VERISIGN INC/CA 10-Q

ITEM 1. FINANCIAL STATEMENTS VERISIGN, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value) (Unaudited) September 30, 2020 December 31, 2019 ASSETS Current 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 to acquire 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 Current liabilities: Accounts payable and accrued liabilities $ 198,342 $ 209,988 Deferred revenues 779,666 755,178 Total current liabilities 978,008 965,166 Long-term deferred revenues 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 Commitments and contingencies Stockholders’ deficit: Preferred stock—par value $ .001 per share; Authorized shares: 5,000 ; Issued and outstanding shares: none — — Common stock and additional paid-in capital—par value $ .001 per share; Authorized shares: 1,000,000 ; Issued shares: 353,730 at September 30, 2020 and 353,157 at December 31, 2019; Outstanding shares: 114,262 at September 30, 2020 and 116,715 at December 31, 2019 14,436,409 14,990,011 Accumulated deficit ( 15,819,916 ) ( 16,477,490 ) Accumulated other comprehensive loss ( 2,741 ) ( 2,621 ) Total stockholders’ deficit ( 1,386,248 ) ( 1,490,100 ) Total liabilities and stockholders’ deficit $ 1,764,306 $ 1,854,009 See accompanying Notes to Condensed Consolidated Financial Statements. 3 Table of Contents 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, 2020 2019 2020 2019 Revenues $ 317,879 $ 308,421 $ 944,768 $ 921,118 Costs and expenses: Cost of revenues 45,024 44,443 134,205 134,013 Sales and marketing 8,389 9,857 23,883 32,775 Research and development 19,708 14,619 55,268 45,704 General and administrative 38,109 33,886 111,719 101,065 Total costs and expenses 111,230 102,805 325,075 313,557 Operating income 206,649 205,616 619,693 607,561 Interest expense ( 22,537 ) ( 22,633 ) ( 67,607 ) ( 67,899 ) Non-operating income, net 775 10,498 15,262 34,137 Income before income taxes 184,887 193,481 567,348 573,799 Income tax (expense) benefit ( 13,908 ) ( 39,568 ) 90,226 ( 109,825 ) Net income 170,979 153,913 657,574 463,974 Other comprehensive (loss) income ( 383 ) 308 ( 120 ) 392 Comprehensive income $ 170,596 $ 154,221 $ 657,454 $ 464,366 Earnings per share: Basic $ 1.49 $ 1.30 $ 5.70 $ 3.90 Diluted $ 1.49 $ 1.30 $ 5.68 $ 3.89 Shares used to compute earnings per share Basic 114,655 118,194 115,456 118,966 Diluted 114,831 118,569 115,699 119,410 See accompanying Notes to Condensed Consolidated Financial Statements. 4 Table of Contents VERISIGN, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (In thousands) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Total stockholders’ deficit, beginning of period $ ( 1,400,324 ) $ ( 1,425,167 ) $ ( 1,490,100 ) $ ( 1,385,474 ) Common stock and additional paid-in capital Beginning balance 14,592,929 15,357,288 14,990,011 15,707,126 Repurchase of common stock ( 173,879 ) ( 198,953 ) ( 603,705 ) ( 583,485 ) Stock-based compensation expense 13,078 13,081 37,526 39,522 Issuance of common stock under stock plans 4,281 4,899 12,577 13,152 Balance, end of period 14,436,409 15,176,315 14,436,409 15,176,315 Accumulated deficit Beginning balance ( 15,990,895 ) ( 16,779,728 ) ( 16,477,490 ) ( 17,089,789 ) Net income 170,979 153,913 657,574 463,974 Balance, end of period ( 15,819,916 ) ( 16,625,815 ) ( 15,819,916 ) ( 16,625,815 ) Accumulated other comprehensive loss Beginning balance ( 2,358 ) ( 2,727 ) ( 2,621 ) ( 2,811 ) Other comprehensive (loss) income ( 383 ) 308 ( 120 ) 392 Balance, end of period ( 2,741 ) ( 2,419 ) ( 2,741 ) ( 2,419 ) Total stockholders’ deficit, end of period $ ( 1,386,248 ) $ ( 1,451,919 ) $ ( 1,386,248 ) $ ( 1,451,919 ) See accompanying Notes to Condensed Consolidated Financial Statements. 5 Table of Contents VERISIGN, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended September 30, 2020 2019 Cash flows from operating activities: Net income $ 657,574 $ 463,974 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property and equipment 34,463 34,327 Stock-based compensation 36,106 38,237 Amortization of discount on investments in debt securities ( 5,844 ) ( 10,271 ) Other, net ( 2,638 ) 2,126 Changes in operating assets and liabilities: Other assets ( 11,107 ) ( 12,123 ) Accounts payable and accrued liabilities ( 5,912 ) ( 7,110 ) Deferred revenues 27,673 24,563 Net deferred income taxes and other long-term tax liabilities ( 195,353 ) 26,571 Net cash provided by operating activities 534,962 560,294 Cash flows from investing activities: Proceeds from maturities and sales of marketable securities 1,804,541 1,523,862 Purchases of marketable securities ( 2,093,437 ) ( 1,721,661 ) Purchases of property and equipment ( 36,933 ) ( 31,498 ) Proceeds received (payments made) related to sale of business 20,009 ( 8,530 ) Net cash used in investing activities ( 305,820 ) ( 237,827 ) Cash flows from financing activities: Repurchases of common stock ( 603,705 ) ( 583,485 ) Proceeds from employee stock purchase plan 12,577 13,152 Net cash used in financing activities ( 591,128 ) ( 570,333 ) Effect of exchange rate changes on cash, cash equivalents, and restricted cash ( 506 ) ( 208 ) Net decrease in cash, cash equivalents, and restricted cash ( 362,492 ) ( 248,074 ) Cash, cash equivalents, and restricted cash at beginning of period 517,601 366,753 Cash, cash equivalents, and restricted cash at end of period $ 155,109 $ 118,679 Supplemental cash flow disclosures: Cash paid for interest $ 56,860 $ 57,074 Cash paid for income taxes, net of refunds received $ 105,258 $ 75,197 See accompanying Notes to Condensed Consolidated Financial Statements. 