VeriSign, Inc. — FY2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. Although the request references 2009 Q4, this is an annual filing; fourth-quarter figures are identified separately below. VeriSign’s core businesses are Naming Services and Authentication Services, reported together as Internet Infrastructure and Identity Services (3IS).
Financial performance
| Metric | FY2009 | FY2008 | Change / context |
|---|---|---|---|
| Continuing-operations revenue | $1,030.6 million | $964.7 million | Up 7% |
| Operating income | $313.7 million | $63.6 million | Operating margin rose to about 30.4% from 6.6% |
| Income from continuing operations attributable to common stockholders | $197.5 million | $85.4 million | Continuing-operations diluted EPS was $1.03 versus $0.43 |
| Net income (loss) attributable to common stockholders | $245.6 million | $(374.3) million | FY2009 included $48.1 million income from discontinued operations; FY2008 included a $459.6 million discontinued-operations loss |
| Operating cash flow | $395.2 million | $484.0 million | Down about 18% |
| Cash and cash equivalents at year-end | $1,477.2 million | $789.1 million | Increased by $688.1 million during 2009 |
| Convertible debentures, carrying amount including derivative | $574.4 million | $568.7 million | $1.25 billion principal; quoted fair value was about $1.1 billion |
Cost of revenues was $245.9 million, implying a gross margin of approximately 76.1%. Total assets were $2.47 billion, total liabilities $1.87 billion, and stockholders’ equity $598.7 million. Current assets of $1.71 billion compared with current liabilities of $886.5 million. The company reported no borrowings under its $500 million revolving credit facility, with $1.7 million of letters of credit outstanding. Interest paid on the debentures was $40.6 million.
Segments and fourth quarter
- 3IS revenue was $1,026.0 million, up 8%; Naming Services contributed $615.9 million, up 12%, and Authentication Services $410.1 million, up 3%.
- Other Services revenue was $4.6 million, down 73%, reflecting the non-core business exits and lower CPS activity.
- Active .com and .net domains reached 96.7 million, up 7% from 90.4 million. The SSL certificate installed base rose 9% to about 1.223 million, while annualized average revenue per certificate fell 8% to $228.
- In Q4 2009, continuing-operations revenue was $262.7 million, operating income $82.5 million, and income attributable to common stockholders $62.3 million, or $0.33 per diluted share. Q4 2008 revenue was $248.8 million and operating results were a loss of $5.1 million; quarterly comparisons reflect the filing’s revised discontinued-operations classifications.
Material changes and notable items
- Revenue grew primarily from Naming Services: domain-base expansion and the October 2008 .com and .net fee increases. Authentication growth was modest, and the SSL mix shifted toward lower-priced GeoTrust and thawte certificates.
- Operating income improved substantially as costs and expenses fell to 70% of revenue from 93%. FY2009 benefited from lower restructuring and impairment charges and cost-saving initiatives; FY2008 included a $77.6 million goodwill impairment, $31.2 million of continuing-operations restructuring charges, and a $79.1 million loss on the Mountain View property sale.
- VeriSign substantially completed its non-core divestiture program in 2009. It reported $477.4 million of aggregate net cash consideration and $35.2 million of aggregate gains on 2009 divestitures. The CPS business was retained for wind-down, expected by the end of 2010; Pre-pay was wound down in October 2009. Results and prior periods were reclassified, so comparability requires care.
- Cash from investing activities was $484.5 million, including $469.4 million of net cash proceeds from divestitures. The company repurchased 11.3 million shares for $252.8 million at an average $22.31 per share; $697.2 million remained authorized at year-end. No cash dividend was anticipated.
- Funds held in the Reserve Primary and International funds were $20.9 million at year-end, after 2009 distributions totaling $129.5 million. A further $8.4 million distribution arrived in January 2010; $12.5 million remained in the funds as of February 26, 2010.
Outlook, risks and contingencies
- Management expected continued improvement in Naming Services revenue growth in 2010, supported by Internet growth and announced fee increases effective July 1, 2010: .com from $6.86 to $7.34 and .net from $4.23 to $4.65. Further permitted increases were described under the existing agreements.
- Management expected 2010 SSL certificate issuance to grow faster than related revenue and Business Authentication revenue to remain consistent with 2009. User Authentication revenue was expected to grow, primarily through managed PKI. Trust Seal revenue was not expected to be significant in 2010.
- Planned 2010 property and equipment expenditures were $65–$85 million. Management expected sales and marketing expense to rise as a percentage of revenue, mainly from advertising, and G&A expense to decline as a percentage of revenue. It said cash, operating cash generation and available financing should cover working capital, capital spending and debt service for the next 12 months.
- Key business risks include dependence on ICANN and Department of Commerce agreements for .com and .net registry operations; .net renewal in 2011 and .com renewal in 2012; new gTLD competition; economic and domain-renewal trends; cyberattacks, service interruptions and cryptographic vulnerabilities; and intense competition in authentication services.
- Divestiture-related transition services and retained liabilities may cost more or last longer than expected. The company also disclosed uncertain tax positions, indemnification obligations, and litigation. A shareholder settlement concerning historical option grants was subject to court approval; an antitrust case challenging .com and .net registry terms had been remanded after an appellate reversal. Management said other routine matters were not expected to have a material effect, but litigation outcomes remained uncertain.
Most important facts for investors to verify
- How much of the earnings improvement reflects durable core operating performance versus reduced restructuring and impairment charges, tax benefits, and discontinued-operation gains?
- Whether growth in .com and .net registrations and renewals offsets slower registration growth, and how the July 2010 fee increases affect volume and revenue.
- Whether Authentication Services can grow revenue despite declining SSL average revenue per certificate and competitive pricing pressure.
- The cash-flow outlook and capital allocation, including share repurchases, planned capital expenditures, and the long-dated convertible debt’s cash obligations and potential conversion terms.
- Progress on the CPS wind-down, remaining divestiture liabilities and Reserve Fund recoveries, and developments in registry-agreement renewals, litigation and tax matters.