VeriSign, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2020. VeriSign operates critical internet infrastructure and domain-name registry services, principally for .com and .net. At quarter-end, its .com and .net domain base was 160.7 million registrations.
Financial performance
- Revenue: $312.5 million, up 2% from $306.4 million a year earlier. Growth primarily reflected .com and .net registry revenue; the .com base rose 4%, while the .net base declined 3%. New .com and .net registrations were 10.0 million, versus 9.8 million.
- Profitability: Operating income was $206.3 million, up 3% from $200.3 million. Operating margin was 66.0%, compared with 65.4%; cost of revenue was 14.6% of revenue, versus 14.8%.
- Net income and EPS: Net income was $334.1 million versus $162.5 million; diluted EPS was $2.86 versus $1.35. The increase was chiefly driven by a $167.8 million income tax benefit, not comparable operating growth. The reported effective tax rate was a 75% benefit, versus 14% expense.
- Cash flow: Operating cash flow was $180.1 million, down from $187.3 million. Investing activities provided $79.1 million versus $430.7 million, largely reflecting changes in marketable-security maturities and purchases. Financing used $267.3 million, mainly for share repurchases. Cash, cash equivalents and restricted cash decreased $9.5 million to $508.1 million.
- Liquidity and debt: Cash and cash equivalents were $498.7 million and marketable securities $639.9 million, totaling $1.14 billion; Treasury securities held at quarter-end matured in less than one year. Senior notes had $1.8 billion carrying value and $1.8 billion principal outstanding, comprising notes due 2023, 2025 and 2027. No revolving-credit-facility borrowings were outstanding. Stockholders’ deficit was $1.41 billion.
- Capital returns: VeriSign repurchased 1.3 million shares for $245.0 million during the quarter. Approximately $825.6 million remained authorized for repurchases at March 31.
Material changes and unusual items
- Revenue increased $6.1 million year over year. Sales and marketing expense fell 37% to $6.6 million, mainly due to lower advertising and marketing programs. General and administrative expense rose 8% to $36.7 million, partly due to $2.0 million in additional COVID-19-related charitable contributions; research and development expense rose 8% to $17.4 million.
- The $167.8 million tax benefit followed IRS written confirmation that no examination adjustment would be proposed for the 2013 worthless-stock deduction. Federal tax returns for 2010–2014 nevertheless remained under IRS examination, and tax benefits could change.
- VeriSign received $15.2 million of contingent consideration from its divested security-services business; the excess over the recorded receivable was recognized in non-operating income. Transition-services income ended after the agreement expired in February 2020.
- On March 27, VeriSign and ICANN amended the .com Registry Agreement, allowing price increases of up to 7% in each of the final four years of each six-year period. VeriSign separately announced a freeze on registry prices for all its TLDs through year-end 2020.
Outlook, commentary and risks
- Management expected revenue growth for the remainder of 2020 to remain consistent with Q1, driven by continued growth in .com registrations. It expected cost of revenue as a percentage of revenue, R&D expense as a percentage of revenue, and G&A expense as a percentage of revenue to remain broadly consistent with Q1; sales and marketing as a percentage of revenue was expected to increase. Quarterly interest expense was expected to remain consistent, while non-operating income as a percentage of revenue was expected to decline.
- Management forecast a 2020 annual effective tax rate representing a net benefit of 2%–5%, reflecting the Q1 tax benefit. The filing notes that IRS audit outcomes remain uncertain.
- VeriSign said it had not experienced, and did not anticipate, a material COVID-19 impact at the filing date, but emphasized that the pandemic’s duration, economic effects and impact on future domain registrations and renewals were uncertain. It continued operating registry and root services with most employees working remotely.
- Key risks include pandemic-related economic disruption and reduced registration demand; dependence on ICANN and government agreements and renewal terms; competition from ccTLDs and new gTLDs; cybersecurity, DDoS and service-continuity threats to critical infrastructure; regulatory, privacy and data-localization requirements; and substantial debt. Management stated that available liquidity, operating cash generation and borrowing capacity should cover working capital, capital expenditures and debt service for at least 12 months.
- The company reported no significant change in market-risk exposures, effective disclosure controls, and no legal proceedings it believed would materially adversely affect financial condition, results or cash flows.
Important facts for investors to verify
- Whether the IRS examination of 2010–2014 returns changes the recognized $167.8 million tax benefit or subsequent tax-rate outlook.
- Whether COVID-19 and broader economic conditions affect domain registrations, renewal rates and management’s 2020 growth expectations.
- How the .com price-increase terms and the temporary price freeze affect future pricing and revenue.
- Whether the 4% .com base growth, 3% .net base decline and 73.8% final Q4 2019 renewal rate develop as expected.
- Whether share repurchases and debt service remain consistent with liquidity needs; reported debt principal was $1.8 billion against $1.14 billion of cash, cash equivalents and marketable securities.