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Verisign(VRSN) - 2020 Q3 - Quarterly Report

Report Information This section provides filing details for VeriSign, Inc.'s Form 10-Q for the quarter ended September 30, 2020, including its filer status and common stock outstanding Filing Details This report is VeriSign, Inc.'s 10-Q quarterly report for the period ended September 30, 2020, identifying the company as a large accelerated filer with 114,109,868 shares of common stock outstanding as of October 16, 2020 - VeriSign, Inc. submitted its quarterly report (Form 10-Q) for the period ended September 30, 20202 - The company is identified as a Large Accelerated Filer34 - All required reports and interactive data files have been submitted within the past 12 months3 Shares Outstanding Information | Class | Shares Outstanding as of October 16, 2020 | | :--- | :--- | | Common stock, $0.001 par value per share | 114,109,868 | PART I—FINANCIAL INFORMATION This part presents VeriSign, Inc.'s unaudited condensed consolidated financial statements and management's discussion and analysis for the period ended September 30, 2020 ITEM 1. FINANCIAL STATEMENTS This section contains VeriSign, Inc.'s unaudited condensed consolidated financial statements for the period ended September 30, 2020, including balance sheets, statements of comprehensive income, stockholders' deficit, and cash flows, along with related notes Condensed Consolidated Balance Sheets This section presents VeriSign, Inc.'s condensed consolidated balance sheets as of September 30, 2020, and December 31, 2019, detailing assets, liabilities, and stockholders' deficit Condensed Consolidated Balance Sheets (Selected) | Metric | September 30, 2020 (Thousands of USD) | December 31, 2019 (Thousands of USD) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | 145,701 | 508,196 | | Marketable securities | 1,004,658 | 709,863 | | Other current assets | 55,767 | 60,530 | | Total current assets | 1,206,126 | 1,278,589 | | Property and equipment, net | 248,587 | 250,283 | | Goodwill | 52,527 | 52,527 | | Deferred tax assets | 76,903 | 87,798 | | Deposits for purchased intangible assets | 145,000 | 145,000 | | Other long-term assets | 35,163 | 39,812 | | Total long-term assets | 558,180 | 575,420 | | Total assets | 1,764,306 | 1,854,009 | | Liabilities and Stockholders' Deficit | | | | Accounts payable and accrued liabilities | 198,342 | 209,988 | | Deferred revenue | 779,666 | 755,178 | | Total current liabilities | 978,008 | 965,166 | | Long-term deferred revenue | 281,887 | 278,702 | | Senior notes | 1,789,453 | 1,787,565 | | Long-term tax and other liabilities | 101,206 | 312,676 | | Total long-term liabilities | 2,172,546 | 2,378,943 | | Total liabilities | 3,150,554 | 3,344,109 | | Stockholders' deficit | (1,386,248) | (1,490,100) | | Total liabilities and stockholders' deficit | 1,764,306 | 1,854,009 | - Total assets decreased to $1,764,306 thousand as of September 30, 2020, from $1,854,009 thousand as of December 31, 201911 - Cash and cash equivalents significantly decreased from $508,196 thousand at year-end 2019 to $145,701 thousand as of September 30, 202011 - Marketable securities increased from $709,863 thousand at year-end 2019 to $1,004,658 thousand as of September 30, 202011 Condensed Consolidated Statements of Comprehensive Income This section provides VeriSign, Inc.'s condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2020, and 2019, highlighting revenue and net income trends Condensed Consolidated Statements of Comprehensive Income (Selected) | Metric | Three Months Ended September 30, 2020 (Thousands of USD) | Three Months Ended September 30, 2019 (Thousands of USD) | Nine Months Ended September 30, 2020 (Thousands of USD) | Nine Months Ended September 30, 2019 (Thousands of USD) | | :--- | :--- | :--- | :--- | :--- | | Revenue | 317,879 | 308,421 | 944,768 | 921,118 | | Operating income | 206,649 | 205,616 | 619,693 | 607,561 | | Net income | 170,979 | 153,913 | 657,574 | 463,974 | | Basic earnings per share | 1.49 | 1.30 | 5.70 | 3.90 | | Diluted earnings per share | 1.49 | 1.30 | 5.68 | 3.89 | - Revenue for the three months ended September 30, 2020, increased by 3% year-over-year to $317,879 thousand12 - Revenue for the nine months ended September 30, 2020, increased by 2.6% year-over-year to $944,768 thousand12 - Net income for the nine months ended September 30, 2020, significantly increased by 41.7% to $657,574 thousand, primarily due to a notable change in income tax (benefit)12 Condensed Consolidated Statements of Stockholders' Deficit This section presents VeriSign, Inc.'s condensed consolidated statements of stockholders' deficit for the three and nine months ended September 30, 2020, and 2019, detailing changes in equity Condensed Consolidated Statements of Stockholders' Deficit (Selected) | Metric | Three Months Ended September 30, 2020 (Thousands of USD) | Three Months Ended September 30, 2019 (Thousands of USD) | Nine Months Ended September 30, 2020 (Thousands of USD) | Nine Months Ended September 30, 2019 (Thousands of USD) | | :--- | :--- | :--- | :--- | :--- | | Total stockholders' deficit, beginning of period | (1,400,324) | (1,425,167) | (1,490,100) | (1,385,474) | | Repurchases of common stock | (173,879) | (198,953) | (603,705) | (583,485) | | Stock-based compensation expense | 13,078 | 13,081 | 37,526 | 39,522 | | Net income | 170,979 | 153,913 | 657,574 | 463,974 | | Total stockholders' deficit, end of period | (1,386,248) | (1,451,919) | (1,386,248) | (1,451,919) | - Total stockholders' deficit improved to $(1,386,248) thousand as of September 30, 2020, from $(1,490,100) thousand as of December 31, 20191114 - For the nine months ended September 30, 2020, the company repurchased $603,705 thousand of common stock, an increase from $583,485 thousand in the prior-year period14 Condensed Consolidated Statements of Cash Flows This section provides VeriSign, Inc.'s condensed consolidated statements of cash flows for the nine months ended September 30, 2020, and 2019, outlining cash movements from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (Selected) | Metric | Nine Months Ended September 30, 2020 (Thousands of USD) | Nine Months Ended September 30, 2019 (Thousands of USD) | | :--- | :--- | :--- | | Net cash provided by operating activities | 534,962 | 560,294 | | Net cash used in investing activities | (305,820) | (237,827) | | Net cash used in financing activities | (591,128) | (570,333) | | Effect of exchange rate changes | (506) | (208) | | Net decrease in cash, cash equivalents, and restricted cash | (362,492) | (248,074) | | Cash, cash equivalents, and restricted cash, end of period | 155,109 | 118,679 | - Net