FORM 10-Q Filing Information Filing Details This document is a Quarterly Report on Form 10-Q for VeriSign, Inc. for the quarterly period ended June 30, 2020, with the company classified as a large accelerated filer - Filing Type: Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 19342 - Reporting Period: For the quarterly period ended June 30, 20202 - Registrant Status: Large accelerated filer34 Common Stock Information as of July 17, 2020 | Class | Shares Outstanding | | :------------------------- | :----------------------- | | Common stock, $0.001 par value per share | 114,853,683 | PART I—FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS This section presents VeriSign, Inc.'s unaudited condensed consolidated financial statements, including the balance sheets, statements of comprehensive income, stockholders' deficit, and cash flows, along with explanatory notes for the periods ended June 30, 2020 and December 31, 2019 Condensed Consolidated Balance Sheets The balance sheet shows a slight decrease in total assets and total liabilities from December 31, 2019, to June 30, 2020, with a notable reduction in cash and cash equivalents offset by an increase in marketable securities Condensed Consolidated Balance Sheet Highlights (In thousands) | Item | June 30, 2020 | December 31, 2019 | | :---------------------------------- | :-------------- | :---------------- | | Cash and cash equivalents | $306,701 | $508,196 | | Marketable securities | $887,872 | $709,863 | | Total current assets | $1,249,648 | $1,278,589 | | Total assets | $1,820,126 | $1,854,009 | | Total current liabilities | $1,018,332 | $965,166 | | Total liabilities | $3,220,450 | $3,344,109 | | Total stockholders' deficit | $(1,400,324) | $(1,490,100) | Condensed Consolidated Statements of Comprehensive Income For the six months ended June 30, 2020, revenues increased by 2% year-over-year, while net income saw a significant increase, primarily driven by a substantial income tax benefit in 2020 Condensed Consolidated Statements of Comprehensive Income Highlights (In thousands, except per share data) | Item | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenues | $314,365 | $306,289 | $626,889 | $612,697 | | Operating income | $206,780 | $201,693 | $413,044 | $401,945 | | Income before income taxes | $191,648 | $190,494 | $382,461 | $380,318 | | Income tax (expense) benefit | $(39,169) | $(42,960) | $104,134 | $(70,257) | | Net income | $152,479 | $147,534 | $486,595 | $310,061 | | Basic EPS | $1.32 | $1.24 | $4.20 | $2.60 | | Diluted EPS | $1.32 | $1.24 | $4.19 | $2.59 | - Net income for the six months ended June 30, 2020, significantly increased to $486.6 million from $310.1 million in the prior year, largely due to a $104.1 million income tax benefit in 2020 compared to a $70.3 million expense in 201912 Condensed Consolidated Statements of Stockholders' Deficit The company's total stockholders' deficit decreased from the beginning of the period, primarily influenced by net income and share repurchases Condensed Consolidated Statements of Stockholders' Deficit Highlights (In thousands) | Item | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------ | :----------------------------- | :----------------------------- | | Total stockholders' deficit, beginning of period | $(1,490,100) | $(1,385,474) | | Repurchase of common stock | $(429,826) | $(384,532) | | Net income | $486,595 | $310,061 | | Total stockholders' deficit, end of period | $(1,400,324) | $(1,425,167) | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities increased for the six months ended June 30, 2020, while investing activities shifted to a net cash outflow, and financing activities saw increased cash usage due to higher share repurchases Condensed Consolidated Statements of Cash Flows Highlights (In thousands) | Item | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------------ | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $395,372 | $352,175 | | Net cash (used in) provided by investing activities | $(174,368) | $418,062 | | Net cash used in financing activities | $(421,530) | $(376,279) | | Net (decrease) increase in cash, cash equivalents, and restricted cash | $(201,491) | $394,201 | | Cash, cash equivalents, and restricted cash at end of period | $316,110 | $760,954 | Notes to Condensed Consolidated Financial Statements The notes provide detailed information on the basis of presentation, financial instruments, selected balance sheet items, stockholders' deficit, earnings per share calculation, revenues, stock-based compensation, non-operating income, and income taxes, highlighting key changes and accounting policies Note 1. Basis of Presentation The interim financial statements are unaudited and prepared in accordance with Form 10-Q instructions, including normal recurring accruals. Certain prior period reclassifications were made without affecting net income - Interim financial statements are unaudited and prepared in accordance with SEC Form 10-Q instructions18 - Reclassifications to prior period amounts were made to conform to current period presentation, with no effect on net income19 Note 2. Financial Instruments The company's financial instruments primarily consist of cash, cash equivalents, and marketable securities, with a significant portion invested in U.S. Treasury debt securities maturing in less than one year. Senior notes are classified as Level 2 in the fair value hierarchy