VERISIGN. INC. 
You should read the following discussion in conjunction with the 2019 Form 10-K and the interim unaudited Condensed Consolidated Financial Statements and related notes included in Part I, Item I of this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q contains 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 (the "Exchange Act"). These forward-looking statements are based on current expectations and assumptions and involve risks and uncertainties, including, among other things, statements regarding our expectations about (i) the impact from the effects of the COVID-19 pandemic, (ii) the rate of growth in revenues for the remainder of 2020, (iii) cost of revenues, sales and marketing expenses, research and development expenses, general and administrative expenses, interest expense and non-operating income, net, for the remainder of 2020, (iv) the impact of new legislation andIRS guidance issued in response to the COVID-19 pandemic, and (v) our annual effective tax rate for 2020. Forward-looking statements include, among others, those statements including the words "expects," "anticipates," "intends," "believes" and similar language. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section titled "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q. You should also carefully review the risks described in other documents we file from time to time with theSecurities and Exchange Commission , including the Quarterly Reports on Form 10-Q or Current Reports on Form 8-K that we file in 2020 and the 2019 Form 10-K, which discuss our business in greater detail. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update publicly or revise such statements, whether as a result of new information, future events, or otherwise, except as required by law. For purposes of this Quarterly Report on Form 10-Q, the terms "Verisign ," "the Company," "we," "us," and "our" refer toVeriSign, Inc. and its consolidated subsidiaries. Overview We are a global provider of domain name registry services and internet infrastructure, enabling internet navigation for many of the world's most recognized domain names. We enable the security, stability, and resiliency of key internet infrastructure and services, including providing root zone maintainer services, operating two of the 13 global internet root servers, and providing registration services and authoritative resolution for the .com and .net top-level domains ("TLDs"), which support the majority of global e-commerce. As ofJune 30, 2020 , we had 162.1 million .com and .net registrations in the domain name base. The number of domain names registered is largely driven by continued growth in online advertising, e-commerce, and the number of internet users, which is partially driven by greater availability of internet access, as well as marketing activities carried out by us and our registrars. Growth in the number of domain name registrations under our management may be hindered by certain factors, including overall economic conditions, competition from country code top-level domains ("ccTLDs"), competition from, and the continued introduction of, new generic top-level domains ("gTLDs"), and ongoing changes in the internet practices and behaviors of consumers and businesses. Factors such as the evolving practices and preferences of internet users, and how they navigate the internet, as well as the motivation of domain name registrants and how they will manage their investment in domain names, can negatively impact our business and the demand for new domain name registrations and renewals. Business Highlights and Trends •We recorded revenues of$314.4 million and$626.9 million during the three and six months endedJune 30, 2020 , an increase of 3% and 2%, respectively, compared to the same periods in 2019. •We recorded operating income of$206.8 million and$413.0 million during the three and six months endedJune 30, 2020 , an increase of 3% compared to the same periods in 2019. •As ofJune 30, 2020 , we had 162.1 million .com and .net registrations in the domain name base, which represents a 4% increase fromJune 30, 2019 , and a net increase of 1.4 million domain name registrations fromMarch 31, 2020 . •During the three months endedJune 30, 2020 , we processed 11.1 million new domain name registrations for .com and .net compared to 10.3 million for the same period in 2019. •The final .com and .net renewal rate for the first quarter of 2020 was 75.4% compared to 75.0% for the first quarter of 2019. Renewal rates are not fully measurable until 45 days after the end of the quarter. 