VERISIGN INC/CA 10-Q

ITEM 1. FINANCIAL STATEMENTS VERISIGN, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value) (Unaudited) June 30, 2021 December 31, 2020 ASSETS Current assets: Cash and cash equivalents $ 216,497 $ 401,194 Marketable securities 906,492 765,713 Other current assets 66,078 51,033 Total current assets 1,189,067 1,217,940 Property and equipment, net 247,694 245,571 Goodwill 52,527 52,527 Deferred tax assets 66,441 67,914 Deposits to acquire intangible assets 145,000 145,000 Other long-term assets 40,651 37,958 Total long-term assets 552,313 548,970 Total assets $ 1,741,380 $ 1,766,910 LIABILITIES AND STOCKHOLDERS’ DEFICIT Current liabilities: Accounts payable and accrued liabilities $ 175,350 $ 208,642 Deferred revenues 822,984 780,051 Total current liabilities 998,334 988,693 Long-term deferred revenues 289,881 282,838 Senior notes 1,784,654 1,790,083 Long-term tax and other liabilities 86,296 95,494 Total long-term liabilities 2,160,831 2,168,415 Total liabilities 3,159,165 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: 354,071 at June 30, 2021 and 353,789 at December 31, 2020; Outstanding shares: 112,001 at June 30, 2021 and 113,470 at December 31, 2020 13,949,525 14,275,160 Accumulated deficit ( 15,364,476 ) ( 15,662,602 ) Accumulated other comprehensive loss ( 2,834 ) ( 2,756 ) Total stockholders’ deficit ( 1,417,785 ) ( 1,390,198 ) Total liabilities and stockholders’ deficit $ 1,741,380 $ 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 June 30, Six Months Ended June 30, 2021 2020 2021 2020 Revenues $ 329,405 $ 314,365 $ 653,026 $ 626,889 Costs and expenses: Cost of revenues 47,796 43,608 94,764 89,181 Sales and marketing 10,221 8,890 18,705 15,494 Research and development 19,808 18,202 40,119 35,560 General and administrative 38,601 36,885 76,052 73,610 Total costs and expenses 116,426 107,585 229,640 213,845 Operating income 212,979 206,780 423,386 413,044 Interest expense ( 23,064 ) ( 22,535 ) ( 45,598 ) ( 45,070 ) Non-operating (loss) income, net ( 2,041 ) 7,403 ( 1,597 ) 14,487 Income before income taxes 187,874 191,648 376,191 382,461 Income tax (expense) benefit ( 40,102 ) ( 39,169 ) ( 78,065 ) 104,134 Net income 147,772 152,479 298,126 486,595 Other comprehensive (loss) income ( 87 ) ( 2,000 ) ( 78 ) 263 Comprehensive income $ 147,685 $ 150,479 $ 298,048 $ 486,858 Earnings per share: Basic $ 1.31 $ 1.32 $ 2.64 $ 4.20 Diluted $ 1.31 $ 1.32 $ 2.64 $ 4.19 Shares used to compute earnings per share Basic 112,387 115,347 112,757 115,861 Diluted 112,517 115,544 112,905 116,137 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 June 30, Six Months Ended June 30, 2021 2020 2021 2020 Total stockholders’ deficit, beginning of period $ ( 1,403,760 ) $ ( 1,409,114 ) $ ( 1,390,198 ) $ ( 1,490,100 ) Common stock and additional paid-in capital Beginning balance 14,111,235 14,734,618 14,275,160 14,990,011 Repurchase of common stock ( 175,785 ) ( 154,203 ) ( 361,199 ) ( 429,826 ) Stock-based compensation expense 14,075 12,514 27,463 24,448 Issuance of common stock under stock plans — — 8,101 8,296 Balance, end of period 13,949,525 14,592,929 13,949,525 14,592,929 Accumulated deficit Beginning balance ( 15,512,248 ) ( 16,143,374 ) ( 15,662,602 ) ( 16,477,490 ) Net income 147,772 152,479 298,126 486,595 Balance, end of period ( 15,364,476 ) ( 15,990,895 ) ( 15,364,476 ) ( 15,990,895 ) Accumulated other comprehensive loss Beginning balance ( 2,747 ) ( 358 ) ( 2,756 ) ( 2,621 ) Other comprehensive income ( 87 ) ( 2,000 ) ( 78 ) 263 Balance, end of period ( 2,834 ) ( 2,358 ) ( 2,834 ) ( 2,358 ) Total stockholders’ deficit, end of period $ ( 1,417,785 ) $ ( 1,400,324 ) $ ( 1,417,785 ) $ ( 1,400,324 ) See accompanying Notes to Condensed Consolidated Financial Statements. 5 Table of Contents VERISIGN, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Six Months Ended June 30, 2021 2020 Cash flows from operating activities: Net income $ 298,126 $ 486,595 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property and equipment 23,577 22,841 Stock-based compensation 26,591 23,428 Other, net 4,398 ( 8,101 ) Changes in operating assets and liabilities: Other assets ( 18,602 ) ( 10,146 ) Accounts payable and accrued liabilities ( 36,787 ) 25,796 Deferred revenues 49,976 30,430 Net deferred income taxes and other long-term tax liabilities ( 6,435 ) ( 175,471 ) Net cash provided by operating activities 340,844 395,372 Cash flows from investing activities: Proceeds from maturities and sales of marketable securities 1,482,952 995,194 Purchases of marketable securities ( 1,623,566 ) ( 1,167,680 ) Purchases of property and equipment ( 24,270 ) ( 21,891 ) Proceeds received related to sale of business — 20,009 Net cash used in investing activities ( 164,884 ) ( 174,368 ) Cash flows from financing activities: Repayment of borrowings ( 750,000 ) — Proceeds from senior note issuance, net of issuance costs 742,329 — Repurchases of common stock ( 361,199 ) ( 429,826 ) Proceeds from employee stock purchase plan 8,101 8,296 Net cash used in financing activities ( 360,769 ) ( 421,530 ) Effect of exchange rate changes on cash, cash equivalents, and restricted cash ( 364 ) ( 965 ) Net decrease in cash, cash equivalents, and restricted cash ( 185,173 ) ( 201,491 ) Cash, cash equivalents, and restricted cash at beginning of period 410,601 517,601 Cash, cash equivalents, and restricted cash at end of period $ 225,428 $ 316,110 Supplemental cash flow disclosures: Cash paid for interest $ 48,718 $ 43,708 Cash paid for income taxes, net of refunds received $ 98,993 $ 26,472 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: June 30, December 31, 2021 2020 (In thousands) Cash $ 28,078 $ 28,832 Time deposits 3,698 4,176 Money market funds (Level 1) 193,652 129,627 Debt securities issued by the U.S. Treasury (Level 1) 906,492 1,013,679 Total $ 1,131,920 $ 1,176,314 Cash and cash equivalents $ 216,497 $ 401,194 Restricted cash (included in Other long-term assets) 8,931 9,407 Total Cash, cash equivalents, and restricted cash 225,428 410,601 Marketable securities 906,492 765,713 Total $ 1,131,920 $ 1,176,314 The fair value of the debt securities held as of June 30, 2021, included less than $ 0.1 million of gross and net unrealized losses. All of the debt securities held as of June 30, 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 June 30, 2021, the carrying value of these financial instruments approximated their fair value. The fair values of the senior notes due 2025, 2027, and 2031 were $ 568.2 million, $ 586.5 million, and $ 761.6 million, respectively, as of June 30, 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: June 30, December 31, 2021 2020 (In thousands) Prepaid expenses $ 30,690 $ 17,920 Prepaid registry fees 23,974 22,654 Accounts receivable, net 4,956 4,642 Taxes receivable 4,829 3,572 Other 1,629 2,245 Total other current assets $ 66,078 $ 51,033 Other Long-Term Assets Other long-term assets consist of the following: June 30, December 31, 2021 2020 (In thousands) Long-term prepaid expenses $ 11,089 $ 7,105 Operating lease right-of-use asset 10,318 11,277 Restricted cash 8,931 9,407 Long-term prepaid registry fees 8,232 7,997 Other 2,081 2,172 Total other long-term assets $ 40,651 $ 37,958 The prepaid expenses included in Other current assets and Other long-term assets as of June 30, 2021 are primarily related to prepaid hardware and software maintenance expenses. 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 June 30, 2021 reflects amortization of $ 9.5 million and $ 18.8 million during the three and six months ended June 30, 2021 which was recorded in Cost of Revenues. Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities consist of the following: June 30, December 31, 2021 2020 (In thousands) Accounts payable and accrued expenses $ 11,739 $ 12,340 Customer deposits 52,659 53,631 Accrued employee compensation 43,080 54,596 Interest payable 19,895 24,408 Taxes payable and other non-income tax liabilities 14,502 27,194 Accrued registry fees 14,216 13,090 Customer incentives payable 9,437 12,556 Other accrued liabilities 9,822 10,827 Total accounts payable and accrued liabilities $ 175,350 $ 208,642 8 Table of Contents 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, 2020, was paid during the six months ended June 30, 2021. Interest payable varies at each period-end based on the payment due dates for each senior note issuance. Taxes payable and other tax liabilities reflect amounts accrued for the income tax provision and payments made during the period. 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 Long-term tax and other liabilities consist of the following: June 30, December 31, 2021 2020 (In thousands) Long-term tax liabilities $ 82,427 $ 90,335 Long-term operating lease liability 3,869 5,159 Long-term tax and other liabilities $ 86,296 $ 95,494 Long-term tax liabilities as of June 30, 2021 reflects a $ 7.7 million reclassification of a portion of the transition tax liability on accumulated foreign earnings from non-current to current as of June 30, 2021. 