Cash, Cash Equivalents, and Marketable Securities (In thousands) | Item | June 30, 2020 | December 31, 2019 | | :---------------------------------- | :-------------- | :---------------- | | Cash | $27,046 | $33,238 | | Time deposits | $3,971 | $3,924 | | Money market funds (Level 1) | $155,113 | $149,624 | | Debt securities issued by the U.S. Treasury (Level 1) | $1,017,852 | $1,040,678 | | Total Cash, cash equivalents, and restricted cash | $316,110 | $517,601 | | Marketable securities | $887,872 | $709,863 | - All debt securities held as of June 30, 2020, are scheduled to mature in less than one year20 - Fair values of senior notes due 2023, 2025, and 2027 were $756.6 million, $555.0 million, and $579.0 million, respectively, as of June 30, 2020, classified as Level 222 Note 3. Selected Balance Sheet Items This note details the composition of other current assets, other long-term assets, accounts payable and accrued liabilities, and long-term tax and other liabilities, highlighting changes such as the receipt of contingent consideration and a significant income tax benefit Other Current Assets (In thousands) | Item | June 30, 2020 | December 31, 2019 | | :-------------------------- | :-------------- | :---------------- | | Prepaid expenses | $24,495 | $19,818 | | Prepaid registry fees | $22,539 | $21,717 | | Accounts receivable, net | $5,338 | $1,524 | | Contingent consideration receivable | — | $14,721 | | Total other current assets | $55,075 | $60,530 | - During the six months ended June 30, 2020, the Company received $20.4 million of contingent consideration related to its divested security services business, recognized as a gain in Non-operating income, net23 Long-term Tax and Other Liabilities (In thousands) | Item | June 30, 2020 | December 31, 2019 | | :-------------------------- | :-------------- | :---------------- | | Long-term tax liabilities | $126,890 | $308,112 | | Long-term operating lease liability | $4,755 | $4,564 | | Total long-term tax and other liabilities | $131,645 | $312,676 | - A $167.8 million income tax benefit was recognized in Q1 2020 due to the remeasurement of previously unrecognized income tax benefits related to a worthless stock deduction27 Note 4. Stockholders' Deficit The Board authorized an additional $743.0 million for common stock repurchases, bringing the total available to $1.0 billion. The company repurchased 2.0 million shares for $395.0 million during the six months ended June 30, 2020 - Board authorized an additional $743.0 million for common stock repurchases, totaling $1.0 billion available under the program with no expiration date28 - Repurchased 0.7 million shares for $150.0 million during Q2 2020, and 2.0 million shares for $395.0 million during the six months ended June 30, 202028 - Approximately $675.6 million remained available for future share repurchases as of June 30, 202028 Note 5. Calculation of Earnings per Share The weighted-average shares used for basic and diluted EPS calculations decreased year-over-year for both the three and six-month periods ended June 30, 2020 Weighted-Average Shares for EPS Calculation (In thousands) | Item | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Weighted-average shares of common stock outstanding | 115,347 | 118,965 | 115,861 | 119,359 | | Shares used to compute diluted earnings per share | 115,544 | 119,361 | 116,137 | 119,837 | Note 6. Revenues Revenues increased across most geographies for the six months ended June 30, 2020, primarily driven by domain name registrations and renewals. Deferred revenues increased due to advance payments for future recognition Revenues Disaggregated by Geography (In thousands) | Region | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | U.S. | $199,408 | $191,848 | $396,911 | $384,003 | | EMEA | $52,964 | $51,595 | $105,069 | $103,741 | | China | $29,026 | $29,448 | $59,213 | $57,690 | | Other | $32,967 | $33,398 | $65,696 | $67,263 | | Total | $314,365 | $306,289 | $626,889 | $612,697 | - The increase in deferred revenues for the six months ended June 30, 2020, was primarily due to amounts billed in advance for domain name registrations and renewals32 Note 7. Stock-based Compensation Total stock-based compensation expense decreased for both the three and six-month periods ended June 30, 2020, with RSUs being the largest component Total Stock-based Compensation Expense (In thousands) | Item | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cost of revenues | $1,555 | $1,741 | $3,203 | $3,339 | | Sales and marketing | $843 | $1,019 | $1,728 | $2,002 | | Research and development | $1,780 | $1,642 | $3,456 | $3,231 | | General and administrative | $7,809 | $8,753 | $15,041 | $17,045 | | Total stock-based compensation expense | $11,987 | $13,155 | $23,428 | $25,617 | Nature of Total Stock-based Compensation (In thousands) | Item | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | RSUs | $9,102 | $9,059 | $18,189 | $17,668 | | Performance-based RSUs | $2,327 | $3,294 | $4,044 | $6,332 | | ESPP | $1,085 | $1,270 | $2,215 | $2,441 | Note 8. Non-operating Income, Net Non-operating income, net decreased due to lower interest income and the expiration of transition services income, partially offset by an increased gain on the sale of a business Components of Non-operating Income, Net (In thousands) | Item | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Interest income | $2,274 | $7,228 | $6,695 | $14,588 | | Transition