cash provided by operating activities for the nine months ended September 30, 2020, was $534,962 thousand, a decrease from the prior-year period17 - Net cash used in investing activities increased to $305,820 thousand, primarily due to increased purchases of marketable securities1785 - Net cash used in financing activities increased to $591,128 thousand, primarily due to increased common stock repurchases1786 Notes to Condensed Consolidated Financial Statements This section provides detailed notes to VeriSign, Inc.'s condensed consolidated financial statements, offering additional context on presentation, financial instruments, balance sheet items, stockholders' deficit, earnings per share, revenue, stock-based compensation, non-operating income, and income taxes Note 1. Basis of Presentation This note explains the basis of presentation for the unaudited condensed consolidated financial statements, noting their preparation according to Form 10-Q instructions and management's assessment of fair presentation - These unaudited condensed consolidated financial statements are prepared in accordance with Form 10-Q instructions and do not include all information and notes typically provided in audited financial statements19 - Management believes all necessary adjustments, including normal recurring accruals and other adjustments, have been included for fair presentation19 - Certain prior period amounts have been reclassified to conform to current period presentation, with no impact on previously reported net income20 Note 2. Financial Instruments This note details VeriSign, Inc.'s financial instruments, including cash, cash equivalents, and marketable securities, and their fair value classifications Cash, Cash Equivalents, and Marketable Securities | Metric | September 30, 2020 (Thousands of USD) | December 31, 2019 (Thousands of USD) | | :--- | :--- | :--- | | Cash | 27,162 | 33,238 | | Time deposits | 4,078 | 3,924 | | Money market funds (Level 1) | 123,869 | 149,624 | | Debt securities issued by U.S. Treasury (Level 1) | 1,004,658 | 1,040,678 | | Total | 1,159,767 | 1,227,464 | | Cash and cash equivalents | 145,701 | 508,196 | | Restricted cash (included in other long-term assets) | 9,408 | 9,405 | | Total cash, cash equivalents, and restricted cash | 155,109 | 517,601 | | Marketable securities | 1,004,658 | 709,863 | | Total | 1,159,767 | 1,227,464 | - As of September 30, 2020, the fair value of debt securities held was $1 billion, including less than $0.1 million in unrealized gains21 - All debt securities are scheduled to mature within one year and are classified as Level 1 in the fair value hierarchy2122 - As of September 30, 2020, the fair values of senior notes due in 2023, 2025, and 2027 were $757.9 million, $554.9 million, and $585.9 million, respectively, and are classified as Level 223 Note 3. Selected Balance Sheet Items This note provides a breakdown of selected balance sheet items, including other current assets, other long-term assets, accounts payable and accrued liabilities, and long-term tax and other liabilities Composition of Other Current Assets | Metric | September 30, 2020 (Thousands of USD) | December 31, 2019 (Thousands of USD) | | :--- | :--- | :--- | | Prepaid expenses | 22,032 | 19,818 | | Prepaid registry fees | 22,578 | 21,717 | | Accounts receivable, net | 6,356 | 1,524 | | Contingent consideration receivable | — | 14,721 | | Other | 4,801 | 2,750 | | Total other current assets | 55,767 | 60,530 | - For the nine months ended September 30, 2020, the company received $20.4 million in contingent consideration related to the divested security services business, with the excess over the accounts receivable balance recognized as non-operating income24 Composition of Other Long-Term Assets | Metric | September 30, 2020 (Thousands of USD) | December 31, 2019 (Thousands of USD) | | :--- | :--- | :--- | | Operating lease right-of-use assets | 11,184 | 9,133 | | Restricted cash | 9,408 | 9,405 | | Long-term prepaid registry fees | 7,942 | 7,753 | | Other tax receivables | 1,254 | 6,927 | | Other | 5,375 | 6,594 | | Total other long-term assets | 35,163 | 39,812 | Composition of Accounts Payable and Accrued Liabilities | Metric | September 30, 2020 (Thousands of USD) | December 31, 2019 (Thousands of USD) | | :--- | :--- | :--- | | Accounts payable and accrued expenses | 10,469 | 17,177 | | Taxes payable and other tax liabilities | 34,176 | 33,435 | | Customer deposits | 46,890 | 52,804 | | Accrued employee compensation | 44,106 | 49,869 | | Accrued interest | 33,021 | 24,318 | | Accrued registry fees | 12,419 | 11,529 | | Customer incentives payable | 10,971 | 13,547 | | Other accrued liabilities | 6,290 | 7,309 | | Total accounts payable and accrued liabilities | 198,342 | 209,988 | Long-Term Tax and Other Liabilities | Metric | September 30, 2020 (Thousands of USD) | December 31, 2019 (Thousands of USD) | | :--- | :--- | :--- | | Long-term tax liabilities | 96,190 | 308,112 | | Long-term operating lease liabilities | 5,016 | 4,564 | | Total long-term tax and other liabilities | 101,206 | 312,676 | - For the nine months ended September 30, 2020, the company remeasured certain previously unrecognized income tax benefits, resulting in the recognition of $191.8 million in income tax benefits, with $167.8 million related to a 2013 worthless stock deduction28 Note 4. Stockholders' Deficit This note details changes in stockholders' deficit, focusing on common stock repurchases and the remaining authorization under the share repurchase program - As of February 6, 2020, the Board of Directors authorized the repurchase of $1 billion of common stock, comprising $743 million in new authorization and $257 million from the existing program balance29 - For the three months ended September 30, 2020, the company repurchased 800 thousand shares of common stock at a total cost of $170 million, with an average price of $206.61 per share29 - For the nine months ended September 30, 2020, the company repurchased 2.8 million shares of common stock at a total cost of $564.9 million, with an average price of $198.84 per share29 - As of September 30, 2020, approximately $505.6 million remained available for future repurchases under the stock repurchase program29 Note 5. Calculation of Earnings per Share This note outlines the calculation of basic and diluted earnings per share, including the weighted-average shares outstanding Weighted-Average Shares Used in Earnings per Share Calculation | Metric | Three Months Ended September 30, 2020 (Thousands of Shares) | Three Months Ended September 30, 2019 (Thousands of Shares) | Nine Months Ended September 30, 2020 (Thousands of Shares) | Nine Months Ended September 30, 2019 (Thousands of Shares) | | :--- | :--- | :--- | :--- | :--- | | Weighted-average common shares outstanding | 114,655 | 118,194 | 115,456 | 118,966 | | Weighted-average potential common shares: | | | | | | Unvested restricted stock units and employee stock purchase plan | 176 | 375 | 243 | 444 | | Shares used to calculate diluted earnings per share | 114,831 | 118,569 | 115,699 | 119,410 | - The weighted-average shares used for basic and diluted EPS calculations both decreased in 2020, reflecting the impact of share repurchases31 Note 6. Revenues This note provides a breakdown of revenue by geographic region and discusses factors influencing deferred revenue balances Revenues by Geographic Region | Region | Three Months Ended September 30, 2020 (Thousands of USD) | Three Months Ended September 30, 2019 (Thousands of USD) | Nine Months Ended September 30, 2020 (Thousands of USD) | Nine Months Ended September 30, 2019 (Thousands of USD) | | :--- | :--- | :--- | :--- | :--- | | United States | 202,934 | 193,392 | 599,845 | 577,395 | | Europe, Middle East, and Africa | 54,034 | 51,480 | 159,103 | 155,221 | | China | 27,463 | 30,647 | 86,676 | 88,337 | | Other | 33,448 | 32,902 | 99,144 | 100,165 | | Total revenues | 317,879 | 308,421 | 944,768 | 921,118 | - Revenue in the United States and EMEA regions increased for both the three and nine months ended September 30, 2020, while revenue from China decreased32 - The increase in deferred revenue balance was primarily driven by billing for domain name registrations and renewals during the first nine months of 2020, partially offset by refunds for domain name renewals deleted within the 45-day grace period33 - As of September 30, 2020, the deferred revenue balance represents the company's remaining performance obligations, with most expected to be recognized as revenue within 12 months33 Note 7. Stock-based Compensation This note details the classification and nature of stock-based compensation expenses for the reported periods Classification of Stock-Based Compensation Expense | Expense Category | Three Months Ended September 30, 2020 (Thousands of USD) | Three Months Ended September 30, 2019 (Thousands of USD) | Nine Months Ended September 30, 2020 (Thousands of USD) | Nine Months Ended September 30, 2019 (Thousands of USD) | | :--- | :--- | :--- | :--- | :--- | | Cost of revenues | 1,558 | 1,725 | 4,761 | 5,064 | | Sales and marketing | 830 | 864 | 2,558 | 2,866 | | Research and development | 1,810 | 1,513 | 5,266 | 4,744 | | General and administrative | 8,480 | 8,518 | 23,521 | 25,563 | | Total stock-based compensation expense | 12,678 | 12,620 | 36,106 | 38,237 | Nature of Stock-Based Compensation Expense | Nature | Three Months Ended September 30, 2020 (Thousands of USD) | Three Months Ended September 30, 2019 (Thousands of USD) | Nine Months Ended September 30, 2020 (Thousands of USD) | Nine Months Ended September 30, 2019 (Thousands of USD) | | :--- | :--- | :--- | :--- | :--- | | Restricted stock units (RSUs) | 10,871 | 10,650 | 29,060 | 28,318 | | Performance restricted stock units | 1,102 | 1,222 | 5,146 | 7,554 | | Employee stock purchase plan (ESPP) | 1,105 | 1,209 | 3,320 | 3,650 | | Capitalized (included in property and equipment, net) | (400) | (461) | (1,420) | (1,285) | | Total stock-based compensation expense | 12,678 | 12,620 | 36,106 | 38,237 | - Total stock-based compensation expense for the nine months ended September 30, 2020, was $36,106 thousand, a slight decrease from the prior-year period35 Note 8. Non-operating Income, Net This note explains the components of non-operating income, net, highlighting changes in interest income, transition services revenue, and gain on sale of business Composition of Non-Operating Income, Net | Metric | Three Months Ended September 30, 2020 (Thousands of USD) | Three Months Ended September 30, 2019 (Thousands of USD) | Nine Months Ended September 30, 2020 (Thousands of USD) | Nine Months Ended September 30, 2019 (Thousands of USD) | | :--- | :--- | :--- | :--- | :--- | | Interest income | 805 | 6,457 | 7,500 | 21,045 | | Transition services revenue | — | 3,750 | 2,100 | 11,850 | | Gain on sale of business | (9) | 64 | 5,602 | 817 | | Other, net | (21) | 227 | 60 | 425 | | Total non-operating income, net | 775 | 10,498 | 15,262 | 34,137 | - Non-operating income, net, significantly decreased for both the three and nine months ended September 30, 2020, primarily due to lower interest income from debt securities investments and the expiration of the transition services agreement in February 202036 - The gain on sale of business increased in 2020, reflecting contingent consideration received related to the divested security services business exceeding estimated receivables36 Note 9. Income Taxes This note details income tax expense (benefit) and effective tax rates, explaining the factors contributing to changes in tax positions Income Tax Expense (Benefit) and Effective Tax Rate | Metric | Three Months Ended September 30, 2020 (Thousands of USD) | Three Months Ended September 30, 2019 (Thousands of USD) | Nine Months Ended September 30, 2020 (Thousands of USD) | Nine Months Ended September 30, 2019 (Thousands of USD) | | :--- | :--- | :--- | :--- | :--- | | Income tax expense (benefit) | 13,908 | 39,568 | (90,226) | 109,825 | | Effective tax rate | 8 % | 20 % | (16)% | 19 % | - For the nine months ended September 30, 2020, the company recognized an income tax benefit of $90,226 thousand compared to an expense of $109,825 thousand in the prior-year period, resulting in a negative 16% effective tax rate37 - The effective tax rate differs from the 21% statutory federal rate primarily due to a lower foreign effective tax rate and excess tax benefits related to stock-based compensation, partially offset by state income taxes and U.S. taxation of foreign earnings (after foreign tax credits)37 - The company remeasured certain previously unrecognized income tax benefits, resulting in the recognition of $191.8 million in income tax benefits during the first nine months of 2020, with $167.8 million related to a 2013 worthless stock deduction38 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section discusses VeriSign, Inc.'s financial condition and results of operations for the period ended September 30, 2020, covering business overview, key highlights, COVID-19 impact, revenue and expense analysis, and liquidity Overview This overview describes Verisign as a global provider of domain name registration services and internet infrastructure, focusing on .com and .net top-level domains - Verisign is a global provider of domain name registration services and internet infrastructure, offering registry services and authoritative