12 -------------------------------------------------------------------------------- Table of Contents •During the three months endedJune 30, 2020 , we repurchased 0.7 million shares of our common stock for an aggregate cost of$150.0 million . As ofJune 30, 2020 , there was approximately$675.6 million remaining available for future share repurchases under our share repurchase program. •We generated cash flows from operating activities of$395.4 million during the six months endedJune 30, 2020 , compared to$352.2 million for the same period in 2019. •OnJuly 23, 2020 , we announced that we will extend the freeze on registry prices for all of our TLDs, including .com and .net, throughMarch 31, 2021 . Additionally, we announced the extension of the waiver of the wholesale restore fee for expired domains through the end of 2020. Pursuant to our agreements with ICANN, we make available on our website (at https://www.Verisign.com/zone) files containing all active domain names registered in the .com and .net registries. At the same website address, we make available a summary of the active zone count registered in the .com and .net registries and the number of .com and .net domain name registrations in the domain name base. The domain name base is the active zone plus the number of domain name registrations that are registered but not configured for use in the respective TLD zone file plus the number of domain name registrations that are in a client or server hold status. These files and the related summary data are updated at least once per day. The update times may vary each day. The number of domain name registrations provided in this Quarterly Report on Form 10-Q are as of midnight of the date reported. Information available on, or accessible through, our website is not incorporated herein by reference. COVID-19 UpdateThe United States and the global community we serve are facing unprecedented challenges posed by the COVID-19 pandemic. In response to the pandemic, we have established a task force to monitor the pandemic and have taken a number of actions to protect our employees, including restricting travel, modifying our sick leave policy to encourage quarantine and isolation when warranted, and directing most of our employees to work from home. We have implemented our readiness plans, which include the ability to maintain critical internet infrastructure with most employees working remotely. While we believe the pandemic has had certain impacts on our business, we do not believe there has been, nor are we anticipating, a material impact from the effects of the pandemic on our business and operations, results of operations, financial condition, cash flows, liquidity and capital and financial resources; however, the situation is uncertain, rapidly changing, and hard to predict. The broader implications of the pandemic on our business and operations and our financial results, including the extent to which the effects of the pandemic will impact future growth in the domain name base, remain uncertain. The duration and severity of the economic downturn from the pandemic may negatively impact our business and operations, results of operations, financial condition, cash flows, liquidity and capital and financial resources. Because fees for domain name registrations and renewals are generally due at the time of registration or renewal and revenues from such registrations and renewals are recognized ratably over their terms, the effects of the pandemic may not be fully reflected in our results of operations until future periods. For further discussion, see "Risk Factors - The effects of the COVID-19 pandemic could adversely affect our business, operations, financial condition and results of operations, and the extent to which the effects of the pandemic will impact our business, operations, financial condition and results of operations remains uncertain" in Part II, Item 1A of this Quarterly Report on Form 10-Q. 13 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table presents information regarding our results of operations as a percentage of revenues: Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Revenues 100.0 % 100.0 % 100.0 % 100.0 % Costs and expenses: Cost of revenues 13.9 14.4 14.2 14.6 Sales and marketing 2.8 4.0 2.5 3.7 Research and development 5.8 4.9 5.7 5.1 General and administrative 11.7 10.8 11.7 11.0 Total costs and expenses 34.2 34.1 34.1 34.4 Operating income 65.8 65.9 65.9 65.6 Interest expense (7.2) (7.4) (7.2) (7.4) Non-operating income, net 2.4 3.7 2.3 3.9 Income before income taxes 61.0 62.2 61.0 62.1 Income tax (expense) benefit (12.5) (14.0) 16.6 (11.5) Net income 48.5 % 48.2 % 77.6 % 50.6 % Revenues Our revenues are primarily derived from registrations for domain names in the .com and .net domain name registries. We also derive revenues from operating domain name registries for several other TLDs and from providing back-end registry services to a number of TLD registry operators, all of which are not significant in relation to our consolidated revenues. For domain names registered in the .com and .net registries we receive a fee from registrars per annual registration that is fixed pursuant to our agreements with ICANN. Individual customers, called registrants, contract directly with registrars or their resellers, and the registrars in turn register the domain names withVerisign . Changes in revenues are driven largely by changes in the number