services income | — | $4,050 | $2,100 | $8,100 | | Gain on sale of business | $5,153 | $43 | $5,611 | $753 | | Total non-operating income, net | $7,403 | $11,436 | $14,487 | $23,639 | - Interest income decreased due to a decline in interest rates on debt securities investments35 - Transition services income decreased as the agreement for the divested security services business ended in February 202035 Note 9. Income Taxes The company reported an income tax benefit for the six months ended June 30, 2020, primarily due to a $167.8 million benefit from remeasuring previously unrecognized tax benefits related to a worthless stock deduction Income Tax Expense (Benefit) and Effective Tax Rate (In thousands) | Item | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Income tax expense (benefit) | $39,169 | $42,960 | $(104,134) | $70,257 | | Effective tax rate | 20% | 23% | (27)% | 18% | - A $167.8 million income tax benefit was recognized in Q1 2020 from the remeasurement of previously unrecognized income tax benefits related to a worthless stock deduction36 - The company's U.S. federal income tax returns for 2010-2014 remain under IRS examination36 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides an overview of VeriSign's business, key highlights, and a detailed analysis of its financial performance for the three and six months ended June 30, 2020, compared to the prior year, also discussing the impact of COVID-19, revenue drivers, and expense trends Overview VeriSign is a global provider of domain name registry services and internet infrastructure, primarily operating .com and .net TLDs. As of June 30, 2020, the company managed 162.1 million .com and .net registrations - VeriSign is a global provider of domain name registry services and internet infrastructure, operating .com and .net TLDs40 - As of June 30, 2020, the company had 162.1 million .com and .net registrations in the domain name base, a 4% increase from June 30, 20194143 Business Highlights and Trends Key highlights include revenue and operating income growth, an increase in domain name registrations, and a stable renewal rate, with the company also extending its registry price freeze and generating strong operating cash flows Key Business Highlights (In millions) | Metric | 3 Months Ended June 30, 2020 | 6 Months Ended June 30, 2020 | YoY Change (3 Months) | YoY Change (6 Months) | | :------------------------------------ | :--------------------------- | :--------------------------- | :-------------------- | :-------------------- | | Revenues | $314.4 | $626.9 | 3% | 2% | | Operating income | $206.8 | $413.0 | 3% | 3% | | .com and .net registrations (June 30) | 162.1 | 162.1 | 4% (from June 30, 2019) | 4% (from June 30, 2019) | | New .com and .net registrations (Q2) | 11.1 | N/A | 7.8% | N/A | | Q1 2020 Renewal Rate | 75.4% | N/A | 0.4 pp | N/A | | Cash flows from operating activities | N/A | $395.4 | N/A | 12.3% | - The company extended its freeze on registry prices for all TLDs, including .com and .net, through March 31, 2021, and waived wholesale restore fees for expired domains through the end of 202047 COVID-19 Update VeriSign has implemented measures to protect employees and maintain critical internet infrastructure during the COVID-19 pandemic. While no material impact has been observed to date, the situation remains uncertain, and future effects on business and financial results are hard to predict - The company has taken actions to protect employees (restricting travel, modifying sick leave, remote work) and maintain critical internet infrastructure46 - No material impact from COVID-19 on business, operations, financial condition, cash flows, liquidity, and capital resources has been observed to date, but the situation is uncertain and rapidly changing46 - Future growth in the domain name base and financial results may be impacted by the pandemic's duration and severity, with effects potentially reflected in future periods due to advance payment for registrations/renewals46 Results of Operations Revenues increased due to growth in .com TLD registrations, while operating expenses showed mixed trends. Non-operating income decreased due to lower interest rates and the end of transition services, but was partially offset by a gain on business sale. A significant income tax benefit was recognized Revenues Revenues increased by 3% for the three months and 2% for the six months ended June 30, 2020, primarily driven by a 4% increase in the .com domain name base. The company has contractual rights to increase .com and .net prices but has frozen them through March 31, 2021 Revenues Comparison (In thousands) | Period | 2020 | % Change | 2019 | | :-------------------------- | :------- | :------- | :------- | | Three Months Ended June 30, | $314,365 | 3% | $306,289 | | Six Months Ended June 30, | $626,889 | 2% | $612,697 | - Revenue increase was primarily due to a 4% increase in the .com domain name base, partially offset by the elimination of revenues from a divested security services business51 - The annual fee for a .com domain name has been fixed at $7.85 since 2012. The company has the right to increase .com prices by up to 7% in four of every six years, and .net prices by up to 10% annually49 - Registry prices for all TLDs, including .com and .net, are frozen through March 31, 2021, as part of the COVID-19 response49 Geographic revenues Revenue growth for the three and six