resolution for .com and .net top-level domains42 - As of September 30, 2020, the company had 163.7 million .com and .net domain name registrations, driven by online advertising, e-commerce, and internet user growth43 - Domain name registration growth may be hindered by overall economic conditions, competition from country code top-level domains (ccTLDs) and new generic top-level domains (gTLDs), and changes in internet user behavior43 Business Highlights and Trends This section highlights key business metrics and trends, including revenue growth, domain name registrations, and renewal rates Key Business Highlights | Metric | Three Months Ended September 30, 2020 | Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2020 | Nine Months Ended September 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $317.9 million | $308.4 million | $944.8 million | $921.1 million | | Operating income | $206.6 million | $205.6 million | $619.7 million | $607.6 million | | .com and .net domain registrations | 163.7 million (as of September 30, 2020) | 157.4 million (as of September 30, 2019) | | | | New .com and .net domain registrations | 10.9 million | 9.9 million | | | | .com and .net renewal rate for Q2 2020 | 72.8% | 74.2% | | | - Revenue increased by 3% year-over-year for both the three and nine months ended September 30, 202045 - As of September 30, 2020, .com and .net domain name registrations increased by 4% year-over-year, with a net increase of 1.7 million from June 30, 202045 - The .com and .net renewal rate for the second quarter of 2020 was 72.8%, lower than 74.2% in the prior-year period45 COVID-19 Update This section provides an update on the company's response to the COVID-19 pandemic, its impact on domain demand, and pricing decisions - The company established a task force to monitor the pandemic, implementing measures like travel restrictions, modified sick leave policies, and remote work for most employees to protect staff48 - The pandemic has, to date, led to increased demand for domain names, particularly from businesses and entrepreneurs seeking to establish or expand online presence48 - Revenue growth in the first three quarters of 2020 was primarily driven by increased .com TLD registrations, but the pandemic's future impact on growth remains uncertain48 - The company announced a freeze on registration and renewal prices for all TLDs, including .com and .net, until March 31, 202151 Results of Operations This section analyzes VeriSign, Inc.'s operating results, including revenue, cost of revenues, sales and marketing, research and development, general and administrative expenses, interest expense, non-operating income, and income taxes Operating Results as a Percentage of Revenue | Metric | Three Months Ended September 30, 2020 | Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2020 | Nine Months Ended September 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Revenue | 100.0 % | 100.0 % | 100.0 % | 100.0 % | | Cost of revenues | 14.2 % | 14.4 % | 14.2 % | 14.5 % | | Sales and marketing | 2.6 % | 3.2 % | 2.5 % | 3.5 % | | Research and development | 6.2 % | 4.7 % | 5.9 % | 5.0 % | | General and administrative | 12.0 % | 11.0 % | 11.8 % | 11.0 % | | Total costs and expenses | 35.0 % | 33.3 % | 34.4 % | 34.0 % | | Operating income | 65.0 % | 66.7 % | 65.6 % | 66.0 % | | Interest expense | (7.1)% | (7.4)% | (7.2)% | (7.4)% | | Non-operating income, net | 0.3 % | 3.4 % | 1.6 % | 3.7 % | | Income before income taxes | 58.2 % | 62.7 % | 60.0 % | 62.3 % | | Income tax (expense) benefit | (4.4)% | (12.8)% | 9.6 % | (11.9)% | | Net income | 53.8 % | 49.9 % | 69.6 % | 50.4 % | Revenues This subsection analyzes revenue trends, primarily from .com and .net domain registrations, and discusses pricing agreements and the COVID-19 related price freeze - Revenue primarily derives from .com and .net domain name registrations, with the company collecting a fixed annual fee from registrars51 - For the three and nine months ended September 30, 2020, revenue increased by $9.5 million and $23.7 million, respectively, mainly due to a 4% increase in .com TLD registrations5253 - The company has agreements with the Department of Commerce and ICANN allowing for price increases of up to 7% for .com domains and up to 10% annually for .net domains during specific periods51 - In response to the COVID-19 crisis, the company has frozen registration and renewal prices for all TLDs, including .com and .net, until March 31, 202151 Geographic revenues This subsection provides a comparative analysis of revenue by geographic region, highlighting growth in the US and EMEA and a decline in China Comparative Geographic Revenues | Region | Three Months Ended September 30, 2020 (Thousands of USD) | Percentage Change | Three Months Ended September 30, 2019 (Thousands of USD) | Nine Months Ended September 30, 2020 (Thousands of USD) | Percentage Change | Nine Months Ended September 30, 2019 (Thousands of USD) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | United States | 202,934 | 5 % | 193,392 | 599,845 | 4 % | 577,395 | | Europe, Middle East, and Africa | 54,034 | 5 % | 51,480 | 159,103 | 3 % | 155,221 | | China | 27,463 | (10)% | 30,647 | 86,676 | (2)% | 88,337 | | Other | 33,448 | 2 % | 32,902 | 99,144 | (1)% | 100,165 | | Total revenues | 317,879 | | 308,421 | 944,768 | | 921,118 | - Revenue growth in the United States and EMEA regions during the first nine months of 2020 was primarily driven by increased sales to registrars in those areas56 - Revenue from registrars in China decreased in 2020 due to lower new registrations and renewal rates in that region56 Cost of revenues This subsection analyzes the cost of revenues, noting its stability compared to the prior year and future expectations Comparative Cost of Revenues | Metric | Three Months Ended September 30, 2020 (Thousands of USD) | Percentage Change | Three Months Ended September 30, 2019 (Thousands of USD) | Nine Months Ended September 30, 2020 (Thousands of USD) | Percentage Change | Nine Months Ended September 30, 2019 (Thousands of USD) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Cost of revenues | 45,024 | 1 % | 44,443 | 134,205 | — % | 134,013 | - Cost of revenues remained largely consistent for the three and nine months ended September 30, 2020, compared to the prior-year periods, primarily due to reduced salary and employee benefits expenses from personnel function adjustments to R&D, offset by other minor items58 - The cost of revenues as a percentage of revenue is expected to remain consistent with the first nine months for the remainder of 202060 Sales and marketing This subsection analyzes sales and marketing expenses, highlighting a decrease due to reduced