VeriSign, Inc. — Q1 2010 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2010, compared with Q1 2009; balance-sheet figures are compared with December 31, 2009. VeriSign operates Internet Infrastructure and Identity Services (3IS), principally domain-name registry and authentication services, and a small Other Services segment. The company reported approximately 99.3 million active .com and .net domain names at quarter-end. Interim results are unaudited and are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2010 | Q1 2009 / comparison |
|---|---|---|
| Revenue | $264.4 million | $253.6 million; up 4% |
| Operating income / margin | $88.7 million / 33.6% | $74.9 million / 29.5% |
| Continuing-operations income attributable to VeriSign stockholders | $52.9 million; diluted EPS $0.29 | $46.8 million; diluted EPS $0.24; income up 13% |
| Net income attributable to VeriSign stockholders | $51.4 million; diluted EPS $0.28 | $65.0 million; diluted EPS $0.34 |
| Cash from operating activities | $101.1 million | $38.4 million |
| Cash and cash equivalents plus marketable securities | $1.550 billion at March 31 | $1.477 billion at December 31, 2009 |
Revenue growth was led by Naming Services: $161.6 million, up 9%. Authentication Services revenue was $101.9 million, down 2%; Other Services revenue was $0.9 million, down 32%. Cost of revenues fell 5% to $59.7 million, while sales and marketing rose 28% to $48.7 million. Research and development fell 6% to $20.4 million, general and administrative fell 10% to $43.8 million, and restructuring charges were $0.4 million versus $4.0 million. The effective tax rate was 34%, compared with 33%.
Total net income declined mainly because discontinued operations contributed a $1.6 million loss in Q1 2010, versus $18.2 million of income in Q1 2009. Q1 2010 discontinued-operations charges reflected adjustments to prior divestiture results, including termination benefits and retained litigation.
Liquidity, debt and capital allocation
- Operating cash flow was $101.1 million. Investing activities used $457.5 million, chiefly reflecting $549.1 million of marketable-security purchases; financing activities used $28.6 million. Cash and cash equivalents decreased by $387.1 million to $1.090 billion, while marketable securities rose to $460.4 million.
- Current assets were $1.743 billion and current liabilities $848.8 million. Deferred revenue totaled approximately $924.0 million, including current and long-term amounts.
- Convertible debentures had a carrying amount of $575.5 million; their disclosed fair value was $1.1 billion. The company reported no borrowings under its $500 million credit facility and $0.9 million of letters of credit outstanding. Management said available cash and expected operating cash flow should cover working capital, capital expenditures and debt service for the next 12 months.
- VeriSign repurchased 2.1 million shares for $50.5 million at an average price of $23.93. $646.7 million remained available under the buyback authorization.
Material changes, outlook and risks
- Management attributed Naming Services growth to a 7% increase in .com and .net names and prior registry-fee increases. A further 7% .com and 10% .net fee increase was scheduled for July 1, 2010. The company expected Naming Services revenue to increase in fiscal 2010 versus 2009, supported by domain growth and these fee increases.
- Management expected Business Authentication and User Authentication revenues to remain approximately consistent with fiscal 2009. Business Authentication certificate count grew 9% to about 1.255 million, but annualized average revenue per certificate fell 9% to $222, reflecting a mix shift toward lower-priced brands. The company expected certificate growth to outpace recognized revenue growth. VeriSign Trust Seal revenue was not expected to be significant in 2010.
- Management expected cost of revenues, sales and marketing, research and development, and general and administrative expenses as a share of revenue to remain consistent with Q1 levels for the remainder of 2010. These are qualitative expectations, not quantified full-year guidance. Management cautioned that the outlook could change with market conditions.
- Key risks include economic weakness and pricing pressure; dependence on .com and .net registry agreements with ICANN and the Department of Commerce, whose renewals were due in 2011 and 2012; competition and possible new domain extensions; cyberattacks, service outages and cryptographic vulnerabilities; and continuing obligations and litigation related to divested businesses. One customer represented 17% of continuing-operations revenue, versus 14% a year earlier.
- Litigation includes the CFIT antitrust case challenging registry-agreement terms, remanded after an appellate reversal; option-grant-related litigation with a settlement preliminarily approved and final approval scheduled for June 2, 2010, for an amount described as not significant; and pending customer indemnity requests associated with SSL patent claims. The filing says outcomes of litigation generally cannot be predicted and losses may be unestimable.
- Management reported disclosure controls and procedures were effective at quarter-end and no material change in internal control over financial reporting during the quarter. The company was evaluating the effects of new revenue-recognition standards effective prospectively for relevant arrangements beginning January 1, 2011.
Important facts for investors to verify
- Whether .com and .net domain growth, July 2010 fee increases, and renewal trends deliver the expected Naming Services growth.
- Whether Authentication Services can stabilize revenue and improve unit revenue as lower-priced certificates grow faster.
- Cash-flow quality and cash deployment: operating cash flow increased substantially, while the quarter’s cash decline largely reflected investment purchases; review the securities portfolio and duration/credit exposure.
- Convertible-debenture obligations, including cash-settlement requirements and the difference between carrying amount and disclosed fair value.
- Developments in ICANN/DOC agreements and the CFIT litigation, as well as final approval of the option-grant settlement and remaining divestiture-related liabilities.