months ended June 30, 2020, was primarily driven by increased sales to registrars based in the U.S., while China and Other regions saw slight decreases or minimal growth Geographic Revenues Comparison (In thousands) | Region | Three Months Ended June 30, 2020 | % Change | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | % Change | Six Months Ended June 30, 2019 | | :------- | :------------------------------- | :------- | :------------------------------- | :----------------------------- | :------- | :----------------------------- | | U.S. | $199,408 | 4% | $191,848 | $396,911 | 3% | $384,003 | | EMEA | $52,964 | 3% | $51,595 | $105,069 | 1% | $103,741 | | China | $29,026 | (1)% | $29,448 | $59,213 | 3% | $57,690 | | Other | $32,967 | (1)% | $33,398 | $65,696 | (2)% | $67,263 | - The majority of revenue growth during the three and six months ended June 30, 2020, came from increased sales to U.S.-based registrars54 Cost of revenues Cost of revenues remained consistent year-over-year, as decreases in salary and employee benefits due to headcount realignment were offset by other minor increases. It is expected to remain consistent as a percentage of revenues Cost of Revenues Comparison (In thousands) | Period | 2020 | % Change | 2019 | | :-------------------------- | :------- | :------- | :------- | | Three Months Ended June 30, | $43,608 | (1)% | $44,066 | | Six Months Ended June 30, | $89,181 | 0% | $89,570 | - Decreases in salary and employee benefits expenses ($1.0 million for 3 months, $1.5 million for 6 months) due to headcount realignment to R&D were offset by other increases, resulting in consistent cost of revenues56 - Cost of revenues as a percentage of revenues is expected to remain consistent for the remainder of 202058 Sales and marketing Sales and marketing expenses decreased significantly due to reduced advertising and marketing programs. The company expects these expenses to increase as a percentage of revenues in the latter half of 2020 Sales and Marketing Expenses Comparison (In thousands) | Period | 2020 | % Change | 2019 | | :-------------------------- | :------- | :------- | :------- | | Three Months Ended June 30, | $8,890 | (28)% | $12,399 | | Six Months Ended June 30, | $15,494 | (32)% | $22,918 | - Decreases in advertising and marketing expenses ($2.4 million for 3 months, $5.5 million for 6 months) were the primary driver for the reduction60 - Sales and marketing expenses as a percentage of revenues are expected to increase during the remainder of 2020 due to planned advertising and marketing campaigns61 Research and development Research and development expenses increased due to higher salary and employee benefits, including headcount realignment from cost of revenues and expanded paid time off benefits related to COVID-19. These expenses are expected to slightly increase as a percentage of revenues Research and Development Expenses Comparison (In thousands) | Period | 2020 | % Change | 2019 | | :-------------------------- | :------- | :------- | :------- | | Three Months Ended June 30, | $18,202 | 22% | $14,953 | | Six Months Ended June 30, | $35,560 | 14% | $31,085 | - Increases in salary and employee benefits expenses ($2.7 million for 3 months, $3.8 million for 6 months) were due to headcount realignment, additional headcount, and expanded COVID-19 related employee benefits62 - Research and development expenses as a percentage of revenues are expected to increase slightly during the remainder of 202063 General and administrative General and administrative expenses increased due to higher salary and employee benefits, increased average headcount, and charitable contributions, partially offset by decreased stock-based compensation. These expenses are expected to remain consistent as a percentage of revenues General and Administrative Expenses Comparison (In thousands) | Period | 2020 | % Change | 2019 | | :-------------------------- | :------- | :------- | :------- | | Three Months Ended June 30, | $36,885 | 11% | $33,178 | | Six Months Ended June 30, | $73,610 | 10% | $67,179 | - For the six months, increases were driven by $4.0 million in salary and employee benefits and $3.1 million in charitable contributions (COVID-19 response, equal justice), partially offset by a $2.0 million decrease in stock-based compensation66 - General and administrative expenses as a percentage of revenues are expected to remain consistent for the remainder of 202067 Interest expense Interest expense remained consistent for the three and six months ended June 30, 2020, compared to the prior year, and is expected to remain consistent for the remainder of 2020 - Interest expense remained consistent for the three and six months ended June 30, 2020, compared to the same periods last year68 - Quarterly interest expense is expected to remain consistent for the remainder of 202068 Non-operating income, net Non-operating income, net decreased due to lower interest income from declining rates and the expiration of transition services income, despite an increase in gain on the sale of a business. It is expected to decrease as a percentage of revenues Non-operating Income, Net Comparison (In thousands) | Item | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Interest income | $2,274 | $7,228 | $6,695 | $14,588 | | Transition services income | — | $4,050 | $2,100 | $8,100 | | Gain on sale of business | $5,153 | $43 | $5,611 | $753 | | Total non-operating