marketing initiatives and future expectations Comparative Sales and Marketing Expenses | Metric | Three Months Ended September 30, 2020 (Thousands of USD) | Percentage Change | Three Months Ended September 30, 2019 (Thousands of USD) | Nine Months Ended September 30, 2020 (Thousands of USD) | Percentage Change | Nine Months Ended September 30, 2019 (Thousands of USD) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Sales and marketing | 8,389 | (15)% | 9,857 | 23,883 | (27)% | 32,775 | - Sales and marketing expenses decreased by $8.9 million for the nine months ended September 30, 2020, primarily due to a $6.4 million reduction in advertising and marketing expenses from fewer regional marketing initiatives62 - Sales and marketing expenses as a percentage of revenue are expected to increase for the remainder of 2020 as the company executes more advertising and marketing activities63 Research and development This subsection analyzes research and development expenses, noting an increase due to personnel adjustments and COVID-19 related benefits Comparative Research and Development Expenses | Metric | Three Months Ended September 30, 2020 (Thousands of USD) | Percentage Change | Three Months Ended September 30, 2019 (Thousands of USD) | Nine Months Ended September 30, 2020 (Thousands of USD) | Percentage Change | Nine Months Ended September 30, 2019 (Thousands of USD) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Research and development | 19,708 | 35 % | 14,619 | 55,268 | 21 % | 45,704 | - Research and development expenses increased by $9.6 million for the nine months ended September 30, 2020, primarily due to a $7.2 million increase in salary and employee benefits from personnel function adjustments, new hires, and increased paid leave benefits for COVID-1964 - Research and development expenses as a percentage of revenue are expected to remain consistent with the first nine months for the remainder of 202065 General and administrative This subsection analyzes general and administrative expenses, detailing increases from personnel, charitable contributions, software, and legal fees, partially offset by lower stock-based compensation Comparative General and Administrative Expenses | Metric | Three Months Ended September 30, 2020 (Thousands of USD) | Percentage Change | Three Months Ended September 30, 2019 (Thousands of USD) | Nine Months Ended September 30, 2020 (Thousands of USD) | Percentage Change | Nine Months Ended September 30, 2019 (Thousands of USD) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | General and administrative | 38,109 | 12 % | 33,886 | 111,719 | 11 % | 101,065 | - General and administrative expenses increased by $10.7 million for the nine months ended September 30, 2020, primarily due to a $6.4 million increase in salary and employee benefits, $3.1 million in charitable contributions (supporting COVID-19 response and equal justice), $2.2 million in software license fees, and $1.8 million in legal fees68 - A $2.0 million decrease in stock-based compensation expense partially offset these increases68 - General and administrative expenses as a percentage of revenue are expected to remain consistent with the first nine months for the remainder of 202069 Interest expense This subsection analyzes interest expense, noting its stability and future expectations - Interest expense remained largely consistent for the three and nine months ended September 30, 2020, compared to the prior-year periods70 - Quarterly interest expense is expected to remain consistent with the first nine months for the remainder of 202070 Non-operating income, net This subsection analyzes non-operating income, net, detailing decreases in interest and transition services revenue, and an increase in gain on sale of business Composition of Non-Operating Income, Net | Metric | Three Months Ended September 30, 2020 (Thousands of USD) | Three Months Ended September 30, 2019 (Thousands of USD) | Nine Months Ended September 30, 2020 (Thousands of USD) | Nine Months Ended September 30, 2019 (Thousands of USD) | | :--- | :--- | :--- | :--- | :--- | | Interest income | 805 | 6,457 | 7,500 | 21,045 | | Transition services revenue | — | 3,750 | 2,100 | 11,850 | | Gain on sale of business | (9) | 64 | 5,602 | 817 | | Other, net | (21) | 227 | 60 | 425 | | Total non-operating income, net | 775 | 10,498 | 15,262 | 34,137 | - Interest income decreased for both the three and nine months ended September 30, 2020, due to lower interest rates on debt securities investments71 - Transition services revenue decreased due to the expiration of the transition services agreement for the divested security services business in February 202071 - Gain on sale of business increased in the first nine months of 2020, reflecting contingent consideration received exceeding estimated receivables71 Income tax expense (benefit) This subsection analyzes income tax expense (benefit) and effective tax rates, explaining the impact of tax benefits and future projections Income Tax Expense (Benefit) and Effective Tax Rate | Metric | Three Months Ended September 30, 2020 (Thousands of USD) | Three Months Ended September 30, 2019 (Thousands of USD) | Nine Months Ended September 30, 2020 (Thousands of USD) | Nine Months Ended September 30, 2019 (Thousands of USD) | | :--- | :--- | :--- | :--- | :--- | | Income tax expense (benefit) | 13,908 | 39,568 | (90,226) | 109,825 | | Effective tax rate | 8 % | 20 % | (16)% | 19 % | - For the nine months ended September 30, 2020, the company remeasured certain previously unrecognized income tax benefits, resulting in the recognition of $191.8 million in income tax benefits, with $167.8 million related to a 2013 worthless stock deduction74 - The full-year effective tax rate for 2020 is projected to be a net benefit of 6% to 9%, reflecting the recognized $191.8 million tax benefit75 Liquidity and Capital Resources This section discusses VeriSign, Inc.'s liquidity and capital resources, including cash and marketable securities, debt obligations, and cash flow from operating, investing, and financing activities Cash and Marketable Securities | Metric | September 30, 2020 (Thousands of USD) | December 31, 2019 (Thousands of USD) | | :--- | :--- | :--- | | Cash and cash equivalents | 145,701 | 508,196 | | Marketable securities | 1,004,658 | 709,863 | | Total | 1,150,359 | 1,218,059 | - As of September 30, 2020, the company's primary liquidity sources were $145.7 million in cash and cash equivalents and $1,004.7 million in marketable securities76 - All debt securities have contractual maturities within one year and are primarily invested in U.S. Treasury securities76 - As of September 30, 2020, the company had $550 million in