VRSN VeriSign Inc

VeriSign, Inc. (NASDAQ: VRSN), a global leader in domain names and internet security, today reported financial results for the second quarter of 2018.

Second Quarter GAAP Financial Results

VeriSign, Inc. and subsidiaries (“Verisign”) reported revenue of $302 million for the second quarter of 2018, up 4.8% percent from the same quarter in 2017. Verisign reported net income of $128 million and diluted earnings per share (diluted “EPS”) of $1.04 for the second quarter of 2018, compared to net income of $123 million and diluted EPS of $0.99 for the same quarter in 2017. The operating margin was 63.8 percent for the second quarter of 2018 compared to 60.6 percent for the same quarter in 2017.

Second Quarter Non-GAAP Financial Results

Verisign reported, on a non-GAAP basis, net income of $145 million and diluted EPS of $1.18 for the second quarter of 2018, compared to net income of $130 million and diluted EPS of $1.05 for the same quarter in 2017. The non-GAAP operating margin was 68.2 percent for the second quarter of 2018 compared to 65.3 percent for the same quarter in 2017. A table reconciling the GAAP to the non-GAAP results (which excludes items described below) is appended to this release.

“Focus and disciplined execution have produced another solid quarter,” said Jim Bidzos, Executive Chairman, President and Chief Executive Officer.

Financial Highlights

• On May 1, 2018, Verisign settled the conversion/redemption of all of its outstanding subordinated convertible debentures by payment of $1.25 billion in cash and the issuance of 26.1 million shares of Verisign’s common stock.
• Verisign ended the second quarter with cash, cash equivalents and marketable securities of $1.17 billion, a decrease of $1.24 billion from year-end 2017.
• Cash flow from operating activities was $202 million for the second quarter of 2018, compared with $181 million for the same quarter in 2017.
• Deferred revenues on June 30, 2018, totaled $1.03 billion, an increase of $27 million from year-end 2017.
• During the second quarter, Verisign repurchased 1.0 million shares of its common stock for $125 million. At June 30, 2018, $813 million remained available and authorized under the current share repurchase program which has no expiration.

Business Highlights

• Verisign ended the second quarter with 149.7 million .com and .net domain name registrations in the domain name base, a 3.7 percent increase from the end of the second quarter of 2017, and a net increase of 1.39 million during the second quarter of 2018.
• In the second quarter, Verisign processed 9.6 million new domain name registrations for .com and .net, compared to 9.2 million for the same quarter in 2017.
• The final .com and .net renewal rate for the first quarter of 2018 was 75.3 percent compared with 72.5 percent for the same quarter in 2017. Renewal rates are not fully measurable until 45 days after the end of the quarter.

Non-GAAP Financial Measures and Adjusted EBITDA

Verisign provides quarterly and annual financial statements that are prepared in accordance with generally accepted accounting principles (GAAP). Along with this information, management typically discloses and discusses certain non-GAAP financial information in quarterly earnings releases, on investor conference calls and during investor conferences and related events. This non-GAAP financial information does not include the following types of financial measures that are included in GAAP: stock-based compensation, unrealized gain/loss on the contingent interest derivative on the subordinated convertible debentures, non-cash interest expense, and loss on debt extinguishment. Non-GAAP net income is decreased by amounts accrued for contingent interest payable through August 15, 2017, related to the subordinated convertible debentures, and is adjusted for an income tax rate of 22 percent starting from the first quarter of 2018, 25 percent for the second through the fourth quarters of 2017, and 26 percent for the first quarter of 2017, all of which differ from the GAAP income tax rate.

On a quarterly basis, Verisign also provides Adjusted EBITDA. Adjusted EBITDA is a non-GAAP financial measure and is calculated in accordance with the terms of the indentures governing Verisign’s senior notes. Adjusted EBITDA refers to net income before interest, taxes, depreciation and amortization, stock-based compensation, unrealized gain / loss on the contingent interest derivative on the subordinated convertible debentures, unrealized gain / loss on hedging agreements, gain on the sale of a business, and loss on debt extinguishment.