income, net | $7,403 | $11,436 | $14,487 | $23,639 | - Interest income decreased due to declining interest rates on debt securities. Transition services income decreased due to the expiration of the agreement in February 202069 - Gain on sale of business increased due to contingent consideration received for the divested security services business69 Income tax expense (benefit) The company reported a significant income tax benefit for the six months ended June 30, 2020, primarily due to a $167.8 million benefit from remeasuring previously unrecognized tax benefits. The annual effective tax rate for 2020 is projected to be a net benefit of 5% to 2% Income Tax Expense (Benefit) and Effective Tax Rate (In thousands) | Period | 2020 | 2019 | | :-------------------------- | :----------- | :----------- | | Three Months Ended June 30, | $39,169 | $42,960 | | Effective tax rate | 20% | 23% | | Six Months Ended June 30, | $(104,134) | $70,257 | | Effective tax rate | (27)% | 18% | - The six-month period included a $167.8 million benefit from remeasuring previously unrecognized income tax benefits related to a worthless stock deduction71 - The annual effective tax rate for 2020 is expected to be a net benefit of between 5% and 2%73 Liquidity and Capital Resources VeriSign's liquidity is primarily supported by cash, cash equivalents, and marketable securities, totaling $1.19 billion as of June 30, 2020. Operating cash flows increased, while investing activities shifted to a net outflow, and financing activities saw increased cash usage for share repurchases Liquidity Position (In thousands) | Item | June 30, 2020 | December 31, 2019 | | :-------------------------- | :-------------- | :---------------- | | Cash and cash equivalents | $306,701 | $508,196 | | Marketable securities | $887,872 | $709,863 | | Total | $1,194,573 | $1,218,059 | - Net cash provided by operating activities increased to $395.4 million for the six months ended June 30, 2020, from $352.2 million in the prior year, primarily due to decreased cash paid for income taxes and vendors, and increased cash from customers7880 - Net cash used in investing activities was $(174.4) million for the six months ended June 30, 2020, a shift from a net inflow of $418.1 million in the prior year, mainly due to decreased proceeds from marketable securities7883 - Net cash used in financing activities increased to $(421.5) million, primarily due to an increase in share repurchases7884 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no significant changes in the company's market risk exposures since December 31, 2019 - No significant changes in market risk exposures since December 31, 201985 ITEM 4. CONTROLS AND PROCEDURES Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2020, and there were no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were effective as of June 30, 202086 - No material change in internal control over financial reporting during the three months ended June 30, 202087 - Acknowledged inherent limitations of disclosure controls and internal control over financial reporting, which provide reasonable, not absolute, assurance88 PART II—OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The company is involved in various legal proceedings, but none are expected to have a material adverse effect on its financial condition, results of operations, or cash flows - Involved in various investigations, claims, and lawsuits arising in the normal course of business91 - None of these legal proceedings are expected to have a material adverse effect on financial condition, results of operations, or cash flows91 ITEM 1A. RISK FACTORS This section outlines significant risks, including the uncertain impact of the COVID-19 pandemic, risks related to agreements with ICANN and the DOC, governmental regulations, cybersecurity threats, evolving internet practices, competition, reliance on registrars, system failures, and financial risks COVID-19 Pandemic Risks The COVID-19 pandemic poses significant, rapidly changing, and uncertain risks to the company's business, operations, financial condition, and results, despite no adverse impact to date. Factors include the pandemic's duration, effectiveness of responsive actions, impact on employees and demand for domain names - The COVID-19 pandemic presents significant volatility, business, and economic disruptions, and uncertainty93 - As of the report date, the business, operations, financial condition, and results have not been adversely impacted, but the future extent of impact remains uncertain and rapidly changing94 - Potential impacts include effects on employees, ability to maintain critical infrastructure, and demand for new and renewal domain name registrations93 Agreement-Related Risks The company's business is highly dependent on agreements with the DOC and ICANN, particularly for .com and .net TLDs. Changes to these agreements, including pricing terms, vertical integration restrictions, renewal conditions, and ICANN's unilateral amendment rights for new gTLDs, could materially impact operations and growth - Substantially all revenues are derived from gTLDs, making the business highly dependent on agreements with the DOC and ICANN, especially for .com and .net95 - The Third .com Amendment allows for price increases of up to 7% in four of every six years for .com domain names, with the first such period starting October 26, 201897100 - Restrictions on