015, revenue was $272.6 million, operating income $158.3 million, net income $101.5 million and diluted EPS $0.76, versus $255.9 million, $142.2 million, $65.5 million and $0.48, respectively, in Q4 2014. Q4 2015 net income included a $5.1 million pretax derivative remeasurement loss; Q4 2014 included a $26.4 million income-tax expense.
Outlook, commentary and key risks
- Management expected revenue to increase in 2016, citing 2015 registration growth, expected continued domain-base growth and .net fee increases. It expected cost of revenue as a percentage of revenue to decline; sales and marketing, R&D, and general and administrative expenses as a percentage of revenue to remain broadly consistent. Interest expense was expected to rise because 2015 senior notes would incur a full year of interest.
- Planned 2016 property and equipment spending was $40 million–$50 million, mainly for infrastructure upgrades and product enhancements. The filing provides no specific numerical revenue or earnings guidance.
- Registry economics are subject to contract and regulatory constraints. The .com agreement runs through November 30, 2018, and renewal or extension requires U.S. Department of Commerce approval; the .net agreement runs through June 30, 2017. The .com maximum price was generally fixed at $7.85 under current terms, subject to limited exceptions and approval requirements.
- Management identified risks from cyberattacks, large-scale DDoS events and service interruptions affecting critical Internet infrastructure; competition and changes in how users navigate the Internet; domain-name demand and renewal trends; and dependence on registrars. One customer accounted for approximately 31% of revenue in 2015 and 2014, though the company said end users would likely transfer to other customers if it were lost.
- Additional risks include PRC licensing requirements for registry services, uncertainty surrounding the transition of U.S. government oversight of Internet functions and a proposed Root Zone Maintainer agreement, tax examinations and uncertain tax positions, and possible dilution or cash demands from convertible debt. The company reported no legal proceedings in Item 3; the notes describe ordinary-course claims and investigations that management did not expect to have a material adverse effect.
- Management reported effective disclosure controls and internal control over financial reporting; KPMG issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether registration additions and renewal rates remain sustainable after the elevated APAC/China registration activity; the final Q3 2015 renewal rate was 71.9%.
- Progress and approvals for the .com agreement extension and Root Zone Maintainer arrangement, as well as regulatory licensing developments in China.
- Cash availability for U.S. uses, potential repatriation taxes, and the company’s ability to manage debt service and any convertible-debenture conversions.
- The effects of tax audits and uncertain tax positions: approximately $211 million of unrecognized tax benefits, including penalties and interest, could affect tax expense and the effective tax rate.
- The extent to which share repurchases, potential conversion dilution and debt-related costs affect per-share results and financial flexibility.