of new domain name registrations and the renewal rate for existing registrations as well as the impact of new and prior price increases, to the extent permitted by ICANN and theDepartment of Commerce ("DOC"). New registrations and the renewal rate for existing registrations are impacted by continued growth in online advertising, e-commerce, and the number of internet users, as well as marketing activities carried out by us and our registrars. The annual fee fora .com domain name registration has been fixed at$7.85 since 2012. OnOctober 26, 2018 , we entered into an agreement with the DOC to amend the Cooperative Agreement. The amendment extends the term of the Cooperative Agreement untilNovember 30, 2024 and permits the price ofa .com domain name to be increased without further DOC approval by up to 7% in each of the final four years of each six-year period beginning onOctober 26, 2018 . OnMarch 27, 2020 ,Verisign and ICANN entered into an agreement to amend the .com Registry Agreement ("Third .com Amendment") that incorporates these changes to the pricing terms. We have the contractual right to increase the fees for .net domain name registrations by up to 10% each year during the term of our agreement with ICANN, throughJune 30, 2023 . As part of our response to the COVID-19 crisis, we announced onMarch 25, 2020 that we will freeze registry prices for domain name registrations and renewals for all of our TLDs, including .com and .net, through the end of 2020. OnJuly 23, 2020 , we announced that we will extend the freeze on registry prices for all of our TLDs, including .com and .net, throughMarch 31, 2021 . Within the current six-year period under the Third .com Amendment, the first year in which we may increase the price for .com domain names ends onOctober 25, 2021 , and we expect to effectuatea .com price increase by that date. We offer promotional marketing programs for our registrars based upon market conditions and the business environment in which the registrars operate. All fees paid to us for .com and .net registrations are inU.S. dollars. A comparison of revenues is presented below: Three Months Ended Six Months Ended June 30, June 30, 2020 % Change 2019 2020 % Change 2019 (Dollars in thousands) Revenues$ 314,365 3 %$ 306,289 $ 626,889 2 %$ 612,697 14
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The following table compares the .com and .net domain name registrations in the
domain name base:
June 30, 2020 % Change June 30, 2019
.com and .net domain name registrations in the domain name base
162.1 million 4 % 156.1 million
Revenues increased by $8.1 million and $14.2 million during the three and six
months ended June 30, 2020 , respectively, as compared to the same periods last
year, primarily due to an increase in revenues from the operation of the
registry for the .com TLD, partially offset by the elimination of revenues from
our divested security services business. The increase in revenues from the .com
TLD was driven by a 4% increase in the domain name base for .com.
Growth in the domain name base has been primarily driven by continued internet
growth and marketing activities carried out by us and our registrars. However,
competitive pressure from ccTLDs, the continued introduction of new gTLDs,
ongoing changes in internet practices and behaviors of consumers and business,
as well as the motivation of existing domain name registrants managing their
investment in domain names, and historical global economic uncertainty, has
limited the rate of growth of the domain name base in recent years and may
continue to do so in the remainder of 2020 and beyond.
We expect the rate of growth in revenues will remain consistent during the
remainder of 2020 compared to the six months ended June 30, 2020 , as a result of
continued growth in the aggregate number of .com domain names.
Geographic revenues
We generate 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 a comparison of our geographic revenues:
Three Months Ended Six Months Ended
June 30, June 30,
2020 % Change 2019 2020 % Change 2019
(Dollars in thousands)
U.S. $ 199,408 4 % $ 191,848 $ 396,911 3 % $ 384,003
EMEA 52,964 3 % 51,595 105,069 1 % 103,741
China 29,026 (1) % 29,448 59,213 3 % 57,690
Other 32,967 (1) % 33,398 65,696 (2) % 67,263
Total revenues $ 314,365 $ 306,289 $ 626,889 $ 612,697
Revenues for our Registry Services business are attributed to the country of
domicile and the respective regions in which our registrars are located;
however, this may differ from the regions where the registrars operate or where
registrants are located. Revenue growth for each region may be impacted by
registrars reincorporating, relocating, or from acquisitions or changes in
affiliations of resellers. Revenue growth for each region may also be impacted
by registrars domiciled in one region, registering domain names in another
region. During the three and six months ended June 30, 2020 , the majority of our
revenue growth has come from increased sales to registrars based in the U.S.