Management believes that this non-GAAP financial data supplements the GAAP financial data by providing investors with additional information that allows them to have a clearer picture of Verisign’s operations and financial performance and the comparability of Verisign’s operating results from period to period. The presentation of this additional information is not meant to be considered in isolation nor as a substitute for results prepared in accordance with GAAP.

The tables appended to this release include a reconciliation of the non-GAAP financial information to the comparable financial information reported in accordance with GAAP for the given periods.

Today’s Conference Call

Verisign will host a live conference call today at 4:30 p.m. (EDT) to review the second quarter 2018 results. The call will be accessible by direct dial at (888) 676-VRSN (U.S.) or (323) 701-0225 (international), conference ID: Verisign. A listen-only live web cast of the conference call and accompanying slide presentation will also be available at https://investor.verisign.com. An audio archive of the call will be available at https://investor.verisign.com/events.cfm. This news release and the financial information discussed on today’s conference call are available at https://investor.verisign.com.

About Verisign

Verisign, a global leader in domain names and internet security, enables internet navigation for many of the world’s most recognized domain names and provides protection for websites and enterprises around the world. Verisign ensures the security, stability and resiliency of key internet infrastructure and services, including the .com and .net domains and two of the internet’s root servers, as well as performs the root zone maintainer function for the core of the internet’s Domain Name System (DNS). Verisign’s Security Services include Distributed Denial of Service Protection and Managed DNS. To learn more about what it means to be Powered by Verisign, please visit Verisign.com.

VRSNF

Statements in this announcement other than historical data and information constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. These statements involve risks and uncertainties that could cause our actual results to differ materially from those stated or implied by such forward-looking statements. The potential risks and uncertainties include, among others, whether the U.S. Department of Commerce will approve any exercise by us of our right to increase the price per .com domain name, under certain circumstances, the uncertainty of whether we will be able to demonstrate to the U.S. Department of Commerce that market conditions warrant removal of the pricing restrictions on .com domain names and the uncertainty of whether we will experience other negative changes to our pricing terms; the failure to renew key agreements on similar terms, or at all; new or existing governmental laws and regulations in the U.S. or other applicable foreign jurisdictions; system interruptions, security breaches, attacks on the internet by hackers, viruses, or intentional acts of vandalism; the uncertainty of the impact of changes to the multi-stakeholder model of internet governance; changes in internet practices and behavior and the adoption of substitute technologies; the success or failure of the evolution of our markets; the operational and other risks from the introduction of new gTLDs by ICANN and our provision of back-end registry services; the highly competitive business environment in which we operate; whether we can maintain strong relationships with registrars and their resellers to maintain their marketing focus on our products and services; challenging global economic conditions; economic, legal and political risk associated with our international operations; our ability to protect and enforce our rights to our intellectual property and ensure that we do not infringe on others’ intellectual property; the outcome of legal or other challenges resulting from our activities or the activities of registrars or registrants, or litigation generally; the impact of our new strategic initiatives, including our IDN gTLDs; whether we can retain and motivate our senior management and key employees; and the impact of unfavorable tax rules and regulations. More information about potential factors that could affect our business and financial results is included in our filings with the SEC, including in our Annual Report on Form 10-K for the year ended Dec. 31, 2017, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Verisign undertakes no obligation to update any of the forward-looking statements after the date of this announcement.

©2018 VeriSign, Inc. All rights reserved. VERISIGN, the VERISIGN logo, and other trademarks, service marks, and designs are registered or unregistered trademarks of VeriSign, Inc. and its subsidiaries in the United States and in foreign countries. All other trademarks are property of their respective owners.

   

VERISIGN, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)

  June 30, 2018 December 31, 2017

ASSETS

Current assets: Cash and cash equivalents $ 256,396 $ 465,851 Marketable securities 914,879 1,948,900 Other current assets 57,640   31,402   Total current assets 1,228,915   2,446,153   Property and equipment, net 256,064 263,513 Goodwill 52,527 52,527 Deferred tax assets 201,900 15,392 Deposits to acquire intangible assets 145,000 145,000 Other long-term assets 27,179   18,603   Total long-term assets 682,670   495,035   Total assets $ 1,911,585   $ 2,941,188  

