Verisign(VRSN) - 2019 Q2 - Quarterly Report

Part I: Financial Information Financial Statements Verisign's unaudited condensed consolidated financial statements for June 30, 2019, reflect 2% revenue growth, 6% operating income increase, and strong cash from operations Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheet (In thousands) | | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total current assets | $1,295,382 | $1,317,034 | | Total assets | $1,889,898 | $1,914,504 | | Total current liabilities | $934,681 | $947,590 | | Total liabilities | $3,315,065 | $3,299,978 | | Total stockholders' deficit | ($1,425,167) | ($1,385,474) | Condensed Consolidated Statement of Comprehensive Income (In thousands) | | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $306,289 | $302,452 | $612,697 | $601,740 | | Operating income | $201,693 | $193,010 | $401,945 | $378,429 | | Net income | $147,534 | $128,351 | $310,061 | $262,614 | | Diluted EPS | $1.24 | $1.04 | $2.59 | $2.13 | Condensed Consolidated Statement of Cash Flows (In thousands) | | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $352,175 | $291,806 | | Net cash provided by investing activities | $418,062 | $1,023,144 | | Net cash used in financing activities | ($376,279) | ($1,523,795) | | Net increase (decrease) in cash | $394,201 | ($209,435) | Notes to Condensed Consolidated Financial Statements Notes to the financial statements detail accounting policies, financial instruments, geographic revenue trends, and share repurchase activities, highlighting growth in U.S. and China revenues and continued share buybacks - As of June 30, 2019, the company held $1.23 billion in cash, cash equivalents, and marketable securities, primarily in money market funds and U.S. Treasury debt securities[23] - The Board authorized an additional $602.9 million for share repurchases in February 2019, bringing the total authorization to $1.0 billion. During the first six months of 2019, the company repurchased 1.9 million shares for $349.9 million. As of June 30, 2019, $716.1 million remained available for future repurchases[31] Revenues by Geography (Six Months Ended June 30, In thousands) | Region | 2019 | 2018 | % Change | | :--- | :--- | :--- | :--- | | U.S. | $384,003 | $373,001 | +2.9% | | EMEA | $103,741 | $106,784 | -2.8% | | China | $57,690 | $52,408 | +10.1% | | Other | $67,263 | $69,547 | -3.3% | | Total | $612,697 | $601,740 | +1.8% | - Interest expense decreased significantly in 2019 due to the settlement of Subordinated Convertible Debentures in May 2018[39] - The effective tax rate for the six months ended June 30, 2019 was 18%, compared to 17% for the same period in 2018. The 2019 rate was reduced by $12.7 million in excess tax benefits from stock-based compensation[41] Management's Discussion and Analysis (MD&A) Management's discussion highlights modest revenue growth driven by domain name base expansion, increased operating income from cost reductions, and strong operating cash flow for the first half of 2019 Overview and Business Highlights Verisign, a global domain name registry provider, reported a 4% year-over-year increase in its .com and .net domain base and significant share repurchases in Q2 2019 - Verisign is a global provider of domain name registry services, operating two of the 13 global internet root servers and managing the .com and .net TLDs[47] - As of June 30, 2019, the .com and .net domain name base reached 156.1 million registrations, a 4% increase from June 30, 2018[50] - In Q2 2019, the company processed 10.3 million new .com and .net domain name registrations, up from 9.6 million in Q2 2018[50] - The final renewal rate for .com and .net for Q1 2019 was 75.0%, slightly down from 75.3% for Q1 2018[50] Results of Operations Six-month revenues increased 2% to $612.7 million due to domain growth and price increases, with operating income rising 6% to $401.9 million and net income reaching $310.1 million Revenue Comparison (in thousands) | Period | 2019 | 2018 | % Change | | :--- | :--- | :--- | :--- | | Three Months Ended June 30 | $306,289 | $302,452 | +1% | | Six Months Ended June 30 | $612,697 | $601,740 | +2% | - Revenue growth was primarily driven by a 5% increase in the .com domain name base and the February 2018 price increase for .net registrations[54] - Cost of revenues for the first six months of 2019 decreased by $5.9 million (6%) compared to the prior year, mainly due to lower telecommunications and salary expenses[61][62] - Sales and marketing expenses for the first six months of 2019 decreased by $10.9 million (32%) compared to the prior year, driven by reduced headcount (related to the Security Services business), and lower advertising spend[65][66] - Interest expense for the first six months of 2019 decreased to $45.3 million from $69.6 million in the prior year, due to the settlement of Subordinated Convertible Debentures in May 2018[74] - Non-operating income increased in H1 2019 due to $8.1 million in transition services income provided to Neustar, which was absent in 2018, and a $6.6 million loss on debt extinguishment recognized in 2018[77] Liquidity and Capital Resources Verisign maintained $1.22 billion in liquidity, generated $352.2 million in operating cash flow, and used $376.3 million for financing activities, primarily share repurchases - Principal sources of liquidity as of June 30, 2019 were $751.6 million in cash and cash equivalents and $473.4 million in marketable securities[79] - During H1 2019, the company repatriated $249.0 million of cash held by foreign subsidiaries. As of June 30, 2019, $643.2 million of cash and marketable securities remained with foreign subsidiaries[80] - Net cash from operating activities increased by $60.4 million in H1 2019 compared to