VeriSign, Inc. (NASDAQ: VRSN), a global leader in domain names and internet security, today reported financial results for the third quarter of 2017.

Third Quarter GAAP Financial Results

VeriSign, Inc. and subsidiaries (“Verisign”) reported revenue of $292 million for the third quarter of 2017, up 1.7 percent from the same quarter in 2016. Verisign reported net income of $115 million and diluted earnings per share (diluted “EPS”) of $0.93 for the third quarter of 2017, compared to net income of $114 million and diluted EPS of $0.90 for the same quarter in 2016. The operating margin was 61.9 percent for the third quarter of 2017 compared to 60.8 percent for the same quarter in 2016.

Third Quarter Non-GAAP Financial Results

Verisign reported, on a non-GAAP basis, net income of $124 million and diluted EPS of $1.00 for the third quarter of 2017, compared to net income of $119 million and diluted EPS of $0.93 for the same quarter in 2016. The non-GAAP operating margin was 66.7 percent for the third quarter of 2017 compared to 65.3 percent for the same quarter in 2016. A table reconciling the GAAP to the non-GAAP results (which excludes items described below) is appended to this release.

“Our team has delivered another quarter of solid results,” said Jim Bidzos, Executive Chairman, President and Chief Executive Officer.

Financial Highlights

  • Verisign ended the third quarter with cash, cash equivalents and marketable securities of $2.4 billion, an increase of $568 million from year-end 2016.
  • Cash flow from operations was $175 million for the third quarter of 2017, compared with $171 million for the same quarter in 2016.
  • Deferred revenues on Sept. 30, 2017, totaled $1.01 billion, an increase of $31 million from year-end 2016.
  • During the third quarter, Verisign repurchased 1.5 million shares of its common stock for $147 million. At Sept. 30, 2017, $622 million remained available and authorized under the current share repurchase program which has no expiration.
  • For purposes of calculating diluted EPS, the third quarter diluted share count included 24.0 million shares related to subordinated convertible debentures, compared with 20.8 million shares for the same quarter in 2016. These represent dilutive shares and not shares that have been issued.

Business Highlights

  • Verisign ended the third quarter with 145.8 million .com and .net domain name registrations in the domain name base, a 1.2 percent increase from the end of the third quarter of 2016, and a net increase of 1.47 million during the third quarter of 2017.
  • In the third quarter, Verisign processed 8.9 million new domain name registrations for .com and .net, compared to 8.3 million for the same quarter in 2016.
  • The final .com and .net renewal rate for the second quarter of 2017 was 74.0 percent compared with 73.8 percent for the same quarter in 2016. 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, and non-cash interest expense. Non-GAAP net income is decreased by amounts accrued, if any, during the period for contingent interest payable through August 15, 2017, resulting from upside or downside triggers related to the subordinated convertible debentures, and is adjusted for an income tax rate of 25 percent starting from the second quarter of 2017, and 26 percent for the other periods presented herein, both 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 and gain on the sale of a business.

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 third quarter 2017 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; the impact of unfavorable tax rules and regulations; and our ability to continue to reinvest offshore our foreign earnings. 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, 2016, 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.

©2017 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)
 

September 30,
2017

December 31,
2016

ASSETS

Current assets:
Cash and cash equivalents $ 286,822 $ 231,945
Marketable securities 2,078,905 1,565,962
Other current assets 40,293   44,435  
Total current assets 2,406,020   1,842,342  
Property and equipment, net 265,306 266,125
Goodwill 52,527 52,527
Deferred tax assets 20,458 9,385
Deposits to acquire intangible assets 145,000 145,000
Other long-term assets 19,052   19,193  
Total long-term assets 502,343   492,230  
Total assets $ 2,908,363   $ 2,334,572  

