VeriSign, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; quarterly figures below include Q4. VeriSign operates primarily as the registry for .com and .net domains and provides DNS and DDoS security services. Security Services revenue was not significant relative to consolidated revenue. The company sold iDefense on April 1, 2017.
Financial performance
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue | $1,165.1 million | $1,142.2 million | +2% |
| Operating income | $707.7 million | $686.6 million | +3% |
| Net income | $457.2 million | $440.6 million | +4% |
| Diluted EPS | $3.68 | $3.42 | +8% |
| Operating cash flow | $702.8 million | $693.0 million | +1% |
- Operating margin was 60.7%, versus 60.1% in 2016; net margin was 39.2%, versus 38.6%.
- Gross profit was $971.8 million, or an 83.4% gross margin, compared with $943.9 million in 2016.
- Q4 revenue was $295.5 million, operating income $176.4 million, and net income $102.8 million. Q4 diluted EPS was $0.83.
- Cash, cash equivalents and marketable securities totaled $2.415 billion at year-end. Operating cash flow was $702.8 million; investing cash flow was negative $405.1 million and financing cash flow negative $65.1 million.
- Senior notes had $1.8 billion carrying value at year-end. Convertible debentures had $1.25 billion principal outstanding and $627.6 million carrying value; they were classified as current. A $200 million revolving credit facility had no borrowings.
- Deferred revenue was $999.4 million. The balance sheet reported stockholders’ deficit of $1.260 billion.
Changes versus prior period
- Revenue growth reflected a 4% increase in the .com domain base and .net price increases, partly offset by a 5% decline in the .net domain base. Total .com and .net registrations reached 146.4 million, up 3% year over year.
- Growth moderated from 8% revenue growth in 2016. Prior-year revenue benefited from unusually high, episodic registrations through Chinese registrars, many of which did not renew; China revenue fell 16% in 2017.
- Operating margin improved as total costs and expenses declined to 39.3% of revenue from 39.9%. G&A expense rose 10%, including higher legal and compensation costs.
- Interest expense increased to $136.3 million from $115.6 million, partly reflecting the 2027 notes. The lower weighted-average share count supported diluted EPS growth.
- The company repurchased 6.3 million shares for $592.7 million under its program. Operating cash flow rose modestly, while the 2017 senior-note issuance increased debt and cash balances.
Outlook, risks and unusual items
- Management expected revenue to grow in 2018, citing 2017 registration volumes, continued domain-base growth and .net fee increases effective in February 2018. It expected cost of revenue as a percentage of revenue to decline slightly; sales and marketing, R&D, and G&A ratios to remain broadly consistent; and interest expense to decrease. Planned 2018 capital expenditures were $45–55 million.
- The .com annual fee remained capped at $7.85 under current agreements, subject to limited exceptions requiring approval. The .com Registry Agreement runs through November 2024, but the related Cooperative Agreement with the U.S. Department of Commerce was due to expire November 30, 2018 unless extended. Changes or renewal terms are material risks. The .net agreement runs through June 2023.
- The Tax Act drove provisional 2017 tax items: a $186.8 million benefit from remeasuring deferred taxes at the new 21% federal rate, offset by $162.4 million of tax on accumulated foreign earnings and $33.6 million of foreign withholding tax. Management expected a slightly lower effective tax rate in 2018, but higher cash taxes related to repatriation. It planned to repatriate about $1.1 billion, net of withholding taxes, by early Q2 2018; the tax accounting remained provisional.
- On February 15, 2018, VeriSign called its convertible debentures for redemption on May 1, 2018. Holders could convert through April 30; the company intended to pay the $1.25 billion principal in cash and settle excess conversion value in shares. At year-end, the conversion spread could have required up to 25.4 million shares.
- The sale of iDefense generated a reported pre-tax gain of about $10.4 million. The $145 million .web rights deposit remained pending objections, regulatory review and ICANN approval. The DOJ investigation concerning .web was closed in January 2018.
- Key risks include dependence on .com and .net agreements, domain demand and renewal trends, registrar/channel concentration, competition and substitute navigation services, cyberattacks and service interruptions, evolving privacy and other regulation, and significant debt. One customer represented about 31% of revenue; management stated end users could transfer to other customers if it were lost.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective controls as of year-end.
Investor verification priorities
- Track .com and .net registration growth, renewal rates, and the persistence of growth after the unusual China registration spike.
- Review the outcome of the DOC Cooperative Agreement review and negotiations with ICANN, including any effects on .com pricing or operating terms.
- Verify the final Tax Act accounting, repatriation timing and costs, and the resulting cash tax profile.
- Monitor conversion or redemption settlement of the debentures, including cash requirements and actual share dilution.
- Confirm the status and recoverability of the $145 million .web deposit and any related regulatory or contractual developments.
- Assess debt service and capital allocation against cash generation, repurchases, and the announced $1.0 billion repurchase authorization.