vertical integration apply solely to the .com TLD, prohibiting greater than 15% ownership in ICANN-accredited registrars selling .com domain names103 - ICANN could adopt unfavorable Consensus Policies or Temporary Policies, such as requiring Thick Whois data, or impose new mandatory obligations on registry operators, increasing costs and legal risks106 Governmental and Regulatory Risks Evolving and conflicting laws and regulations, particularly regarding data privacy (e.g., GDPR) and foreign market restrictions (e.g., China), could increase compliance costs, limit operations, and expose the company to substantial liability and litigation - Unclear and evolving laws and regulations in the U.S. and overseas, especially concerning data privacy (e.g., GDPR), can lead to significant compliance costs and potential liability109111 - New regulations in China impose additional costs and risks on registry services, potentially impacting growth or renewal rates of domain names in the region109 - Laws restricting domain name registration, online gambling, counterfeit goods, and cybersecurity could impose significant costs or liabilities110 Cybersecurity and System Failure Risks The company faces significant risks from system defects, cyber-attacks (including advanced persistent threats and DDoS), and security breaches, which could lead to service outages, data compromise, liability, reputational damage, and increased costs. Reliance on third-party technologies and the RPKI system also introduces vulnerabilities - Services may contain undetected defects or errors, leading to service outages, compromised data, reputational harm, and legal claims113 - The company is frequently targeted by sophisticated cyber-attacks (APT, zero-hour threats, insider threats) due to operating critical internet infrastructure114 - DDoS attacks are growing in size and sophistication, posing a continuous threat to network disruption, increased response times, and ability to meet service level obligations118 Internet Governance Risks Changes in the multi-stakeholder model of internet governance, including the U.S. government's reduced oversight, the role of ICANN and its Empowered Community, and increased influence from foreign governments, could negatively impact the company's strategy and business interests - The U.S. government's transition of DNS coordination to the multi-stakeholder community could negatively impact the business120121 - ICANN or its Empowered Community may assert positions that negatively impact the company's strategy or business, or face legal challenges to their authority120122 - Increased control by foreign governments over internet governance could materially and adversely impact the business124 Root Zone Operations Risks Operating root zone servers and performing Root Zone Maintainer functions exposes the company to significant claims and potential security/stability issues, particularly with the deployment of new gTLDs and associated domain name collisions - Operating two of the 13 global internet root servers and performing Root Zone Maintainer functions under the RZMA exposes the company to significant claims and potential liabilities125126 - The deployment of over 1,200 new gTLDs since 2012, and future rounds, poses potential security and stability issues for the root zone, including domain name collisions and cyber-attacks127 Demand for Domain Names Risks Evolving internet practices, such as the rise of social media, mobile apps, and search engines, along with alternative TLDs and changes in online advertising compensation, could decrease demand and renewal rates for domain names, adversely affecting revenues - Changes in internet practices and behaviors (e.g., social media, mobile devices, apps, search engines) can negatively impact demand for domain names128129 - Alternative TLDs (e.g., blockchain namespace systems) could negatively impact demand for TLDs in the root zone131 - Changes in compensation for advertising on websites and search algorithms could decrease demand and renewal rates for certain domain names132 Market Development and Acceptance Risks The company's growth strategy relies on new, developing, and emerging markets, which are uncertain. Failure of these markets to develop or lack of wide acceptance for its services due to various factors could materially harm the business - Growth depends on new, developing, and emerging markets in foreign countries, which are rapidly evolving and may not grow as expected134 - Factors affecting acceptance include regional internet infrastructure, substitute products (social media, apps), public perception of security, government regulations, and competition from ccTLDs and new gTLDs134 Competitive Environment Risks The internet and communications network services industries are highly competitive and rapidly changing. Failure to continually innovate, adapt to new technologies, and compete effectively against other gTLD and ccTLD registries could lead to reduced demand, lower margins, and market share loss - The industry is characterized by rapid technological change, requiring continuous improvement in services and adaptation to market conditions136 - Competition comes from other gTLD and ccTLD registries, with new gTLDs potentially facing universal acceptance and usability challenges138 Registrar Relationship Risks The company's business relies heavily on registrars and their resellers for domain name