LIABILITIES AND STOCKHOLDERS’ DEFICIT

Current liabilities:
Accounts payable and accrued liabilities $ 193,462 $ 203,920
Deferred revenues 717,586 688,265
Subordinated convertible debentures, including contingent interest derivative 624,474   629,764  
Total current liabilities 1,535,522   1,521,949  
Long-term deferred revenues 289,262 287,424
Senior notes 1,781,912 1,237,189
Deferred tax liabilities 401,359 371,433
Other long-term tax liabilities 130,246   117,172  
Total long-term liabilities 2,602,779   2,013,218  
Total liabilities 4,138,301   3,535,167  
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:325,172 at September 30, 2017 and 324,118 at December 31, 2016; Outstanding shares:98,865 at September 30, 2017 and 103,091 at December 31, 2016 325 324
Additional paid-in capital 16,570,518 16,987,488
Accumulated deficit (17,797,627 ) (18,184,954 )
Accumulated other comprehensive loss (3,154 ) (3,453 )
Total stockholders’ deficit (1,229,938 ) (1,200,595 )
Total liabilities and stockholders’ deficit $ 2,908,363   $ 2,334,572  
 
       
VERISIGN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except per share data)
(Unaudited)
 

Three Months Ended
September 30,

Nine Months Ended
September 30,
2017   2016 2017   2016
Revenues $ 292,428   $ 287,554   $ 869,594   $ 855,896  
Costs and expenses:
Cost of revenues 47,333 49,807 145,646 149,142
Sales and marketing 18,667 18,647 56,463 58,431
Research and development 12,715 14,324 39,569 45,355
General and administrative 32,654   30,000   96,626   85,158  
Total costs and expenses 111,369   112,778   338,304   338,086  
Operating income 181,059 174,776 531,290 517,810
Interest expense (37,756 ) (28,919 ) (95,869 ) (86,582 )
Non-operating income, net 6,241   3,262   21,544   8,092  
Income before income taxes 149,544 149,119 456,965 439,320
Income tax expense (34,645 ) (34,692 ) (102,554 ) (104,227 )
Net income 114,899   114,427   354,411   335,093  
Realized foreign currency translation adjustments, included in net income — — — 85
Unrealized gain (loss) on investments 61 (485 ) 739 1,301
Realized gain on investments, included in net income (325 ) (11 ) (440 ) (78 )
Other comprehensive (loss) income (264 ) (496 ) 299   1,308  
Comprehensive income $ 114,635   $ 113,931   $ 354,710   $ 336,401  
 
Earnings per share:
Basic $ 1.15   $ 1.08   $ 3.51   $ 3.10  
Diluted $ 0.93   $ 0.90   $ 2.85   $ 2.58  
Shares used to compute earnings per share
Basic 99,614   106,307   101,036   107,982  
Diluted 124,074   127,750   124,162   129,967  
 
 
VERISIGN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended
September 30,
2017   2016
Cash flows from operating activities:
Net income $ 354,411 $ 335,093
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property and equipment 37,665 44,114
Gain on sale of business (10,421 ) —
Stock-based compensation 40,043 35,745
Payment of contingent interest (15,232 ) (13,385 )
Amortization of debt discount and issuance costs 10,827 9,971
Other, net (8,942 ) (5,355 )
Changes in operating assets and liabilities:
Other assets 4,566 14,278
Accounts payable and accrued liabilities (9,524 ) (8,285 )
Deferred revenues 32,790 19,470
Net deferred income taxes and other long-term tax liabilities 67,385   56,397  
Net cash provided by operating activities 503,568   488,043  
Cash flows from investing activities:
Proceeds from maturities and sales of marketable securities 3,895,675 3,029,699
Purchases of marketable securities (4,398,787 ) (2,917,743 )
Purchases of property and equipment (40,609 ) (19,889 )
Deposits to acquire intangible assets — (143,000 )
Other investing activities 12,102   171  
Net cash used in investing activities (531,619 ) (50,762 )
Cash flows from financing activities:
Proceeds from employee stock purchase plan 12,915 13,670
Repurchases of common stock (474,290 ) (501,934 )
Proceeds from borrowings, net of issuance costs 543,185   —  
Net cash provided by (used in) financing activities 81,810   (488,264 )
Effect of exchange rate changes on cash and cash equivalents 1,118   109  
Net increase (decrease) in cash and cash equivalents 54,877 (50,874 )
Cash and cash equivalents at beginning of period 231,945   228,659  
Cash and cash equivalents at end of period $ 286,822   $ 177,785  
Supplemental cash flow disclosures:
Cash paid for interest $ 86,622   $ 84,930  
Cash paid for income taxes, net of refunds received $ 22,717   $ 14,474  
 