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 and six months ended June 30, 2021, the Company repurchased 0.8 million and 1.7 million shares of its common stock, respectively, at an average stock price of $ 216.48 and $ 206.29 , respectively. The aggregate cost of the repurchases in the three and six months ended June 30, 2021 was $ 172.5 million and $ 345.1 million, respectively. As of June 30, 2021, there was approximately $ 737.5 million remaining available for future share repurchases under the share repurchase program. During the six months ended June 30, 2021, the Company placed 0.1 million shares, at an average stock price of $ 203.95 , and for an aggregate cost of $ 16.1 million, into treasury stock for purposes related to tax withholding upon vesting of Restricted Stock Units (“RSUs”). Since inception, the Company has repurchased 242.1 million shares of its common stock for an aggregate cost of $ 11.34 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 June 30, Six Months Ended June 30, 2021 2020 2021 2020 (In thousands) Weighted-average shares of common stock outstanding 112,387 115,347 112,757 115,861 Weighted-average potential shares of common stock outstanding: Unvested RSUs and ESPP 130 197 148 276 Shares used to compute diluted earnings per share 112,517 115,544 112,905 116,137 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 June 30, Six Months Ended June 30, 2021 2020 2021 2020 (In thousands) U.S. $ 211,010 $ 199,408 $ 418,072 $ 396,911 EMEA 57,714 52,964 114,102 105,069 China 24,935 29,026 50,367 59,213 Other 35,746 32,967 70,485 65,696 Total revenues $ 329,405 $ 314,365 $ 653,026 $ 626,889 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 six months ended June 30, 2021 was primarily driven by amounts billed in the first half 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 $ 510.5 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 June 30, 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 June 30, Six Months Ended June 30, 2021 2020 2021 2020 (In thousands) Cost of revenues $ 1,680 $ 1,555 $ 3,289 $ 3,203 Sales and marketing 1,132 843 2,039 1,728 Research and development 1,981 1,780 3,927 3,456 General and administrative 8,824 7,809 17,336 15,041 Total stock-based compensation expense $ 13,617 $ 11,987 $ 26,591 $ 23,428 The following table presents the nature of the Company’s total stock-based compensation: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (In thousands) RSUs $ 10,186 $ 9,102 $ 19,878 $ 18,189 Performance-based RSUs 2,836 2,327 5,426 4,044 ESPP 1,053 1,085 2,159 2,215 Capitalization (included in Property and equipment, net) ( 458 ) ( 527 ) ( 872 ) ( 1,020 ) Total stock-based compensation expense $ 13,617 $ 11,987 $ 26,591 $ 23,428 10 Table of Contents Note 8. Debt On June 8, 2021, the Company issued $ 750.0 million of 2.700 % senior unsecured notes due June 15, 2031 (“2031 Notes”). The 2031 Notes were issued at 99.712 % of par value. The Company will pay interest on the notes semi-annually on June 15 and December 15, commencing on December 15, 2021. The total discount and issuance costs of $ 8.9 million are presented on the balance sheet as a reduction of the debt obligation and are being amortized to Interest expense over the 10-year term of the notes. On June 23, 2021, the Company used the net proceeds from the 2031 Notes and cash on hand, to redeem all of its $ 750.0 million aggregate principal amount of outstanding 4.625 % senior notes due 2023 (“2023 Notes”). The redemption of the 2023 Notes resulted in a loss on debt extinguishment of $ 2.1 million related to the unamortized debt issuance costs on the notes. The loss on extinguishment is included in Non-operating (loss) income during the three and six months ended June 30, 2021. Note 9. Non-operating (Loss) Income, Net The following table presents the components of Non-operating income, net: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (In thousands) Loss on extinguishment of debt $ ( 2,149 ) $ — $ ( 2,149 ) $ — Interest income 111 2,274 327 6,695 Gain on sale of business — 5,153 — 5,611 Transition services income — — — 2,100 Other, net ( 3 ) ( 24 ) 225 81 Total non-operating (loss) income, net $ ( 2,041 ) $ 7,403 $ ( 1,597 ) $ 14,487 The lower interest income during the three and six months ended June 30, 2021 reflects a decline in interest rates on our investments in debt securities. 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. The transition services income in 2020 relates to the divested security services business. The transition services agreement ended in February 2020. Note 10. Income Taxes The following table presents Income tax expense (benefit) and the effective tax rate: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (Dollars in thousands) Income tax expense (benefit) $ 40,102 $ 39,169 $ 78,065 $ ( 104,134 ) Effective tax rate 21 % 20 % 21 % ( 27 ) % When compared to the statutory federal rate of 21 %, the effective tax rates above reflect a lower effective tax rate on foreign income and excess tax benefits related to stock-based compensation, which are offset by state income taxes. The effective tax rate for the six months ended June 30, 2020 also reflected the remeasurement of unrecognized tax benefits discussed below. 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 first quarter of 2020, 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. 11 Table of Contents