registrations. Consolidation, changes in strategy, or a shift in their marketing focus towards new gTLDs or their own services could adversely impact demand and renewal rates for the company's TLDs - All domain name registrations occur through registrars, whose marketing efforts are crucial for demand and renewal rates140 - Consolidation or changes in registrar/reseller strategy could lead to reduced marketing efforts for the company's TLDs140 - Registrars may shift focus to selling new gTLDs or their own services, potentially harming the company's revenues141 System Interruption and Failure Risks The company's operations are vulnerable to interruptions and failures from various sources, including natural disasters, cyber-attacks, software defects, and third-party service provider issues. Such events could lead to liability, service outages, reputational damage, and financial losses - Operations are vulnerable to damage or interruption from power loss, natural disasters, cyber-attacks, software/hardware defects, and other events beyond control142 - Failures in root zone servers, the Shared Registration System, or supporting infrastructure could result in DNS resolution outages, domain name deletions, or misdirection, leading to liability and reputational harm145 - Dependence on internet service providers and backbone service providers means their operational problems or outages could harm the business144 Macroeconomic and Geopolitical Risks Unfavorable global market, economic, social, public health, and political conditions can adversely impact the company's operating results by affecting customer growth, demand for services, pricing, stock price, liquidity, and debt servicing ability - Unfavorable global conditions can impact customer growth, demand for services, price competition, stock price, liquidity, and ability to service debt146 - Concentration of end-users in specific industry or geographic sectors could lead to disproportionate negative impacts during adverse conditions146 International Operations Risks International operations, which generate a significant portion of revenues, expose the company to various economic, legal, regulatory, and political risks, including competition from foreign companies, compliance with diverse laws, trade policies, currency fluctuations, and potential scrutiny from foreign governments - A significant portion of revenues is derived from customers outside the U.S., exposing the company to international risks147 - Risks include competition from foreign companies, legal uncertainty, economic tensions, tariffs, currency fluctuations, and difficulties in managing foreign operations148 - Compliance with diverse foreign laws and regulations, including those on privacy and data localization, can be challenging and costly148 Intellectual Property Risks The company's success depends on protecting its intellectual property (IP), including internally developed technologies and the Verisign brand. Failure to protect or enforce IP, misappropriation by external parties, or challenges to patents could harm the business. Reliance on licensed technology and public domain software also presents risks - Success depends on internally developed technologies and related intellectual property; external parties could copy or use IP without authorization149 - Foreign laws may not protect proprietary rights to the same extent as U.S. law149 - Litigation to enforce IP rights is unpredictable and costly, and patents considered 'standards essential' may require licensing to competitors149 - Reliance on licensed technology means loss or inability to obtain licenses could harm the business, and public domain software is equally available to competitors150 IP Infringement Claims Risks The company faces risks of intellectual property infringement claims from others, which could lead to costly litigation, diversion of resources, delays, damages, or injunctions. The evolving legal standards for internet-related IP rights add to this uncertainty - Risk of infringing intellectual property rights of others, leading to costly litigation, diversion of resources, and potential damages or injunctions152 - Legal standards for internet-related intellectual property rights are uncertain and evolving, increasing the likelihood of patent litigation154 Litigation and Investigation Risks The company may be involved in various claims, lawsuits, audits, and investigations, which are inherently unpredictable. Adverse outcomes could result in significant monetary damages, injunctive relief, and diversion of management attention and resources - Involvement in claims, lawsuits, audits, and investigations is unpredictable, with potential for significant monetary damages or injunctive relief155 - Such proceedings could involve significant expense and divert management's attention and resources155 Strategic Initiative Risks Pursuing new strategic initiatives, such as investments in new revenue streams or TLD acquisitions, involves significant risks including diversion of management attention, regulatory scrutiny, adverse financial effects, and potential damage to reputation - New strategic initiatives (e.g., new revenue streams, TLD acquisitions) involve risks like diversion of management attention, regulatory scrutiny, and adverse effects on financial results157 - ICANN review or approval may be required for new initiatives, potentially delaying or preventing implementation158 