VeriSign, Inc. — Q3 2009 Form 10-Q
Reporting period: Three and nine months ended September 30, 2009; filed November 6, 2009. Financial statements are unaudited. VeriSign’s continuing business centers on Naming Services and Authentication Services; the company is divesting or winding down non-core operations.
Financial performance
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Revenue, continuing operations | $258.0 million | $245.9 million | $769.6 million | $723.2 million |
| Operating income | $75.1 million | $67.2 million | $234.0 million | $78.7 million |
| Operating margin | 29.1% | 27.3% | 30.4% | 10.9% |
| Continuing income attributable to VeriSign common stockholders | $47.4 million | $41.5 million | $137.2 million | $43.1 million |
| Net income (loss) attributable to common stockholders, including discontinued operations | $53.6 million | ($201.1 million) | $153.5 million | ($278.3 million) |
| Diluted EPS, continuing operations | $0.24 | $0.21 | $0.71 | $0.21 |
- Q3 revenue rose 5% year over year; nine-month revenue rose 6%. Naming Services revenue increased 10% in Q3 and 13% year to date; Authentication Services increased 2% and 4%, respectively.
- Q3 operating margin improved to 29.1% from 27.3%. Nine-month operating income and margin increased substantially versus 2008, when restructuring, impairment and other charges were much higher.
- Q3 discontinued operations contributed $6.2 million of income, versus a $242.6 million loss a year earlier; nine-month discontinued operations contributed $16.3 million, versus a $321.5 million loss. The prior-year comparison includes substantial disposal losses, so total net income comparisons are not representative of continuing-business growth alone.
- Cash and cash equivalents were $1.432 billion at September 30, up from $789.1 million at December 31, 2008. Current assets were $1.897 billion and current liabilities $953.5 million.
- For the first nine months, operating cash flow was $222.0 million, down from $363.0 million. Investing cash flow was positive $330.7 million, including $282.2 million of net proceeds from divestitures; financing cash flow was positive $81.7 million. Cash increased by $643.2 million.
- Convertible debentures had a $1.250 billion principal amount and a $571.5 million balance-sheet carrying amount, including the contingent-interest derivative. The company reported no credit-facility borrowings and $1.7 million of letters of credit used against a $50 million limit. The $500 million facility was available.
Material changes and unusual items
- Management attributed improved continuing income chiefly to revenue growth, cost-saving initiatives and lower restructuring, impairment and other charges. Nine-month continuing charges were $15.7 million in 2009 versus $107.3 million in 2008.
- Q3 included a $9.7 million impairment of the .name domain intangible asset after a strategic change in its planned use; the asset was assigned a $2.0 million estimated fair value and a finite useful life.
- During 2009, VeriSign sold Communications Services, MSS, Real-Time Publisher and International Clearing. The Communications Services sale generated a reported $57.3 million loss; other reported sale results included gains on RTP and International Clearing and a loss on MSS. Disposal-group estimates and tax effects affected these amounts.
- After quarter-end, VeriSign sold Global Security Consulting for $4.9 million and Messaging and Mobile Media Services for $174.5 million, subject to working-capital adjustment. It also decided to wind down Content Portal Services by the end of 2010.
- At September 30, assets held for sale were $240.2 million and related liabilities were $41.5 million. Remaining disposal groups included GSC, MMM, Mobile Delivery Gateway and Content Portal Services; iDefense was retained and reclassified to continuing operations.
- VeriSign recorded $71.2 million of income tax expense for continuing operations in the first nine months, versus $7.5 million in 2008, primarily reflecting higher pretax income. A $4.1 million discrete tax benefit arose from California tax-law changes. Gross unrecognized tax benefits were $28.2 million.
- The company held $32.4 million in funds associated with The Reserve at quarter-end, classified in prepaid expenses and other current assets because of the lack of an active market. It received further distributions in October.
- Accounting for convertible debt was retrospectively adjusted upon adoption of FSP APB 14-1. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Outlook, risks and contingencies
- Management expected continued but slowing growth in Business Authentication Services and said User Authentication Services growth was expected to be lower than in 2008. It warned that the economic environment could further slow domain-name growth and authentication revenue growth. No full-year revenue or earnings guidance is provided in the filing.
- Management expected sales and marketing expense to increase slightly as a percentage of revenue in fiscal 2010, mainly from higher advertising and marketing spend; general and administrative expense was expected to decrease slightly as a percentage of revenue as divestitures reduce shared-service costs.
- Management believed cash and operating cash generation would cover working capital, capital spending and debt service for at least 12 months. It cautioned that divestitures depend on buyers, financing and market conditions, and that transition services or indemnification obligations could be more costly or last longer than expected. Excess-facility costs could exceed estimates by $2.7 million over seven years if subleasing assumptions worsen.
- Key business risks include macroeconomic weakness, slowing domain-name growth, price pressure on SSL certificates, competition, security incidents or service interruptions, reliance on ICANN and registry agreements, and possible effects of new domain extensions. The .com and .net registry agreements run through 2012 and 2011, respectively.
- The CFIT antitrust case was remanded after an appellate reversal; VeriSign sought rehearing and said it would defend the claims. The filing also describes shareholder litigation, consumer class actions and an appeal in an Italian matter. VeriSign said it could not predict outcomes; the NetMoneyIN case and a patent declaratory action were settled or dismissed. Potential financial exposure for the unresolved matters is not stated clearly.
- VeriSign reported no significant change in market-risk exposures during the period. It cautioned that debt terms may require cash payments on conversion or repurchase after a fundamental change, and that it may not have sufficient funds or financing in those circumstances.
Important facts for investors to verify
- Whether core Naming and Authentication revenue growth, renewal activity and pricing hold up as management’s expected slowing growth and economic risks develop.
- Cash-flow quality and the extent to which the cash increase depended on divestiture proceeds, tax benefits and recovery of Reserve fund assets.
- Final working-capital adjustments and other closing terms for the post-quarter MMM sale, and the financial and cash costs of remaining divestitures and the CPS wind-down.
- Current carrying value, cash-settlement obligations and refinancing or liquidity implications of the $1.25 billion convertible debentures.
- Developments in the CFIT case and other unresolved litigation, tax examinations and contingent indemnification obligations.