senior unsecured notes due 2027, $500 million due 2025, and $750 million due 202378 - The company believes existing cash, cash equivalents, marketable securities, and funds generated from operations, combined with borrowing capacity under its $200 million revolving credit facility, are sufficient to meet working capital, capital expenditure, and debt service needs for the next 12 months79 Cash flows from operating activities This subsection analyzes cash flows from operating activities, noting a decrease due to increased tax payments and reduced interest and transition services income Cash Flows from Operating Activities | Metric | Nine Months Ended September 30, 2020 (Thousands of USD) | Nine Months Ended September 30, 2019 (Thousands of USD) | | :--- | :--- | :--- | | Net cash provided by operating activities | 534,962 | 560,294 | - Net cash provided by operating activities for the nine months ended September 30, 2020, decreased primarily due to increased income tax payments, reduced interest income on investments, and lower cash receipts from transition services, partially offset by decreased cash paid to suppliers and increased cash receipts from customers83 Cash flows from investing activities This subsection analyzes cash flows from investing activities, highlighting an increase in net cash outflow due to higher purchases of marketable securities and equipment Cash Flows from Investing Activities | Metric | Nine Months Ended September 30, 2020 (Thousands of USD) | Nine Months Ended September 30, 2019 (Thousands of USD) | | :--- | :--- | :--- | | Net cash used in investing activities | (305,820) | (237,827) | - Net cash used in investing activities for the nine months ended September 30, 2020, increased primarily due to higher purchases of marketable securities and investments (net of maturities and sales) and increased equipment purchases, partially offset by contingent consideration received from the divested security services business85 Cash flows from financing activities This subsection analyzes cash flows from financing activities, noting an increase in net cash outflow due to higher stock repurchases Cash Flows from Financing Activities | Metric | Nine Months Ended September 30, 2020 (Thousands of USD) | Nine Months Ended September 30, 2019 (Thousands of USD) | | :--- | :--- | :--- | | Net cash used in financing activities | (591,128) | (570,333) | - Net cash used in financing activities for the nine months ended September 30, 2020, increased primarily due to higher common stock repurchases86 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section states that there have been no significant changes in the company's market risk exposure since December 31, 2019 - There have been no significant changes in the company's market risk exposure since December 31, 201987 ITEM 4. CONTROLS AND PROCEDURES This section discloses the company's assessment of disclosure controls and procedures, confirming their effectiveness, and discusses changes and inherent limitations in internal control over financial reporting Evaluation of Disclosure Controls and Procedures This subsection details the evaluation of disclosure controls and procedures, confirming their effectiveness as of September 30, 2020 - As of September 30, 2020, the company's Chief Executive Officer and Chief Financial Officer assessed the effectiveness of disclosure controls and procedures as effective89 - Disclosure controls and procedures are designed to ensure that information required to be disclosed in SEC reports is recorded, processed, summarized, and reported timely89 Changes in Internal Control over Financial Reporting This subsection states that there were no material changes in internal control over financial reporting during the quarter ended September 30, 2020 - There were no changes in the company's internal control over financial reporting that materially affected or are reasonably likely to materially affect internal control during the three months ended September 30, 202090 Inherent Limitations of Disclosure Controls and Internal Control over Financial Reporting This subsection acknowledges the inherent limitations of disclosure controls and internal control over financial reporting, which may not prevent all errors or fraud - Due to inherent limitations, disclosure controls and procedures and internal control over financial reporting may not prevent all material misstatements or fraud91 - Control systems can only provide reasonable, not absolute, assurance, and their effectiveness is subject to risks such as changing conditions or declining adherence to policies and procedures91 PART II—OTHER INFORMATION This part provides additional information, including legal proceedings, risk factors, unregistered equity securities sales, and a list of exhibits ITEM 1. LEGAL PROCEEDINGS The company is involved in various legal proceedings, but management believes they will not materially adversely affect its financial condition, operating results, or cash flows, though litigation costs and management distraction are possible - The company is involved in various investigations, claims, and lawsuits, but management believes these will not materially adversely affect its financial condition, results of operations, or cash flows94 - Any litigation could result in significant legal expenses and diversion of management's attention94 ITEM 1A. RISK FACTORS This section details various risk factors that could materially impact the company's business, prospects, operating results, or financial condition, including the COVID-19 pandemic, business agreement risks, government regulation, system security, internet governance changes, market competition, registrar relationships, system interruptions, macroeconomic conditions, international operations, intellectual property, litigation, strategic initiatives, key employee dependence, tax policy changes, marketable securities value fluctuations, real estate ownership, and anti-takeover protections and debt management The effects of the COVID-19 pandemic could adversely affect our business, operations, financial condition and results of operations, and the extent to which the effects of the pandemic will impact our business, operations, financial condition and results of operations remains uncertain. The COVID-19 pandemic's effects could adversely impact the company's business, operations, financial condition, and results, with the extent of its future impact remaining uncertain - The COVID-19 pandemic and responses have caused significant market volatility, business and economic disruptions, and uncertainty96 - The extent of the pandemic's impact on the company's business, operations, financial condition, and