Key Employee Dependence Risks The company's effective management relies on key employees and senior management. Difficulty in attracting, retaining, integrating, and motivating these individuals, especially in a highly technical and competitive environment, could adversely affect the business - Dependence on knowledge, experience, and performance of senior management and other key employees in a unique, competitive, and highly regulated environment159 - Difficulty in attracting, integrating, retaining, and motivating key individuals and highly skilled employees could harm the business159 Taxation Risks Changes in tax rules, regulations, or interpretations in the U.S. and foreign jurisdictions, including new digital economy taxation proposals, could lead to significant fluctuations in effective tax rates, increased taxes, and adverse effects on financial results - Subject to income taxes in U.S. and foreign jurisdictions, with significant judgment required in determining tax provision160 - Effective tax rates may fluctuate due to changes in earnings mix, tax laws, or audit outcomes160 - OECD proposals and independent tax regimes for the digital economy could increase taxes and adversely impact financial condition161 Marketable Securities Risks The company's significant marketable securities portfolio, primarily U.S. Treasury debt, is exposed to credit, liquidity, market, and interest rate risks. A decline in market value or an impairment charge could materially affect financial results - As of June 30, 2020, $1.20 billion in cash, cash equivalents, and marketable securities, with $887.9 million in marketable securities (primarily U.S. Treasury debt)162 - Investments are subject to general credit, liquidity, market, and interest rate risks162 - A decline in market value or an impairment charge could adversely impact results of operations and cash flows162 Real Property Ownership Risks Ownership of headquarters and data centers exposes the company to risks such as adverse changes in property value, ongoing maintenance costs, compliance with regulations, environmental issues, and disputes with neighbors - Ownership of headquarters and data centers subjects the company to risks including adverse changes in property value, maintenance expenses, and compliance costs164 - Risks also include potential environmental contamination and disputes with neighboring owners or service providers164 Anti-Takeover Protections Risks The company has anti-takeover provisions in its Certificate of Incorporation and Bylaws, along with Delaware's Section 203, which could discourage, delay, or prevent a change in control, potentially limiting stockholder benefits - Anti-takeover provisions in corporate documents include restrictions on stockholder actions, special meetings, Board vacancies, and preferred stock issuance164 - Delaware's Section 203 prohibits business combinations with interested stockholders for three years, unless certain conditions are met, potentially discouraging unsolicited offers165 Indebtedness Management Risks The company's significant outstanding debt requires a substantial portion of cash flow for payments and could limit operational flexibility, increase refinancing difficulty, and heighten vulnerability to adverse economic conditions. Debt covenants may also restrict business activities - Significant outstanding debt requires dedicating a substantial portion of cash flow for principal and interest payments166 - Indebtedness could limit flexibility, make refinancing difficult, trigger events of default, and increase vulnerability to adverse economic conditions166 - Debt covenants may restrict share repurchases, dividends, acquisitions, and asset disposals if financial ratios are not met166 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The company repurchased 730 thousand shares of common stock for an aggregate cost of $150.0 million during the three months ended June 30, 2020, under a $1.0 billion authorization Share Repurchase Activity (Three Months Ended June 30, 2020) | Period | Total Number of Shares Purchased (thousands) | Average Price Paid per Share | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (millions) | | :----------------- | :--------------------------------------- | :--------------------------- | :--------------------------------------------------------------------------------------------- | | April 1 - 30, 2020 | 279 | $197.18 | $770.6 | | May 1 - 31, 2020 | 213 | $211.86 | $725.3 | | June 1 - 30, 2020 | 238 | $209.39 | $675.6 | | Total | 730 | | | - The Board authorized a total of $1.0 billion for share repurchases, with approximately $675.6 million remaining as of June 30, 2020167 ITEM 6. EXHIBITS This section lists the exhibits filed as part of the report, including certifications from the Principal Executive Officer and Principal Financial Officer, and Interactive Data Files - Includes certifications from the Principal Executive Officer and Principal Financial Officer (Exhibits 31.01, 31.02, 32.01, 32.02)168 - Includes Interactive Data Files (Exhibits 101, 104) formatted as Inline XBRL168 Signatures The report is signed by D. James Bidzos, Chief Executive Officer, and George E. Kilguss, III, Chief Financial Officer, on July 23, 2020 - Signed by D. James Bidzos, Chief Executive Officer, and George E. Kilguss, III, Chief Financial Officer172 - Date of signing: July 23, 2020172
Verisign(VRSN) - 2020 Q2 - Quarterly Report