VeriSign, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. VeriSign operates critical internet infrastructure and provides registry services, principally for the .com and .net top-level domains. Results are unaudited.
Financial results and key metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $306.3 million | $302.5 million | $612.7 million | $601.7 million |
| Operating income | $201.7 million | $193.0 million | $401.9 million | $378.4 million |
| Operating margin | 65.9% | 63.8% | 65.6% | 62.9% |
| Net income | $147.5 million | $128.4 million | $310.1 million | $262.6 million |
| Diluted EPS | $1.24 | $1.04 | $2.59 | $2.13 |
| Operating cash flow | Not separately stated | Not separately stated | $352.2 million | $291.8 million |
Liquidity and debt: At June 30, cash and cash equivalents were $751.6 million and marketable securities were $473.4 million; substantially all debt securities were U.S. Treasury securities maturing within one year. Senior notes had $1.8 billion principal outstanding: $750 million due 2023, $500 million due 2025, and $550 million due 2027. The $200 million revolving credit facility had no borrowings outstanding. Management said available liquidity, operating cash generation, and the revolver should cover working capital, capital expenditures, and debt service for at least 12 months.
Capital allocation: VeriSign repurchased 0.9 million shares for $175.0 million in Q2 and 1.9 million shares for $349.9 million in the first half. Approximately $716.1 million remained authorized for repurchases at quarter-end.
Material changes versus prior comparable periods
- Q2 revenue rose 1% and first-half revenue rose 2%. Growth in .com and .net registry revenue was partly offset by the wind-down and customer transition of Security Services contracts to Neustar.
- The .com/.net domain base reached 156.1 million, up 4% year over year. Q2 new registrations were 10.3 million versus 9.6 million; the final Q1 renewal rate was 75.0% versus 75.3% in Q1 2018.
- Operating income increased 4% in Q2 and 6% in the first half. Lower cost of revenues and sales and marketing expenses contributed; research and development and general and administrative expenses increased.
- First-half interest expense declined to $45.3 million from $69.6 million, primarily because the subordinated convertible debentures were settled in May 2018. Non-operating income included $8.1 million of 2019 transition-services income from Neustar; 2018 included a $6.6 million debt-extinguishment loss.
- Cash from operations increased by $60.4 million year over year. Investing cash inflow was lower, while financing cash outflow was substantially lower than in 2018, which included repayment of the convertible debentures.
Outlook, commentary, and risks
- Management expected revenue to remain consistent in the remainder of 2019 compared with the six months ended June 30, 2019, with .com growth offset by declining Security Services revenue as contracts transition to Neustar.
- For the remainder of 2019, management expected cost of revenues as a percentage of revenue to increase slightly due to infrastructure projects; sales and marketing and general and administrative expense ratios to increase slightly; and research and development and interest expense to remain consistent.
- Growth may be constrained by competition from country-code and new generic TLDs, changing internet-use patterns, economic conditions, and renewal and registration trends. The company’s .com and .net operations are also exposed to ICANN and government agreement terms, pricing restrictions, renewal conditions, and potential policy changes.
- Other principal risks include cyberattacks, DDoS attacks, service outages, privacy and data regulation, international regulatory developments, and substantial indebtedness. The filing reported no significant change in market-risk exposures since year-end.
- VeriSign described Afilias’s arbitration challenging ICANN’s handling of the .web auction. VeriSign was not a party but sought to participate as an interested party; the company said it believed the claims were without merit, while noting that another party could potentially become .web operator.
- Ordinary-course investigations, claims, and lawsuits were disclosed; management did not expect them to have a material adverse effect, but stated litigation outcomes cannot be assured. Adoption of lease accounting in 2019 had no material financial-statement impact.
Important facts for investors to verify
- Track .com and .net registration-base growth, renewal rates, and new registrations, particularly against competitive and changing consumer-behavior pressures.
- Monitor the transition of remaining Security Services customers to Neustar and the related revenue and transition-services income.
- Review the terms and outcomes of ICANN and Department of Commerce discussions affecting the .com Registry Agreement, including permitted pricing changes and renewal conditions.
- Assess the pace of share repurchases against cash generation, the $716.1 million remaining authorization, and $1.8 billion of senior-note principal.
- Follow the .web arbitration and developments in cybersecurity, service reliability, privacy regulation, and international compliance.