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VeriSign 10-Q 2009 Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended June 30, 2009 OR
For the transition period from to Commission File Number: 000-23593
VERISIGN, INC. (Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code: (650) 961-7500
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): YES ¨ NO x Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Table of ContentsTABLE OF CONTENTS
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Table of ContentsPART I—FINANCIAL INFORMATION
As required under Item 1—Condensed Consolidated Financial Statements (Unaudited) included in this section are as follows:
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Table of ContentsVERISIGN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) (Unaudited)
See accompanying Notes to Condensed Consolidated Financial Statements.
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Table of ContentsVERISIGN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
See accompanying Notes to Condensed Consolidated Financial Statements.
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Table of ContentsVERISIGN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS) (In thousands) (Unaudited)
See accompanying Notes to Condensed Consolidated Financial Statements.
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Table of ContentsVERISIGN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
See accompanying Notes to Condensed Consolidated Financial Statements.
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Table of ContentsVERISIGN, INC. AND SUBSIDIARIES 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. and its subsidiaries (collectively, “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 fiscal 2008 Annual Report on Form 10-K (the “2008 Form 10-K”) filed with the SEC on March 3, 2009. Reclassifications During the first quarter of 2009, the Company disaggregated its Enterprise and Security Services (“ESS”) disposal group held for sale as of December 31, 2008, into the following three businesses: (i) Global Security Consulting (“GSC”), (ii) iDefense Security Intelligence Services (“iDefense”) and (iii) Managed Security Services (“MSS”). The Company decided to retain its iDefense business and, accordingly, reclassified the assets and liabilities related to iDefense as held and used in 2009. The Company also reclassified the historical results of operations of iDefense from discontinued operations to continuing operations as part of Naming Services for all periods presented. The Condensed Consolidated Statements of Operations have been reclassified for all periods presented to reflect current discontinued operations treatment. Unless noted otherwise, discussions in the Notes to Condensed Consolidated Financial Statements pertain to continuing operations. Subsequent Events The Company evaluated subsequent events through August 6, 2009, the date this Quarterly Report on Form 10-Q was filed with the SEC. Adoption of New Accounting Standards Effective January 1, 2009, the Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 160 (“SFAS 160”), “Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51,” which requires all entities to report minority interests in subsidiaries as equity in the consolidated financial statements, and requires that transactions between entities and noncontrolling interests be treated as equity. The Company reclassified the noncontrolling interest of $49.2 million as of December 31, 2008 in its consolidated VeriSign Japan subsidiary to Stockholders’ equity. Effective January 1, 2009, the Company retroactively adopted the Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) No. Accounting Principles Board (“APB”) 14-1 (“FSP APB 14-1”), “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” FSP APB 14-1 specifies that issuers of convertible debt instruments should separately account for the liability (debt) and equity (conversion option) components of such instruments in a manner that reflects the borrowing rate for a similar non-convertible debt. The Company’s adoption of FSP APB 14-1 affected its
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Table of Contents3.25% junior subordinated convertible debentures due 2037 (the “Convertible Debentures”). The condensed consolidated financial statements have been retroactively adjusted for all periods presented in accordance with FSP APB 14-1. See Note 9, “Junior Subordinated Convertible Debentures,” for further information regarding the adoption of FSP APB 14-1. The following tables present the effects of the retroactive adjustments to the Company’s Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2008:
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Note 2. Stock-Based Compensation Stock-based compensation is classified in the Condensed Consolidated Statements of Operations in the same expense line items as cash compensation. The following table presents the classification of stock-based compensation:
VeriSign currently uses the Black-Scholes option pricing model to determine the fair value of stock options and employee stock purchase plan awards. The determination of the fair value of stock-based payment awards using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. The following table sets forth the weighted-average assumptions used to estimate the fair value of the stock options and employee stock purchase plan awards:
VeriSign’s expected volatility is based on the average of the historical volatility over the period commensurate with the expected term of the options and the mean historical implied volatility of traded options. The risk-free interest rates are derived from the average United States (“U.S.”) Treasury constant maturity rates during the respective periods commensurate with the expected term. The expected terms are based on an analysis of the observed and expected time to post-vesting exercise and/or cancellation of options. The Company does not