Cost of revenues
Cost of revenues consist primarily of salaries and employee benefits expenses
for our personnel who manage the operational systems, depreciation expenses,
operational costs associated with the delivery of our services, fees paid to
ICANN, customer support and training, consulting and development services, costs
of facilities and computer equipment used in these activities,
telecommunications expense and allocations of indirect costs such as corporate
overhead.
A comparison of Cost of revenues is presented below:
Three Months Ended Six Months Ended
June 30, June 30,
2020 % Change 2019 2020 % Change 2019
(Dollars in thousands)
Cost of revenues $ 43,608 (1) % $ 44,066 $ 89,181 - % $ 89,570
Cost of revenues remained consistent during the three and six months ended
June 30, 2020 , compared to the same periods last year as decreases in salary and
employee benefits expenses of $1.0 million and $1.5 million , respectively,
during the three and six months ended June 30, 2020 resulting from a functional
realignment of some headcount to research and development were offset by other
individually insignificant increases.
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We expect Cost of revenues as a percentage of revenues to remain consistent
during the remainder of 2020 compared to the six months ended June 30, 2020 .
Sales and marketing
Sales and marketing expenses consist primarily of salaries and other
personnel-related expenses, travel and related expenses, trade shows, costs of
lead generation, costs of computer and communications equipment and support
services, facilities costs, consulting fees, costs of marketing programs, such
as online, television, radio, print and direct mail advertising costs, and
allocations of indirect costs such as corporate overhead.
A comparison of Sales and marketing expenses is presented below:
Three Months Ended Six Months Ended
June 30, June 30,
2020 % Change 2019 2020 % Change 2019
(Dollars in thousands) (Dollars in thousands)
Sales and marketing $ 8,890 (28) % $ 12,399 $ 15,494 (32) % $ 22,918
Sales and marketing expenses decreased by $3.5 million and $7.4 million during
the three and six months ended June 30, 2020 , respectively, compared to the same
periods last year, primarily due to decreases in advertising and marketing
expenses of $2.4 million and $5.5 million , respectively, as a result of
decreases in marketing programs in various regions.
We expect Sales and marketing expenses as a percentage of revenues to increase
during the remainder of 2020, compared to the six months ended June 30, 2020 , as
we execute more advertising and marketing campaigns.
Research and development
Research and development expenses consist primarily of costs related to research
and development personnel, including salaries and other personnel-related
expenses, consulting fees, facilities costs, computer and communications
equipment, support services used in our service and technology development, and
allocations of indirect costs such as corporate overhead.
A comparison of Research and development expenses is presented below:
Three Months Ended Six Months Ended
June 30, June 30,
2020 % Change 2019 2020 % Change 2019
(Dollars in thousands)
Research and development $ 18,202 22 % $ 14,953 $ 35,560 14 % $ 31,085
Research and development expenses increased by $3.2 million and $4.5 million
during the three and six months ended June 30, 2020 , respectively, compared to
the same periods last year, primarily due to increases in salary and employee
benefits expenses of $2.7 million and $3.8 million , respectively, resulting from
a functional realignment of some headcount from cost of revenues, additional
headcount increases, and an increase in expenses for other employee benefits
including expanded paid time off benefits provided to employees in response to
the COVID-19 pandemic.
We expect Research and development expenses as a percentage of revenues to
increase slightly during the remainder of 2020 compared to the six months ended
June 30, 2020 .
General and administrative
General and administrative expenses consist primarily of salaries and other
personnel-related expenses for our executive, administrative, legal, finance,
information technology and human resources personnel, costs of facilities,
computer and communications equipment, management information systems, support
services, professional services fees, and certain tax and license fees, offset
by allocations of indirect costs such as facilities and shared services expenses
to other cost types.
