Business context and reporting period
VeriSign, Inc. filed this Form 10-K for the fiscal year ended December 31, 2018; quarterly figures below identify the fourth quarter where available. The company primarily operates critical internet infrastructure and .com/.net domain registry services. On December 5, 2018, it sold its Security Services customer contracts to Neustar and expects to support customer transitions through 2019.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $1,215.0 million | $1,165.1 million |
| Operating income | $767.4 million | $707.7 million |
| Net income | $582.5 million | $457.2 million |
| Diluted EPS | $4.75 | $3.68 |
| Operating cash flow | $697.8 million | $702.8 million |
Revenue grew 4.3%; operating income rose 8.4%. Operating margin was 63.2% (60.7% in 2017), and net margin was 47.9% (39.2%). 2018 net income includes a $52.0 million after-tax gain from the Security Services sale. The effective tax rate was 20%, versus 24% in 2017.
Fourth-quarter revenue was $307.5 million, operating income $194.0 million, net income $182.2 million, and diluted EPS $1.50. Versus Q4 2017, revenue increased about 4%, operating income about 10%, and net income about 77%; the Q4 2018 results include the sale gain.
At year-end, cash, cash equivalents and marketable securities totaled $1.270 billion. Senior notes were $1.785 billion; there were no borrowings under the $200 million revolving facility. Operating cash flow was slightly lower year over year. Capital expenditures were $37.0 million. Deferred revenue was $1.018 billion.
Material changes versus the prior period
- The .com/.net domain base grew 4% to 153.0 million; new registrations were 38.2 million versus 36.7 million in 2017. The reported Q3 renewal rate was 74.8%, compared with 74.4% a year earlier.
- Revenue growth reflected .com base expansion and .net wholesale price increases; the annual .net fee rose to $9.02 in February 2018. The .net domain base declined 4%.
- Operating margin improved as sales and marketing expense fell 21%, partly offset by higher R&D expense.
- VeriSign redeemed its $1.25 billion principal amount of convertible debentures in May 2018, paying the principal in cash and issuing 26.1 million shares for the conversion value above principal. Year-end debt consists primarily of senior notes.
- Cash and marketable securities declined from $2.415 billion at 2017 year-end, principally reflecting the debenture settlement. The company repurchased $600 million of shares in 2018.
Outlook, risks and unusual items
Management expected revenue to grow in 2019 from the 2018 registration base and continued growth, partly offset by the Security Services sale. It expected cost of revenue as a percentage of revenue and R&D and G&A ratios to remain broadly consistent, sales and marketing as a percentage of revenue to decrease, interest expense to decline, and non-operating income to decrease as the sale gain does not recur. Planned 2019 capital expenditures were $45–55 million; expected cash income taxes were $95–115 million. Management stated available liquidity and operating cash generation should cover working capital, capital spending, and debt service for the next 12 months.
Amendment 35 to the Cooperative Agreement extended its term through November 2024 and permits the company, subject to agreement with ICANN and incorporation in the .com Registry Agreement, to seek price increases of up to 7% in each of the final four years of each six-year period. Implementation and related ICANN negotiations remain important uncertainties. Key risks include dependence on .com/.net agreements, competition and changing domain-use patterns, cyberattacks or service outages, privacy and regulatory changes, and international operations.
The sale consideration is capped at $120 million and includes contingent consideration tied in part to customer transitions; the company recognized a $54.8 million pretax gain based on estimates that could be adjusted in 2019. The $145 million deposit for .web contractual rights remains subject to objections, regulatory review, and ICANN approval. The filing reports $219.5 million of gross unrecognized tax benefits, including penalties and interest; tax audits could change the amount. The auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether growth in the .com/.net base and renewal rates sustains revenue growth, particularly given the declining .net base.
- Whether ICANN and VeriSign implement the .com pricing provisions permitted by Amendment 35, and on what terms.
- Actual customer transitions and contingent proceeds from Neustar, including any adjustment to the recognized sale gain.
- Cash, debt, share count, and repurchase pace following the convertible-debenture settlement and ongoing buybacks.
- Resolution of the .web rights process and the potential outcome of tax examinations and unrecognized tax positions.