results of operations is uncertain, depending on factors like duration, effectiveness of response measures, impact on employees, customers, and suppliers, ability to maintain critical infrastructure, and effects on domain name registration demand969798 - As of the report date, the company's financial condition and results of operations have not been adversely affected by the COVID-19 pandemic, but future uncertainty remains97 Risks arising from our agreements governing our business could limit our ability to maintain or grow our business. Risks from business agreements, particularly those governing gTLD operations, could limit the company's ability to maintain or grow its business due to restrictions, obligations, changes, or challenges - The vast majority of the company's revenue is derived from operating gTLDs like .com and .net, and restrictions, obligations, changes, or challenges to these agreements could materially adversely affect the business98 - The Cooperative Agreement with the Department of Commerce (DOC) has been extended until November 30, 2024, allowing for annual .com domain price increases of up to 7% in the last four years of specific six-year periods98100103 - ICANN has the right to modify new gTLD registry agreements under certain conditions, potentially imposing unfavorable contractual obligations102 - The company has the right to increase .net domain registration prices by up to 10% annually during the term of its agreement with ICANN105 - The Third .com Amendment clarified that vertical integration restrictions apply only to the .com TLD, prohibiting the company from directly or indirectly acquiring more than 15% ownership interest in any ICANN-accredited registrar selling .com domain registrations106 - The .com, .net, and .name registry agreements include "presumptive" renewal rights, but renewal terms may need to be similar to those of the five largest gTLD registry agreements108 - ICANN may adopt consensus or temporary policies unfavorable to the company's strategy or business, increasing operational costs or legal risks109 Governmental regulation and the application of new and existing laws in the U.S. and overseas may slow business growth, increase our costs of doing business, create potential liability and have an adverse effect on our business. Government regulation and the application of new and existing laws in the U.S. and overseas may slow business growth, increase operating costs, create potential liability, and adversely affect the company's business - The application of new and existing laws and regulations in the U.S. and overseas to the internet and communications industry may be unclear, and compliance costs or non-compliance could limit operations, create significant liability, and lead to litigation112 - The Chinese government has issued new regulations and begun enforcing existing ones, imposing additional costs and risks on the company's registry services in China, potentially impacting domain name registration growth or renewal rates112113 - The company faces challenges from various privacy, data protection, and data security laws and regulations in its international operations, such as the EU's GDPR, which could increase compliance costs and potential liabilities115 - Federal, state, or foreign governments may attempt to regulate internet transmissions or prosecute the company for legal violations, potentially leading to increased compliance costs, reputational damage, liability, fines, or changes in business practices116 Undetected or unknown defects in our systems or services, security breaches including from vulnerabilities, defects in the technologies, components, and services in our supply chain, and Distributed Denial of Service ("DDoS") attacks could expose us to liability and materially harm our business and reputation. Undetected defects, security breaches, supply chain vulnerabilities, and DDoS attacks could expose the company to liability and materially harm its business and reputation - The services provided by the company may contain undetected defects or errors, potentially leading to service interruptions, customer data breaches, reputational damage, claims, and increased costs117 - As an operator of critical internet infrastructure, the company frequently faces sophisticated cyberattacks, including advanced persistent threats and zero-day threats118 - Both external and internal threats, including third-party vendors and employees, could lead to security breaches affecting the security of data centers and domain name registration systems118 - The company's networks have experienced DDoS attacks, and the increasing scale and sophistication of these attacks could lead to network outages, increased response times, and inability to meet service level agreements122 Changes to the multi-stakeholder model of internet governance could materially and adversely impact our business. Changes to the multi-stakeholder model of internet governance, including the transition of DNS coordination from the U.S. government, could materially and adversely impact the company's business - The U.S. government has transitioned its historical role in DNS coordination to the multi-stakeholder community, and this change could materially and adversely impact the company's business124125 - ICANN or the Empowered Community may adopt positions unfavorable to the company's strategy or business124126 - Some foreign governments and multi-stakeholder community members question ICANN's role in internet governance, potentially seeking multilateral oversight bodies or changes to ICANN's Government Advisory Committee to give governments more control over certain aspects of internet governance127 We face risks from our operation of two root zone servers and performance of the Root Zone Maintainer functions under the RZMA. The company faces risks from operating two root zone servers and performing Root Zone Maintainer functions under the RZMA, including potential claims and security issues from new gTLD deployments - The company operates two of the 13 root zone servers, which are critical for the proper functioning of the internet128 - As the Root Zone Maintainer, the company provides and publishes authoritative root zone data under the RZMA agreement, potentially facing significant claims regarding its agreements or performance128129 - The deployment of new gTLDs may introduce security and stability issues at the root zone and other DNS levels, such as name collisions, potentially leading to network outages and cyberattacks130 The evolution of internet practices and behaviors, the adoption of substitute technologies, or price increases may impact the demand for domain names. The evolution of