6 Table of Contents VERISIGN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Basis of Presentation Interim Financial Statements The accompanying unaudited Condensed Consolidated Financial Statements have been prepared by VeriSign, Inc. (“Verisign” or the “Company”) in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, therefore, do not include all information and notes normally provided in audited financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and other adjustments) considered necessary for a fair presentation have been included. The results of operations for any interim period are not necessarily indicative of, nor comparable to, the results of operations for any other interim period or for a full fiscal year. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related notes contained in Verisign’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”) filed with the SEC on February 14, 2020. Reclassifications Certain reclassifications have been made to prior period amounts to conform to current period presentation. Such reclassifications have no effect on net income as previously reported. Note 2. Financial Instruments Cash, Cash Equivalents, and Marketable Securities The following table summarizes the Company’s cash, cash equivalents, and marketable securities and the fair value categorization of the financial instruments measured at fair value on a recurring basis: September 30, December 31, 2020 2019 (In thousands) Cash $ 27,162 $ 33,238 Time deposits 4,078 3,924 Money market funds (Level 1) 123,869 149,624 Debt securities issued by the 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 The fair value of the debt securities held as of September 30, 2020 was $ 1.00 billion, including less than $ 0.1 million of gross and net unrealized gains. All of the debt securities held as of September 30, 2020 are scheduled to mature in less than one year. Fair Value Measurements The fair value of the Company’s investments in money market funds approximates their face value. Such instruments are included in Cash and cash equivalents. The fair value of the debt securities consisting of U.S. Treasury bills is based on their quoted market prices. Debt securities purchased with original maturities in excess of three months are included in Marketable securities. The fair value of all of these financial instruments are classified as Level 1 in the fair value hierarchy. The Company’s other financial instruments include cash, accounts receivable, restricted cash, and accounts payable. As of September 30, 2020, the carrying value of these financial instruments approximated their fair value. The fair values of the senior notes due 2023, 2025, and 2027 were $ 757.9 million, $ 554.9 million, and $ 585.9 million, respectively, as of September 30, 2020. The fair values of these debt instruments are based on available market information from public data sources and are classified as Level 2. 7 Table of Contents Note 3. Selected Balance Sheet Items Other Current Assets Other current assets consist of the following: September 30, December 31, 2020 2019 (In thousands) 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 During the nine months ended September 30, 2020, the Company received $ 20.4 million of contingent consideration related to its divested security services business. The excess of the proceeds received over the balance of the receivable was recognized as a gain and included in Non-operating income, net. Other Long-Term Assets Other long-term assets consist of the following: September 30, December 31, 2020 2019 (In thousands) Operating lease right-of-use asset $ 11,184 $ 9,133 Restricted cash 9,408 9,405 Long-term prepaid registry fees 7,942 7,753 Other tax receivable 1,254 6,927 Other 5,375 6,594 Total other long-term assets $ 35,163 $ 39,812 The current and long-term prepaid registry fees in the tables above relate to the fees the Company pays to ICANN for each annual increment of . com domain name registrations and renewals which are deferred and amortized over the domain name registration term. The amount of prepaid registry fees as of September 30, 2020 reflects amortization of $ 9.1 million and $ 27.0 million during the three and nine months ended September 30, 2020 which was recorded in Cost of Revenues. Other tax receivables as of December 31, 2019 included indirect benefits related to the previously unrecognized tax benefits that were remeasured during the three months ended September 30, 2020, as discussed in Note 9. Income Taxes. Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities consist of the following: September 30, December 31, 2020 2019 (In thousands) 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 Interest payable 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 8 Table of Contents Taxes payable and other tax liabilities reflect amounts accrued for the income tax provision and payments made during the period. Customer deposits primarily relate to advance payments to cover domain name registration activity by registrars. Accrued employee compensation primarily consists of liabilities for employee leave, salaries, payroll taxes, employee contributions to the employee stock purchase plan, and incentive compensation. Accrued employee incentive compensation as of December 31, 2019, was paid during the nine months ended September 30, 2020. Interest payable varies at each period-end based on the payment due dates for each Senior Note issuance. Customer incentives payable includes amounts related to rebates and marketing programs payable to registrars. These amounts may vary from period to period due to the timing of payments. Long-term tax and other liabilities September 30, December 31, 2020 2019 (In thousands) Long-term tax liabilities $ 96,190 $ 308,112 Long-term operating lease liability 5,016 4,564 Long-term tax and other liabilities $ 101,206 $ 312,676 During the nine months ended September 30, 2020, the Company remeasured certain previously unrecognized income tax benefits, including those relating to the worthless stock deduction taken in 2013. These remeasurements resulted in the recognition of $ 191.8 million of income tax benefits in the nine months ended September 30, 2020, as discussed in Note 9. Income Taxes. Note 4. Stockholders’ Deficit Effective February 6, 2020, the Company’s Board of Directors authorized the repurchase of its common stock in the amount of $ 743.0 million, in addition to the $ 257.0 million that remained available for repurchases under the share repurchase program, for a total repurchase authorization of up to $ 1.00 billion under the program. The program has no expiration date. Purchases made under the program could be effected through open market transactions, block purchases, accelerated share repurchase agreements or other negotiated transactions. During the three and nine months ended September 30, 2020, the Company repurchased 0.8 million and 2.8 million shares of its common stock, respectively, at an average stock price of $ 206.61 and $ 198.84 , respectively. The aggregate cost of the repurchases in the three and nine months ended September 30, 2020 was $ 170.0 million and $ 564.9 million, respectively. As of September 30, 2020, there was approximately $ 505.6 million remaining available for future share repurchases under the share repurchase program. During the nine months ended September 30, 2020, the Company placed 0.2 million shares, at an average stock price of $ 209.90 , and for an aggregate cost of $ 38.8 million, into treasury stock for purposes related to tax withholding upon vesting of Restricted Stock Units (“RSUs”). Since inception, the Company has repurchased 239.5 million shares of its common stock for an aggregate cost of $ 10.81 billion, which is presented as a reduction of Additional paid-in capital. Note 5. Calculation of Earnings per Share The following table presents the computation of weighted-average shares used in the calculation of basic and diluted earnings per share: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In thousands) Weighted-average shares of common stock outstanding 114,655 118,194 115,456 118,966 Weighted-average potential shares of common stock outstanding: Unvested RSUs and ESPP 176 375 243 444 Shares used to compute diluted earnings per share 114,831 118,569 115,699 119,410 The calculation of diluted weighted average shares outstanding excludes performance-based RSUs granted by the Company for which the relevant performance criteria have not been achieved. The number of potential shares excluded from the calculation was not significant in any period presented. 