A comparison of General and administrative expenses is presented below:
Three Months Ended Six Months Ended
June 30, June 30,
2020 % Change 2019 2020 % Change 2019
(Dollars in thousands)
General and administrative $ 36,885 11 % $ 33,178 $ 73,610 10 % $ 67,179
General and administrative expenses increased by $3.7 million during the three
months ended June 30, 2020 , compared to the same period last year, due to a $2.2
million increase in salary and employee benefits expenses resulting from an
increase in average headcount as well as an increase in expenses for other
employee benefits.
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General and administrative expenses increased by $6.4 million during the six
months ended June 30, 2020 , compared to the same period last year, due to
increases in salary and employee benefits expenses and charitable contributions,
partially offset by a decrease in stock-based compensation expenses. Salary and
employee benefits expenses increased by $4.0 million as a result of an increase
in average headcount as well as an increase in expenses for other employee
benefits. Charitable contributions increased by $3.1 million to support the
response to the COVID-19 pandemic and to promote equal justice. Stock-based
compensation expense decreased by $2.0 million as a result of a decrease in the
projected achievement level on certain performance-based RSU grants.
We expect General and administrative expenses as a percentage of revenues to
remain consistent during the remainder of 2020 compared to the six months ended
June 30, 2020 .
Interest expense
Interest expense remained consistent in the three and six months ended June 30,
2020 as compared to the same period last year. We expect quarterly Interest
expense to remain consistent during the remainder of 2020 compared to the six
months ended June 30, 2020 .
Non-operating income, net
The following table presents the components of Non-operating income, net:
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(In thousands)
Interest income $ 2,274 $ 7,228 $ 6,695 $ 14,588
Transition services income - 4,050 2,100 8,100
Gain on sale of business $ 5,153 $ 43 $ 5,611 $ 753
Other, net $ (24) $ 115 $ 81 $ 198
Total non-operating income, net 7,403 11,436 $ 14,487 $ 23,639
Interest income decreased in the three and six months ended June 30, 2020 due to
a decline in interest rates on our investments in debt securities. Transition
services income related to our divested security services business decreased in
the three and six months ended June 30, 2020 due to the expiration of the
transition services agreement in February 2020 . Gain on sale of business
increased in the three and six months ended June 30, 2020 as the result of
contingent consideration received related to our divested security services
business in excess of the estimated receivable.
We expect Non-operating income, net to decrease as a percentage of revenues
during the remainder of 2020 compared to the six months ended June 30, 2020 due
to the impact of the decline in interest rates on our investments in debt
securities and the expiration of the transition services agreement.
Income tax expense (benefit)
The following table presents Income tax (benefit) expense and the effective tax
rate:
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(Dollars in thousands)
Income tax expense (benefit) $ 39,169 $ 42,960 $ (104,134) $ 70,257
Effective tax rate 20 % 23 % (27) % 18 %
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. During the
six months ended June 30, 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, 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.
The timing of completion and ultimate outcome of the audits remains uncertain
and it is reasonably possible that during the next 12 months, the Company's
unrecognized tax benefits may change further as a result of IRS audits.
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During the first quarter of 2020, new legislation was enacted and new IRS
guidance was issued to provide relief to businesses in response to the COVID-19
pandemic. We have evaluated the tax provisions included in legislation such as
the CARES Act, as well as recent IRS guidance and we do not expect it to have a
significant impact on our financial position, results of operations or cash
flows.
We expect our annual effective tax rate for 2020 to be a net benefit of between
5% and 2%, which reflects the income tax benefit from $167.8 million of
previously unrecognized tax benefits recognized in the first quarter of 2020.
