VERISIGN INC/CA 10-Q

ITEM 1. FINANCIAL STATEMENTS VERISIGN, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value) (Unaudited) March 31, 2021 December 31, 2020 ASSETS Current assets: Cash and cash equivalents $ 246,811 $ 401,194 Marketable securities 934,365 765,713 Other current assets 54,374 51,033 Total current assets 1,235,550 1,217,940 Property and equipment, net 241,136 245,571 Goodwill 52,527 52,527 Deferred tax assets 67,577 67,914 Deposits to acquire intangible assets 145,000 145,000 Other long-term assets 41,108 37,958 Total long-term assets 547,348 548,970 Total assets $ 1,782,898 $ 1,766,910 LIABILITIES AND STOCKHOLDERS’ DEFICIT Current liabilities: Accounts payable and accrued liabilities $ 201,463 $ 208,642 Deferred revenues 808,754 780,051 Total current liabilities 1,010,217 988,693 Long-term deferred revenues 290,288 282,838 Senior notes 1,790,712 1,790,083 Long-term tax and other liabilities 95,441 95,494 Total long-term liabilities 2,176,441 2,168,415 Total liabilities 3,186,658 3,157,108 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: 354,025 at March 31, 2021 and 353,789 at December 31, 2020; Outstanding shares: 112,766 at March 31, 2021 and 113,470 at December 31, 2020 14,111,235 14,275,160 Accumulated deficit ( 15,512,248 ) ( 15,662,602 ) Accumulated other comprehensive loss ( 2,747 ) ( 2,756 ) Total stockholders’ deficit ( 1,403,760 ) ( 1,390,198 ) Total liabilities and stockholders’ deficit $ 1,782,898 $ 1,766,910 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 March 31, 2021 2020 Revenues $ 323,621 $ 312,524 Costs and expenses: Cost of revenues 46,968 45,573 Sales and marketing 8,484 6,604 Research and development 20,311 17,358 General and administrative 37,451 36,725 Total costs and expenses 113,214 106,260 Operating income 210,407 206,264 Interest expense ( 22,534 ) ( 22,535 ) Non-operating income, net 444 7,084 Income before income taxes 188,317 190,813 Income tax (expense) benefit ( 37,963 ) 143,303 Net income 150,354 334,116 Other comprehensive income 9 2,263 Comprehensive income $ 150,363 $ 336,379 Earnings per share: Basic $ 1.33 $ 2.87 Diluted $ 1.33 $ 2.86 Shares used to compute earnings per share Basic 113,131 116,375 Diluted 113,296 116,730 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 March 31, 2021 2020 Total stockholders’ deficit, beginning of period $ ( 1,390,198 ) $ ( 1,490,100 ) Common stock and additional paid-in capital Beginning balance 14,275,160 14,990,011 Repurchase of common stock ( 185,414 ) ( 275,623 ) Stock-based compensation expense 13,388 11,934 Issuance of common stock under stock plans 8,101 8,296 Balance, end of period 14,111,235 14,734,618 Accumulated deficit Beginning balance ( 15,662,602 ) ( 16,477,490 ) Net income 150,354 334,116 Balance, end of period ( 15,512,248 ) ( 16,143,374 ) Accumulated other comprehensive loss Beginning balance ( 2,756 ) ( 2,621 ) Other comprehensive income 9 2,263 Balance, end of period ( 2,747 ) ( 358 ) Total stockholders’ deficit, end of period $ ( 1,403,760 ) $ ( 1,409,114 ) See accompanying Notes to Condensed Consolidated Financial Statements. 5 Table of Contents VERISIGN, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Three Months Ended March 31, 2021 2020 Cash flows from operating activities: Net income $ 150,354 $ 334,116 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property and equipment 11,574 11,232 Stock-based compensation 12,974 11,441 Other, net 1,155 ( 1,311 ) Changes in operating assets and liabilities: Other assets ( 6,758 ) 28 Accounts payable and accrued liabilities ( 7,613 ) ( 27,409 ) Deferred revenues 36,153 22,807 Net deferred income taxes and other long-term tax liabilities 497 ( 170,844 ) Net cash provided by operating activities 198,336 180,060 Cash flows from investing activities: Proceeds from maturities and sales of marketable securities 793,857 805,748 Purchases of marketable securities ( 962,340 ) ( 730,507 ) Purchases of property and equipment ( 6,721 ) ( 11,013 ) Proceeds received related to sale of business — 14,856 Net cash (used in) provided by investing activities ( 175,204 ) 79,084 Cash flows from financing activities: Repurchases of common stock ( 185,414 ) ( 275,623 ) Proceeds from employee stock purchase plan 8,101 8,296 Net cash used in financing activities ( 177,313 ) ( 267,327 ) Effect of exchange rate changes on cash, cash equivalents, and restricted cash ( 202 ) ( 1,316 ) Net decrease in cash, cash equivalents, and restricted cash ( 154,383 ) ( 9,499 ) Cash, cash equivalents, and restricted cash at beginning of period 410,601 517,601 Cash, cash equivalents, and restricted cash at end of period $ 256,218 $ 508,102 Supplemental cash flow disclosures: Cash paid for interest $ 13,156 $ 13,151 Cash paid for income taxes, net of refunds received $ 17,286 $ 15,914 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, 2020 (the “2020 Form 10-K”) filed with the SEC on February 19, 2021. 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: March 31, December 31, 2021 2020 (In thousands) Cash $ 26,199 $ 28,832 Time deposits 3,760 4,176 Money market funds (Level 1) 226,259 129,627 Debt securities issued by the U.S. Treasury (Level 1) 934,365 1,013,679 Total $ 1,190,583 $ 1,176,314 Cash and cash equivalents $ 246,811 $ 401,194 Restricted cash (included in Other long-term assets) 9,407 9,407 Total Cash, cash equivalents, and restricted cash 256,218 410,601 Marketable securities 934,365 765,713 Total $ 1,190,583 $ 1,176,314 The fair value of the debt securities held as of March 31, 2021, included less than $ 0.1 million of gross and net unrealized gains. All of the debt securities held as of March 31, 2021 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 March 31, 2021, the carrying value of these financial instruments approximated their fair value. The fair values of the senior notes due 2023, 2025, and 2027 were $ 753.1 million, $ 563.8 million, and $ 584.3 million, respectively, as of March 31, 2021. 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: March 31, December 31, 2021 2020 (In thousands) Prepaid registry fees $ 23,532 $ 22,654 Prepaid expenses 22,996 17,920 Accounts receivable, net 5,135 4,642 Taxes receivable 1,180 3,572 Other 1,531 2,245 Total other current assets $ 54,374 $ 51,033 Other Long-Term Assets Other long-term assets consist of the following: March 31, December 31, 2021 2020 (In thousands) Operating lease right-of-use asset $ 10,979 $ 11,277 Long-term prepaid expenses 10,368 7,105 Restricted cash 9,407 9,407 Long-term prepaid registry fees 8,231 7,997 Other tax receivable 969 969 Other 1,154 1,203 Total other long-term assets $ 41,108 $ 37,958 The current and long-term prepaid registry fees in the tables above relate to the fees the Company pays to Internet Corporation for Assigned Names and Numbers (“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 March 31, 2021 reflects amortization of $ 9.3 million during the three months ended March 31, 2021 which was recorded in Cost of Revenues. Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities consist of the following: March 31, December 31, 2021 2020 (In thousands) Accounts payable and accrued expenses $ 11,253 $ 12,340 Customer deposits 46,595 53,631 Taxes payable and other tax liabilities 45,227 27,194 Interest payable 33,105 24,408 Accrued employee compensation 32,789 54,596 Accrued registry fees 14,481 13,090 Customer incentives payable 8,473 12,556 Other accrued liabilities 9,540 10,827 Total accounts payable and accrued liabilities $ 201,463 $ 208,642 8 Table of Contents Customer deposits primarily relate to advance payments to cover domain name registration activity by registrars. Taxes payable and other tax liabilities reflect amounts accrued for the income tax provision and payments made during the period. Interest payable varies at each period-end based on the payment due dates for each Senior Note issuance. 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, 2020, was paid during the three months ended March 31, 2021. 