9 Table of Contents Note 6. Revenues The Company generates revenues in the U.S.; Europe, the Middle East and Africa (“EMEA”); China; and certain other countries, including Canada, Australia, and Japan. The following table presents our revenues disaggregated by geography, based on the billing addresses of our customers: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In thousands) U.S. $ 202,934 $ 193,392 $ 599,845 $ 577,395 EMEA 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 Revenues in the table above are attributed to the country of domicile and the respective regions in which registrars are located; however, this may differ from the regions where the registrars operate or where registrants are located. Revenues for each region may be impacted by registrars reincorporating, relocating, or from acquisitions or changes in affiliations of resellers. Revenues for each region may also be impacted by registrars domiciled in one region, registering domain names in another region. Deferred Revenues As payment for domain name registrations and renewals are due in advance of our performance, we record these amounts as deferred revenues. The increase in the deferred revenues balance for the nine months ended September 30, 2020 was primarily driven by amounts billed in the first nine months of 2020 for domain name registrations and renewals to be recognized as revenues in future periods, offset by refunds for domain name renewals deleted during the 45-day grace period, and $ 644.0 million of revenues recognized that were included in the deferred revenues balance at the beginning of the period. The balance of deferred revenues as of September 30, 2020 represents our aggregate remaining performance obligations. Amounts included in current deferred revenues are all expected to be recognized in revenues within 12 months, except for a portion of deferred revenues that relates to domain name renewals that are deleted in the 45-day grace period following the transaction. The long-term deferred revenues amounts will be recognized in revenues over several years and in some cases up to 10 years. Note 7. Stock-based Compensation Stock-based compensation is classified in the Condensed Consolidated Statements of Comprehensive Income in the same expense line items as cash compensation. The following table presents the classification of stock-based compensation: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In thousands) 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 10 Table of Contents The following table presents the nature of the Company’s total stock-based compensation: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In thousands) RSUs $ 10,871 $ 10,650 $ 29,060 $ 28,318 Performance-based RSUs 1,102 1,222 5,146 7,554 ESPP 1,105 1,209 3,320 3,650 Capitalization (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 Note 8. Non-operating Income, Net The following table presents the components of Non-operating income, net: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In thousands) Interest income $ 805 $ 6,457 $ 7,500 $ 21,045 Transition services income — 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 The lower interest income during the three and nine months ended September 30, 2020 reflects a decline in interest rates on our investments in debt securities. The transition services income relates to the divested security services business. The transition services agreement ended in February 2020. The gain on sale of business in 2020 represents the excess of the contingent consideration received related to the divested security services business compared to the estimated receivable. Note 9. Income Taxes The following table presents Income tax expense (benefit) and the effective tax rate: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (Dollars in thousands) Income tax expense (benefit) $ 13,908 $ 39,568 $ ( 90,226 ) $ 109,825 Effective tax rate 8 % 20 % ( 16 ) % 19 % The effective tax rate for each of the periods in the table above differed from the statutory federal rate of 21 % due to a lower foreign effective tax rate and excess tax benefits related to stock-based compensation, offset by state income taxes and U.S. taxes on foreign earnings, net of foreign tax credits. Additionally, the Company remeasured certain previously unrecognized income tax benefits, which resulted in the recognition of $24.0 million and $ 191.8 million of income tax benefits in the three and nine months ended September 30, 2020, respectively. The most significant portion of these tax benefits related to the worthless stock deduction taken in 2013, which resulted in the recognition of a $ 167.8 million benefit in the first quarter of 2020. These remeasurements were based on written confirmations from Internal Revenue Service (“IRS”), received in the first and third quarters of 2020, indicating no examination adjustments would be proposed related to the worthless stock deduction or certain other matters reviewed as part of the audit of the Company’s federal income tax returns for 2010 through 2014. Notwithstanding these written confirmations, the Company’s U.S. federal income tax returns for those years remain under examination by the IRS. 11 Table of Contents