VeriSign, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Financial amounts are in U.S. dollars; statements report millions except per-share data. VeriSign operates critical internet infrastructure and the .com and .net domain registries. Its domain name base was 173.9 million registrations at quarter-end.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $376.3 million | $356.9 million | $1,112.7 million | $1,055.7 million |
| Operating income | $254.3 million | $236.8 million | $744.3 million | $697.6 million |
| Net income | $188.5 million | $169.5 million | $552.9 million | $494.3 million |
| Diluted EPS | $1.83 | $1.58 | $5.32 | $4.55 |
| Operating margin | 67.6% | 66.3% | 66.9% | 66.1% |
| Net margin | 50.1% | 47.5% | 49.7% | 46.8% |
- Revenue drivers: Revenue rose 5% in both comparison periods. Growth primarily reflected .com price increases effective in September 2022 and September 2023; the increase was partly offset by the transition of the .tv registry to another provider in late 2022. Q3 revenue from China fell 18% year over year; nine-month China revenue fell 10%.
- Costs and other income: Nine-month operating expenses increased 3% to $368.4 million, slower than revenue growth. Interest expense was unchanged at $56.5 million for the nine months. Non-operating income rose to $37.1 million from $6.8 million, primarily because of higher interest income on cash and investments. The effective tax rate was 24% in both nine-month periods.
- Cash flow: Nine-month cash from operations was $649.6 million, versus $614.2 million. Investing activities used $201.5 million, including marketable-security purchases and $40.8 million of property and equipment purchases. Financing activities used $663.5 million, primarily for share repurchases. Cash, cash equivalents and restricted cash declined $216.0 million to $163.0 million.
- Liquidity and debt: Cash and cash equivalents plus marketable securities totaled $943.5 million at September 30, 2023, compared with $980.4 million at year-end 2022. Senior notes had a carrying value of $1,789.6 million; principal outstanding was $1.8 billion, comprising notes due 2025, 2027 and 2031. No borrowings were outstanding on the $200 million revolving credit facility. Management said existing liquidity, operating cash generation and potential financing should cover working capital, capital spending and debt service for the next 12 months and beyond.
- Balance sheet: Total assets were $1,695.9 million and total liabilities were $3,329.3 million, leaving a stockholders’ deficit of $1,633.4 million. Current deferred revenue was $941.4 million and long-term deferred revenue was $320.7 million; these largely reflect advance customer payments for services to be delivered in future periods.
Material changes and capital allocation
- The .com and .net domain base declined 0.1% year over year to 173.9 million and fell 0.5 million from June 30, 2023. The final .com and .net renewal rate for Q2 2023 was 73.4%, compared with 73.8% for Q2 2022; renewal figures are not final until 45 days after quarter-end.
- Share repurchases totaled $675.8 million for the first nine months of 2023, versus $834.0 million a year earlier. VeriSign repurchased 1.1 million shares for $219.9 million in Q3. Its July authorization increased the program to $1.50 billion; approximately $1.34 billion remained available at September 30. Repurchases reduced the share count and contributed to higher EPS.
- VeriSign purchased a Reston, Virginia building for $19.8 million to serve as its future headquarters; construction was ongoing at quarter-end.
- The company renewed its .net Registry Agreement through June 30, 2029. It announced a .net wholesale fee increase from $9.92 to $10.91, effective February 1, 2024. The .com fee increased from $8.97 to $9.59 effective September 1, 2023.
Outlook, risks and contingencies
- The filing provides no quantified earnings or revenue guidance. Management highlighted softer domain-name demand, particularly in China, and said global economic uncertainty and competition may constrain demand. It also cited alternatives such as other top-level domains, social media and other online-presence services.
- Material business risks include cyberattacks and service outages affecting critical internet infrastructure; dependence on ICANN and government agreements and the right to operate .com and .net; regulatory and geopolitical risks, including China; evolving internet practices and competitive alternatives; and litigation, privacy, tax and cybersecurity exposures.
- VeriSign reported various ordinary-course investigations, claims and lawsuits, none of which management believes will have a material adverse effect on financial condition, results or cash flows. It cautioned that litigation outcomes remain uncertain and may entail expense and management distraction.
- Management reported effective disclosure controls as of September 30, 2023, and no material change in internal control over financial reporting during the quarter. The filing reported no significant change in market-risk exposures since December 31, 2022.
Most important facts for investors to verify
- Whether domain-base trends and renewal rates stabilize, especially in China, and how fee increases affect registrations and renewals.
- Whether operating cash flow continues to support debt service, capital investment and substantial share repurchases while liquidity declines.
- Execution and financial impact of the announced .net price increase and the .com and .net contractual and regulatory frameworks.
- Whether higher interest income, which materially boosted non-operating income, persists as rates and investment balances change.
- Developments in cyber resilience, regulatory compliance, litigation and other risks to the uninterrupted operation of critical services.