Liquidity and Capital Resources
June 30, December 31,
2020 2019
(In thousands)
Cash and cash equivalents $ 306,701 $ 508,196
Marketable securities 887,872 709,863
Total $ 1,194,573 $ 1,218,059
As of June 30, 2020 , our principal sources of liquidity were $306.7 million of
cash and cash equivalents and $887.9 million of marketable securities. The
marketable securities primarily consist of debt securities issued by the U.S.
Treasury meeting the criteria of our investment policy, which is focused on the
preservation of our capital through investment in investment grade securities.
The cash equivalents consist of amounts invested in money market funds, time
deposits and U.S. Treasury bills purchased with original maturities of less than
90 days. As of June 30, 2020 , all of our debt securities have contractual
maturities of less than one year. Our cash and cash equivalents are readily
accessible. For additional information on our investment portfolio, see Note 2,
"Financial Instruments," of our Notes to Condensed Consolidated Financial
Statements in Part I, Item I of this Quarterly Report on Form 10-Q.
During the three months ended June 30, 2020 , we repurchased 0.7 million shares
of our common stock for an aggregate cost of $150.0 million . As of June 30,
2020 , there was approximately $675.6 million remaining available for future
share repurchases under the share repurchase program which has no expiration
date.
As of June 30, 2020 , we had $550.0 million principal amount outstanding of 4.75%
senior unsecured notes due 2027, $500.0 million principal amount outstanding of
5.25% senior unsecured notes due 2025, and $750.0 million principal amount
outstanding of 4.625% senior unsecured notes due 2023. As of June 30, 2020 ,
there were no borrowings outstanding under our $200.0 million credit facility
that will expire in 2024.
We believe existing cash, cash equivalents and marketable securities, and funds
generated from operations, together with our borrowing capacity under the
unsecured revolving credit facility should be sufficient to meet our working
capital, capital expenditure requirements, and to service our debt for at least
the next 12 months. We regularly assess our cash management approach and
activities in view of our current and potential future needs.
In summary, our cash flows for the six months ended June 30, 2020 and 2019 were
as follows:
Six Months Ended
June 30,
2020 2019
(In thousands)
Net cash provided by operating activities $ 395,372 $ 352,175
Net cash (used in) provided by investing activities (174,368) 418,062
Net cash used in financing activities (421,530) (376,279) Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(965) 243
Net (decrease) increase in cash, cash equivalents, and restricted cash
Cash flows from operating activities Our largest source of operating cash flows is cash collections from our customers. Our primary uses of cash from operating activities are for personnel related expenditures, and other general operating expenses, as well as payments related to taxes, interest and facilities. Net cash provided by operating activities increased during the six months endedJune 30, 2020 , compared to the same period last year, primarily due to a decrease in cash paid for income taxes and to vendors, and an increase in cash received from customers, partially offset by decreases in cash received from interest on investments and from transition services. Cash paid for income taxes decreased primarily due toIRS guidance that permitted the deferral ofU.S. federal tax payments until the third 18
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Table of Contents quarter of 2020. Cash received from customers increased primarily due to higher domain name registrations and renewals. Cash paid to vendors decreased primarily due to the timing of payments. Cash received for interest on investments decreased due to a decline in interest rates. Cash received from transition services decreased due to the expiration of the transition services agreement related to our divested security services business inFebruary 2020 . Cash flows from investing activities The changes in cash flows from investing activities primarily relate to purchases, maturities and sales of marketable securities, purchases of property and equipment and the sale of businesses. We had net cash outflows from investing activities in the six months endedJune 30, 2020 , compared to net cash inflows during the same period last year, primarily due to a decrease in proceeds from sales and maturities of marketable securities, net of purchases, partially offset by contingent consideration received in the first half of 2020 related to our divested security services business. Cash flows from financing activities The changes in cash flows from financing activities primarily relate to share repurchases and our employee stock purchase plan. Net cash used in financing activities increased during the six months endedJune 30, 2020 , compared to the same period last year, primarily due to an increase in share repurchases.
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