Market Overview

Verisign Reports Second Quarter 2018 Results

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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 Ended
June 30,
Six Months Ended
June 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 Ended
June 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

Operating
Income

  Net Income  

Operating
Income

    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

Operating
Income

Net Income  

Operating
Income

  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 Ended
June 30,

Four Quarters
Ended
June 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 Ended
June 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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