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. Note 4. Stockholders’ Deficit Effective February 11, 2021, the Company’s Board of Directors authorized the repurchase of its common stock in the amount of $ 747.0 million, in addition to the $ 253.0 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 months ended March 31, 2021, the Company repurchased 0.9 million shares of its common stock at an average stock price of $ 197.02 . The aggregate cost of the repurchases in the three months ended March 31, 2021 was $ 172.6 million. As of March 31, 2021, there was approximately $ 910.0 million remaining available for future share repurchases under the share repurchase program. During the three months ended March 31, 2021, the Company placed 0.1 million shares, at an average stock price of $ 200.10 , and for an aggregate cost of $ 12.8 million, into treasury stock for purposes related to tax withholding upon vesting of Restricted Stock Units (“RSUs”). Since inception, the Company has repurchased 241.3 million shares of its common stock for an aggregate cost of $ 11.17 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 March 31, 2021 2020 (In thousands) Weighted-average shares of common stock outstanding 113,131 116,375 Weighted-average potential shares of common stock outstanding: Unvested RSUs and ESPP 165 355 Shares used to compute diluted earnings per share 113,296 116,730 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. 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 March 31, 2021 2020 (In thousands) U.S. $ 207,062 $ 197,503 EMEA 56,388 52,105 China 25,432 30,187 Other 34,739 32,729 Total revenues $ 323,621 $ 312,524 9 Table of Contents 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 three months ended March 31, 2021 was primarily driven by amounts billed in the first quarter of 2021 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 $ 288.4 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 March 31, 2021 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 March 31, 2021 2020 (In thousands) Cost of revenues $ 1,609 $ 1,648 Sales and marketing 907 885 Research and development 1,946 1,676 General and administrative 8,512 7,232 Total stock-based compensation expense $ 12,974 $ 11,441 The following table presents the nature of the Company’s total stock-based compensation: Three Months Ended March 31, 2021 2020 (In thousands) RSUs $ 9,692 $ 9,087 Performance-based RSUs 2,590 1,717 ESPP 1,106 1,130 Capitalization (included in Property and equipment, net) ( 414 ) ( 493 ) Total stock-based compensation expense $ 12,974 $ 11,441 10 Table of Contents Note 8. Non-operating Income, Net The following table presents the components of Non-operating income, net: Three Months Ended March 31, 2021 2020 (In thousands) Interest income $ 216 $ 4,421 Transition services income — 2,100 Other, net 228 563 Total non-operating income, net $ 444 $ 7,084 The lower interest income during the three months ended March 31, 2021 reflects a decline in interest rates on our investments in debt securities. The transition services income in 2020 relates to the divested security services business. The transition services agreement ended in February 2020. Note 9. Income Taxes The following table presents Income tax expense (benefit) and the effective tax rate: Three Months Ended March 31, 2021 2020 (Dollars in thousands) Income tax expense (benefit) $ 37,963 $ ( 143,303 ) Effective tax rate 20 % ( 75 ) % The effective tax rate for the three months ended March 31, 2021 was lower than the statutory federal rate of 21 % primarily due to a lower effective tax rate on foreign income, partially offset by state income taxes. The effective tax rate for the three months ended March 31, 2020 was lower than the statutory federal rate of 21 % primarily due to the remeasurement of unrecognized tax benefits discussed below, a lower effective tax rate on foreign income, and $ 11.8 million of excess tax benefits related to stock-based compensation, partially offset by state income taxes. During the three months ended March 31, 2020, the Company remeasured its previously unrecognized income tax benefits relating to the worthless stock deduction taken in 2013. The remeasurement, which resulted in the recognition of a $ 167.8 million benefit in the quarter, was based on Internal Revenue Service (“IRS”) written confirmation indicating no examination adjustment would be proposed. Notwithstanding this written confirmation, the Company’s U.S. federal income tax returns remain under examination by the IRS for 2010 through 2014.