   
VERISIGN, INC.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(In thousands, except per share data)
(Unaudited)
 
Three Months Ended September 30,
2017     2016

Operating
Income

   Net Income

Operating
Income

   Net Income
GAAP as reported $ 181,059 $ 114,899 $ 174,776 $ 114,427
Adjustments:
Stock-based compensation 14,105 14,105 12,854 12,854
Unrealized gain on contingent interest derivative on the subordinated convertible debentures — (1,440 )
Non-cash interest expense 3,779 3,381
Contingent interest payable on subordinated convertible debentures (1,879 ) (3,639 )
Tax adjustment   (6,741 )   (6,979 )
Non-GAAP $ 195,164   $ 124,163   $ 187,630   $ 118,604  
 
Revenues $ 292,428 $ 287,554
Non-GAAP operating margin 66.7 % 65.3 %
Diluted shares 124,074 127,750
Diluted EPS, non-GAAP $ 1.00   $ 0.93  
 
 
Nine Months Ended September 30,
2017 2016

Operating
Income

Net Income

Operating
Income

Net Income
GAAP as reported $ 531,290 $ 354,411 $ 517,810 $ 335,093
Adjustments:
Stock-based compensation 40,043 40,043 35,745 35,745
Unrealized loss (gain) on contingent interest derivative on the subordinated convertible debentures 893 (2,411 )
Non-cash interest expense 10,827 9,971
Contingent interest payable on subordinated convertible debentures (9,445 ) (10,406 )
Tax adjustment   (23,872 )   (18,550 )
Non-GAAP $ 571,333   $ 372,857   $ 553,555   $ 349,442  
 
Revenues $ 869,594 $ 855,896
Non-GAAP operating margin 65.7 % 64.7 %
Diluted shares 124,162 129,967
Diluted EPS, non-GAAP $ 3.00   $ 2.69  
 
       
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 (in thousands):

 

Three Months Ended
September 30,

Four Quarters
Ended
September 30,

2017   2016 2017
Net Income $ 114,899 $ 114,427 $ 459,963
Interest expense 37,756 28,919 124,851
Income tax expense 34,645 34,692 138,855
Depreciation and amortization 12,493 14,697 51,718
Stock-based compensation 14,105 12,854 54,342
Unrealized (gain) loss on contingent interest derivative on the subordinated convertible debentures — (1,440 ) 902
Unrealized loss on hedging agreements 10 460 99
Loss (gain) on sale of business 186   —   (10,421 )
Non-GAAP Adjusted EBITDA $ 214,094   $ 204,609   $ 820,309  
 
       
VERISIGN, INC.
STOCK-BASED COMPENSATION CLASSIFICATION
(In thousands)
(Unaudited)
 

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

 

Three Months Ended
September 30,

Nine Months Ended
September 30,

2017   2016 2017   2016
Cost of revenues $ 1,774 $ 1,779 $ 5,311 $ 5,367
Sales and marketing 1,369 1,129 4,255 4,219
Research and development 1,575 1,676 4,553 4,966
General and administrative 9,387   8,270   25,924   21,193
Total stock-based compensation expense $ 14,105   $ 12,854   $ 40,043   $ 35,745