internet practices, adoption of substitute technologies, or price increases may impact domain name demand, affecting the company's business - The development of technologies like social media, mobile devices, applications, and search engines has changed how consumers and businesses use the internet, potentially affecting domain name demand131 - Domain name demand could decline if significant changes occur in web browsers or internet search technology, or if user preferences shift towards applications, voice recognition technology, or third-party identifiers132133 - The emergence of alternative TLDs, such as blockchain naming space systems, if widely adopted, could negatively impact demand for root zone TLDs134 - Changes in compensation practices for registrars and registrants by advertisers and ad networks, along with reduced online advertising and marketing spending, could lead to decreased domain name demand and renewal rates135 Many of our markets are evolving, and if these markets fail to develop or if our products and services are not widely accepted in these markets, our business or our prospects could be harmed. Many of the company's markets are evolving, and failure to develop or widespread acceptance of its products and services could harm its business or prospects - The company seeks to grow its business in many evolving markets, but these markets may fail to develop or its services may not be widely accepted, leading to business harm137138 - Factors affecting service acceptance include regional internet infrastructure development, acceptance of alternative products and services, perception of technology security, mobile device usage habits, cyber threats, government regulation, and competition from ccTLDs and new gTLDs137 The business environment is highly competitive and, if we do not compete effectively, we may suffer lower demand for our products, reduced gross margins and loss of market share. The highly competitive business environment means ineffective competition could lead to lower product demand, reduced gross margins, and loss of market share - The internet and communication network services industry is characterized by rapid technological change, requiring the company to continuously improve service performance, functionality, and reliability to remain competitive139 - The company faces competition from other gTLD and ccTLD registries, which compete for domain name registrations and online presence141 - New gTLDs, particularly IDN gTLDs, may face challenges with widespread acceptance and usability, as existing software may not universally recognize and support them141 We must establish and maintain strong relationships with registrars and their resellers to maintain their focus on marketing our products and services; otherwise, our business could be harmed. The company must maintain strong relationships with registrars and their resellers to ensure their focus on marketing its products and services, as failure to do so could harm its business - All domain name registrations occur through registrars, and the marketing efforts of registrars and their resellers are crucial for domain name demand and renewal rates143 - Consolidation or strategic changes in the registrar and reseller industry could lead to reduced marketing efforts, adversely impacting domain name demand and renewal rates143 - Registrars and resellers may focus more on selling other competing TLDs or their own services, reducing attention to the company's TLDs, which could adversely affect revenue144 If we encounter system interruptions or failures, we could be exposed to liability and our reputation and business could suffer. System interruptions or failures could expose the company to liability and harm its reputation and business - The company's business relies on the continuous operation of various systems, secure data centers, and other computer and communication networks, which are vulnerable to damage or interruption from power outages, natural disasters, cyberattacks, software defects, and human error145 - The company is transitioning some data center operations to leased facilities and updating its network architecture, and if these facilities or architecture do not perform as expected, service interruptions could occur146 - Failures in critical infrastructure like root zone servers, root zone files, and the Shared Registration System could lead to DNS resolution or service interruptions, or even domain name deletion from the internet, resulting in potential liability and harm to the company's reputation and business148 Our operating results may be adversely affected as a result of unfavorable market, economic, social, public health, and political conditions. Unfavorable market, economic, social, public health, and political conditions could adversely affect the company's operating results - Unfavorable global market, economic, social, public health, and political environments could impact customer business growth, demand for company services, price competition, stock price, liquidity, and debt servicing ability149151 - If these conditions disproportionately affect specific industries and geographic regions where the company's products and services end-users are concentrated, the business could suffer149 Our international operations subject our business to additional economic, legal, regulatory and political risks that could have an adverse impact on our revenues and business. The company's international operations expose it to additional economic, legal, regulatory, and political risks that could adversely impact revenues and business - A significant portion of the company's revenue comes from customers outside the U.S., and international operations require substantial management attention and resources, facing risks like local legal and custom differences and employee non-compliance150152 - International business risks include competition from foreign companies, legal uncertainties, intergovernmental political and economic tensions, tariffs and trade barriers, difficulties managing foreign operations, exchange rate fluctuations, technology adaptation issues, difficulties verifying end-user information, stricter privacy policies, and threats of terrorism152 - Escalating political tensions between the U.S. and China could pose additional risks to the company's operations in China, including tariffs, trade restrictions, and government actions153 We rely on our intellectual property rights to protect our proprietary assets, and any failure by us to protect or enforce, or any misappropriation of, our intellectual property could harm our business. The company relies on intellectual property rights to protect proprietary asset