Business context and reporting period
VeriSign, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. The company operates internet infrastructure and registry services, principally for the .com and .net top-level domains. It reported 172.1 million .com and .net registrations at quarter-end, up 5% year over year.
Financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $334.2 million | $317.9 million | $987.3 million | $944.8 million |
| Operating income | $221.3 million | $206.6 million | $644.7 million | $619.7 million |
| Net income | $156.6 million | $171.0 million | $454.7 million | $657.6 million |
| Diluted EPS | $1.40 | $1.49 | $4.04 | $5.68 |
| Operating margin | 66.2% | 65.0% | 65.3% | 65.6% |
For the nine months, operating cash flow was $600.9 million, versus $535.0 million a year earlier. Investing activities used $215.1 million and financing activities used $533.3 million; cash, cash equivalents and restricted cash decreased by $148.1 million. At September 30, cash and cash equivalents were $256.9 million and marketable securities were $941.6 million. Total debt carrying value was $1.785 billion; principal outstanding was $1.8 billion. The company had no borrowings on its $200 million revolving credit facility.
Material changes versus prior comparable period
- Q3 revenue increased 5% and operating income increased 7% year over year. Nine-month revenue rose 4% and operating income rose 4%.
- Net income fell year over year: Q3 effective tax rate was 23%, versus 8% in 2020; the prior-year nine-month comparison included $191.8 million of tax benefits from remeasurement of previously unrecognized tax benefits. The 2021 nine-month effective tax rate was 21%, compared with a 2020 benefit-driven rate of negative 16%.
- The company issued $750 million of 2.700% notes due 2031 and used the proceeds plus cash to redeem $750 million of 4.625% notes due 2023. The redemption generated a $2.1 million debt-extinguishment loss.
- It repurchased 0.8 million shares for $172.4 million in Q3. Nine-month repurchases totaled $536.8 million in the cash flow statement; $565.1 million remained authorized at quarter-end.
- Revenue growth was driven primarily by the .com domain base, up 5%. China revenue declined 10% in Q3 and 14% for the nine months, attributed to lower new registrations and renewal rates.
Outlook, commentary, and risks
- Management expected Q4 revenue to exceed each of the first three quarters of 2021, reflecting continued .com registration growth and the .com wholesale price increase effective September 1, from $7.85 to $8.39.
- Management expected the 2021 annual effective tax rate to be 20%–23%; Q4 interest expense was expected to be consistent with Q3. Cost of revenue, R&D, and G&A as percentages of revenue were expected to remain broadly consistent with the nine-month period; sales and marketing percentage was expected to increase slightly.
- Management said cash, securities, operating cash generation, and available borrowing capacity should meet working-capital, capital expenditure, and debt-service needs for at least 12 months.
- Management noted COVID-19 had supported demand for online presence but that its future effects on domain growth and company results remained uncertain. Other stated growth risks include competition from ccTLDs, other gTLDs and alternative online-presence services, changing user behavior, and economic conditions.
- The IRS examination of federal returns for 2010–2014 remained open despite written confirmations that no adjustments would be proposed on specified reviewed matters. The company reported no material change in risk factors and said ordinary-course legal matters were not expected to have a material adverse effect, while noting litigation may entail costs and management distraction.
Important facts for investors to verify
- Whether the .com price increase and registration trends translate into sustained revenue and domain-base growth; Q3 new registrations were 10.7 million versus 10.9 million a year earlier.
- The durability of renewal performance: the final Q2 2021 .com/.net renewal rate was 75.4%, compared with 72.8% in Q2 2020.
- Net income and EPS comparability, given the substantial 2020 tax benefits, and the status or potential effects of the continuing IRS examination.
- Debt maturity and interest profile after refinancing, and the pace of share repurchases relative to cash generation and liquidity.
- Potential effects of COVID-19, competitive alternatives, and continued weakness in China on registrations, renewals, and future results.