LIABILITIES AND STOCKHOLDERS’ DEFICIT

Current liabilities: Accounts payable and accrued liabilities $ 183,521 $ 219,603 Deferred revenues 737,706 713,309 Subordinated convertible debentures —   627,616   Total current liabilities 921,227   1,560,528   Long-term deferred revenues 288,996 286,097 Senior notes 1,783,788 1,782,529 Deferred tax liabilities — 444,108 Other long-term tax liabilities 298,563   128,197   Total long-term liabilities 2,371,347   2,640,931   Total liabilities 3,292,574   4,201,459   Commitments and contingencies Stockholders’ deficit: Preferred stock—par value $.001 per share; Authorized shares: 5,000; Issued and outstanding shares: none — — Common stock—par value $.001 per share; Authorized shares: 1,000,000; Issued shares: 352,120 at June 30, 2018 and 325,218 at December 31, 2017; Outstanding shares: 122,189 at June 30, 2018 and 97,591 at December 31, 2017 352 325 Additional paid-in capital 16,031,004 16,437,135 Accumulated deficit (17,409,664 ) (17,694,790 ) Accumulated other comprehensive loss (2,681 ) (2,941 ) Total stockholders’ deficit (1,380,989 ) (1,260,271 ) Total liabilities and stockholders’ deficit $ 1,911,585   $ 2,941,188      

VERISIGN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, except per share data)

(Unaudited)

  Three Months EndedJune 30, Six Months EndedJune 30, 2018   2017 2018   2017 Revenues $ 302,452   $ 288,552   $ 601,740   $ 577,166   Costs and expenses: Cost of revenues 47,365 47,644 95,517 98,313 Sales and marketing 16,569 19,474 33,844 37,796 Research and development 13,755 13,510 29,130 26,854 General and administrative 31,753   32,964   64,820   63,972   Total costs and expenses 109,442   113,592   223,311   226,935   Operating income 193,010 174,960 378,429 350,231 Interest expense (28,792 ) (29,090 ) (69,580 ) (58,113 ) Non-operating income, net 660   14,002   8,464   15,303   Income before income taxes 164,878 159,872 317,313 307,421 Income tax expense (36,527 ) (36,772 ) (54,699 ) (67,909 ) Net income 128,351   123,100   262,614   239,512   Other comprehensive income 17   217   260   563   Comprehensive income $ 128,368   $ 123,317   $ 262,874   $ 240,075     Earnings per share: Basic $ 1.13   $ 1.22   $ 2.49   $ 2.35   Diluted $ 1.04   $ 0.99   $ 2.13   $ 1.93   Shares used to compute earnings per share Basic 113,936   101,060   105,639   101,759   Diluted 123,200   123,980   123,399   124,218    

VERISIGN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

  Six Months EndedJune 30, 2018   2017 Cash flows from operating activities: Net income $ 262,614 $ 239,512 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property and equipment 24,195 25,172 Stock-based compensation 26,276 25,938 Loss on debt extinguishment 6,554 — Gain on sale of business — (10,607 ) Amortization of debt discount and issuance costs 5,719 7,048 Amortization of discount on investments in debt securities (7,686 ) (4,587 ) Other, net 1,179 261 Changes in operating assets and liabilities: Other assets (7,605 ) 8,310 Accounts payable and accrued liabilities (20,892 ) (38,285 ) Deferred revenues 27,296 34,246 Net deferred income taxes and other long-term tax liabilities (25,844 ) 41,889   Net cash provided by operating activities 291,806   328,897   Cash flows from investing activities: Proceeds from maturities and sales of marketable securities 2,634,376 2,356,948 Purchases of marketable securities (1,592,403 ) (2,351,738 ) Purchases of property and equipment (18,669 ) (18,974 ) Other investing activities (160 ) 11,748   Net cash provided by (used in) investing activities 1,023,144   (2,016 ) Cash flows from financing activities: Repayment of principal on subordinated convertible debentures (1,250,009 ) — Proceeds from employee stock purchase plan 7,811 7,997 Repurchases of common stock (281,597 ) (325,759 ) Net cash used in financing activities (1,523,795 ) (317,762 ) Effect of exchange rate changes on cash, cash equivalents, and restricted cash (590 ) 1,002   Net (decrease) increase in cash, cash equivalents, and restricted cash (209,435 ) 10,121 Cash, cash equivalents, and restricted cash at beginning of period 475,139   241,581   Cash, cash equivalents, and restricted cash at end of period $ 265,704   $ 251,702   Supplemental cash flow disclosures: Cash paid for interest $ 73,971   $ 58,797   Cash paid for income taxes, net of refunds received $ 85,597   $ 23,662    

VERISIGN, INC.