H1 2018, driven by lower cash paid for interest (due to 2018 debt settlement) and income taxes, and higher cash collections from customers[86] - Net cash used in financing activities decreased significantly in H1 2019, primarily because the prior year period included a $1.25 billion repayment of Subordinated Convertible Debentures[90] Quantitative and Qualitative Disclosures About Market Risk No significant changes in market risk exposures have occurred since December 31, 2018 - There have been no significant changes in market risk exposures since the end of the previous fiscal year[91] Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the quarter[92] - No changes occurred in the company's internal control over financial reporting during Q2 2019 that materially affected, or are reasonably likely to materially affect, these controls[93] Part II: Other Information Legal Proceedings Ongoing legal proceedings are not expected to materially impact the company's financial condition, results of operations, or cash flows - The company states that none of its ongoing legal proceedings are expected to have a material adverse effect on its financial condition or operations[97] Risk Factors Significant risks include those related to ICANN and DOC agreements, government regulation, cybersecurity threats, internet governance changes, competition, and evolving user behavior Risks Related to Agreements and Regulation Business heavily relies on ICANN and DOC agreements for .com and .net registries, facing risks from potential amendments, pricing restrictions, renewal challenges, and increasing global regulatory burdens - Substantially all revenues are derived from registry agreements for .com and .net, making the business highly sensitive to any changes or challenges to these agreements[99] - The amended Cooperative Agreement with the DOC permits price increases for .com domain names of up to 7% in the final four years of each six-year period, but there is no guarantee the company will implement them or that further changes would be approved[102] - The .com and .net registry agreements have a "presumptive" right of renewal, but failure to renew would have a material adverse effect on the business[104] - Evolving laws and regulations regarding data privacy (like GDPR), cybersecurity, and e-commerce in the U.S. and foreign jurisdictions (e.g., China) could impose significant compliance costs and liabilities[109][111] Operational and Technical Risks Operational risks include service defects, security breaches, and sophisticated cyber-attacks, with potential system failures impacting critical internet infrastructure and company reputation - The company is frequently targeted by sophisticated cyber-attacks, including advanced persistent threats and large-scale DDoS attacks, which could disrupt services despite significant security investments[115][117] - As the operator of two of the 13 root zone servers and the Root Zone Maintainer, any failure in these critical functions could lead to DNS resolution outages, potential liability, and reputational damage[124][142] - System interruptions or failures at its data centers due to natural disasters, power loss, or sabotage could materially harm the business, and the company does not carry insurance for such interruptions[140] Market and Business Risks Market risks include declining domain name demand due to evolving internet usage, intense competition from other TLDs, and reliance on registrar relationships - The evolution of internet user behavior, including increased reliance on social media, mobile apps, and search engines, may decrease the demand for domain names[128][129] - The internet services industry is highly competitive, with pressure from other gTLD and ccTLD registries competing for domain registrations[135][136] - The business relies on registrars to market its TLDs; if registrars focus on selling competing TLDs or their own services, Verisign's revenues could be adversely impacted[138][139] Financial and Corporate Risks Financial and corporate risks encompass economic downturns, international operational challenges, tax law changes, significant debt obligations, and anti-takeover provisions - Changes in tax rules, such as the 2017 Tax Act, or adverse audit outcomes could negatively affect the company's income tax provisions and cash flows[160][161] - The company's significant outstanding debt requires dedication of cash flow to service payments and contains covenants that could limit operational flexibility[166] - Anti-takeover provisions in the company's certificate of incorporation and bylaws, along with Delaware law, could make it more difficult for an outside party to acquire the company[164][165] - Unfavorable global market and economic conditions could negatively impact customer demand, the company's stock price, and its ability to service debt[143] Share Repurchases The company repurchased 896,000 shares for approximately $175 million in Q2 2019, with $716.1 million remaining for future repurchases Share Repurchase Activity (Q2 2019) | Period | Total Shares Purchased (thousands) | Average Price Paid per Share | Total Cost (millions) | | :--- | :--- | :--- | :--- | | April 2019 | 310 | $188.08 | $58.3 | | May 2019 | 313 | $194.95 | $61.0 | | June 2019 | 273 | $203.83 | $55.6 | | Total Q2 | 896 | $195.31 (approx.) | $175.0 | - As of June 30, 2019, approximately $716.1 million remained available for repurchase under the company's share repurchase program, which has no expiration date[168] Exhibits Exhibits filed include CEO and CFO certifications and the Interactive Data File (XBRL) - Exhibits filed with the report include CEO and CFO certifications pursuant to Exchange Act Rules 13a-14(a) and 13a-14(b), and the iXBRL data file[169]