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

(In thousands, except per share data)

(Unaudited)

  Three Months Ended June 30, 2018     2017

OperatingIncome

  Net Income  

OperatingIncome

    Net Income GAAP as reported $ 193,010 $ 128,351 $ 174,960 $ 123,100 Adjustments: Stock-based compensation 13,298

 

13,298

 

13,375

 

13,375

Non-cash interest expense

 

1,801

 

3,554

Contingent interest payable on subordinated convertible debentures

 

—

 

(3,757

) Loss on debt extinguishment

 

6,554

 

—

Tax adjustment  

 

(4,510

)

     

 

(6,489

) Non-GAAP $ 206,308   $ 145,494   $ 188,335   $ 129,783     Revenues $ 302,452 $ 288,552 Non-GAAP operating margin 68.2 %

 

65.3

% Diluted shares

 

123,200

 

123,980

Diluted EPS, non-GAAP $ 1.18   $ 1.05       Six Months Ended June 30, 2018   2017

OperatingIncome

Net Income  

OperatingIncome

  Net Income GAAP as reported $ 378,429

$

262,614

$

350,231

$

239,512

Adjustments: Stock-based compensation 26,276

 

26,276

 

25,938

 

25,938

Unrealized loss on contingent interest derivative on the subordinated convertible debentures

 

—

 

893

Non-cash interest expense

 

5,719

 

7,048

Contingent interest payable on subordinated convertible debentures

 

—

 

(7,566

) Loss on debt extinguishment

 

6,554

 

—

Tax adjustment  

 

(23,591

)        

 

(17,131

) Non-GAAP $ 404,705  

$

277,572

   

$

376,169

 

$

248,694

    Revenues $ 601,740

$

577,166

Non-GAAP operating margin 67.3 %

 

65.2

%

Diluted shares

 

123,399

 

124,218

Diluted EPS, non-GAAP

$

2.25

   

$

2.00

     

VERISIGN, INC.

RECONCILIATION OF NON-GAAP ADJUSTED EBITDA

(In thousands)

(Unaudited)

 

 

The following table reconciles GAAP net income to non-GAAP Adjusted EBITDA for the periods shown below:

   

Three Months EndedJune 30,

Four QuartersEndedJune 30,

2018   2017 2018 Net Income $ 128,351 $ 123,100 $ 480,350 Interest expense 28,792 29,090 147,803 Income tax expense 36,527 36,772 128,554 Depreciation and amortization 12,077 12,070 48,900 Stock-based compensation 13,298 13,375 53,245 Unrealized gain on hedging agreements (227 ) (289 ) (293 ) Gain (loss) on sale of business — (10,607 ) 186 Loss on debt extinguishment 6,554   —   6,554   Non-GAAP Adjusted EBITDA $ 225,372   $ 203,511   $ 865,299      

VERISIGN, INC.

STOCK-BASED COMPENSATION CLASSIFICATION

(In thousands)

(Unaudited)

 

The following table presents the classification of stock-based compensation:

 

Three Months EndedJune 30,

Six Months Ended

June 30,

2018   2017 2018   2017 Cost of revenues $ 1,818 $ 1,802 $ 3,428 $ 3,537 Sales and marketing 1,494 1,457 2,942 2,886 Research and development 1,688 1,482 3,409 2,978 General and administrative 8,298   8,634   16,497   16,537 Total stock-based compensation expense $ 13,298   $ 13,375   $ 26,276   $ 25,938

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VeriSign, Inc.Investor Relations:David Atchley, 703-948-4643datchley@verisign.comorMedia Relations:Don Chapman, 703-948-4481dchapman@verisign.com