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Table of Contentsanticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero. The Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option and award forfeitures and records stock-based compensation only for those options and awards that are expected to vest. The following table presents the nature of the Company’s total stock-based compensation, inclusive of amounts for discontinued operations:
During the six months ended June 30, 2009, the Company modified certain stock-based awards to accelerate the vesting of twenty-five percent (25%) of unvested “in-the-money” stock options outstanding and 25% of unvested restricted stock units outstanding on the termination dates of employees affected by divestitures and workforce reductions. The Company remeasured the fair value of these modified awards and recorded the charges over the future service periods, if any. The modification charges are included in restructuring for continuing operations as well as for discontinued operations. In the second quarter of 2008, the Company modified certain stock-based awards outstanding for Mr. William A. Roper, Jr., the former chief executive officer. Pursuant to the settlement agreement with Mr. Roper, the Company accelerated the vesting of Mr. Roper’s then unvested sign-on options, unvested sign-on restricted stock units, first-year options outstanding that would otherwise have vested had Mr. Roper remained employed with the Company through August 8, 2008, and one-third of the first-year restricted stock units outstanding. Upon acceleration of vesting of Mr. Roper’s stock-based awards, the Company recognized an additional amount of $5.4 million of stock-based compensation in general and administrative expenses during the second quarter of 2008. Note 3. Assets Held for Sale and Discontinued Operations In 2007, VeriSign announced a change to its business strategy to allow management to focus its attention on its core competencies and to make additional resources available to invest in its core businesses. The strategy calls for the divesture or winding down of the following remaining non-core businesses in the Company’s portfolio as of June 30, 2009: GSC, MSS (sold in July 2009), Messaging Services, and Pre-Pay billing and payment (“Pre-Pay”) Services. The Messaging Services business is comprised of Messaging and Mobile Media (“MMM”) Services and m-Qube Services. The m-Qube Services business is comprised of Content Portal Services (“CPS”) which was formerly reported as a separate disposal group held for sale as of December 31, 2008, and Mobile Delivery Gateway (“MDG”) Services which was formerly included as part of the MMM disposal group held for sale as of December 31, 2008. All of the remaining non-core businesses in the Company’s portfolio, except for the Pre-Pay Services business, which the Company is currently in the process of winding down, are classified as disposal groups held for sale as of June 30, 2009, and their results of operations have been classified as discontinued operations for all periods presented.
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Table of ContentsDuring the first quarter of 2009, the Company disaggregated its ESS disposal group held for sale as of December 31, 2008, into the following three businesses: (i) GSC, (ii) iDefense and (iii) MSS. The Company decided to retain its iDefense business and, accordingly, reclassified the assets and liabilities related to iDefense as held and used in 2009. The Company also reclassified the historical results of operations of iDefense from discontinued operations to continuing operations as part of Naming Services for all periods presented. Completed Divestitures On May 5, 2009, the Company sold its Real-Time Publisher (“RTP”) Services business which allows organizations to obtain access to and organize large amounts of constantly updated content, and distribute it, in real time, to enterprises, Web-portal developers, application developers and consumers. During the six months ended June 30, 2009, the Company recorded a gain on sale of $7.7 million, net of an income tax benefit of $5.8 million, including a reversal of estimated losses on disposal recorded prior to sale. On May 1, 2009, the Company sold its Communications Services business which provides Billing and Commerce Services, Connectivity and Interoperability Services, and Intelligent Database Services to Transaction Network Services, Inc. (“TNS”) for cash consideration of $226.2 million. During the six months ended June 30, 2009, the Company recorded a loss on sale of $57.3 million, net of an income tax expense of $55.3 million, including estimated losses on disposal recorded prior to sale. The cash consideration of $226.2 million was determined after certain initial adjustments to reflect the parties’ then-current estimate of working capital associated with the Communications Services business as of the closing date. This divestiture transaction will be subject to a final adjustment to reflect the final agreed-upon working capital balances as of the closing date. On April 10, 2009, the Company sold its International Clearing business which enables financial settlement and call data settlement for wireless and wireline carriers. The Company recorded a gain on sale of $12.2 million, net of an income tax benefit of $6.0 million, primarily representing cumulative translation adjustments associated with the business. Assets Held for Sale The following table presents the carrying amounts of major classes of assets and liabilities related to assets held for sale as of June 30, 2009 and December 31, 2008:
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Table of ContentsAs of June 30, 2009, businesses classified as held for sale and presented as discontinued operations are the following: Global Security Consulting The Company’s GSC business helps companies understand corporate security requirements, comply with all applicable regulations, identify security vulnerabilities, reduce risk, and meet the security compliance requirements applicable to the particular business and industry. Managed Security Services The Company’s MSS business enables enterprises to effectively monitor and manage their network security infrastructure 24 hours per day, every day of the year, while reducing the associated time, expense, and personnel commitments by relying on VeriSign’s security platform and experienced security staff. VeriSign sold its MSS business on July 6, 2009, for a net consideration of $42.9 million. Messaging Services The Company’s Messaging Services business is comprised of the following two businesses: Messaging and Mobile Media Services The Company’s MMM Services business consists of the InterCarrier Messaging, PictureMail, Premium Messaging Gateway, and Mobile Enterprise Service offerings. The MMM Services business is an industry-leading global provider of short-messaging, multimedia messaging, and mobile content application services. MMM Services enables messages and multimedia content to be sent globally across any wireless operator and mobile device. MMM Services offers the global connectivity, network reliability, and scalability necessary to capitalize on the fast growing global messaging and media content markets. m-Qube Services The Company’s m-Qube Services business is comprised of CPS and MDG Services. CPS enables a seamless end-to-end business solution focused on providing best-in-class digital content storefront services. CPS can be used as a content delivery platform for games, ringtones, and other content services. CPS are provided to mobile carriers and media companies primarily located in Canada. MDG Services offer solutions to manage the complex operator interfaces, relationships, distribution, reporting and customer service for the delivery of premium mobile content to customers. The MDG messaging aggregation services enable short messaging and multimedia messaging service connectivity for content providers, aggregators and others to all wireless subscribers of certain carriers and/or countries and regions. MDG Services enable content providers to more rapidly expand their global reach. The current and historical operations, gains and losses upon disposition, including estimated losses upon disposition, of these disposal groups are presented as discontinued operations for all periods presented in the Company’s Condensed Consolidated Statements of Operations. The amounts presented represent direct operating costs of the disposal groups. The Company has determined direct costs consistent with the manner in which the disposal groups were structured and managed during the respective periods. Allocations of indirect costs such as corporate overhead and goodwill impairments that are not directly attributable to a disposal group have not been made. For a period of time, the Company will continue to generate cash flows and will report income statement activity in continuing operations that are associated with these disposal groups and certain of the completed divestitures. The activities that will give rise to these impacts are transitional in nature and generally result from agreements that ensure and facilitate the orderly transfer of business operations. The nature, magnitude and
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Table of Contentsduration of the agreements will vary depending on the specific circumstances of the service, location and/or business need. The agreements can include the following: logistics, customer service, support of financial processes, procurement, human resources, facilities management, data collection and information services. Existing agreements generally extend for periods less than 12 months. During the three and six months ended June 30, 2009, the Company recorded net gains on disposals including net reversals of estimated losses on disposal, of $22.1 million and $26.1 million, respectively, which are included in discontinued operations. During the three and six months ended June 30, 2008, the Company recorded net losses on disposals, including estimated losses on disposal, of $13.8 million and $39.8 million, respectively, which are included in discontinued operations. Net gains on disposal are recorded on the date the sale of the disposal group is consummated. Full or partial reversals of previously reported estimated losses on disposals are recorded upon changes in the fair values and/or carrying values of the disposal groups. The following table presents the revenues and the components of (Loss) income from discontinued operations, net of tax:
Note 4. Restructuring, Impairments and Other Charges A comparison of restructuring, impairments and other charges is presented below:
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Table of ContentsRestructuring Charges As part of its divestiture strategy, VeriSign initiated a restructuring plan in the first quarter of 2008 (the “2008 Restructuring Plan”) which includes workforce reductions, abandonment of excess facilities and other exit costs. The restructuring charges in the table above are substantially related to the 2008 Restructuring Plan. Through June 30, 2009, VeriSign recorded a total of $77.7 million in restructuring charges, inclusive of amounts for discontinued operations, under its 2008 Restructuring Plan. The following table presents the nature of the restructuring charges:
As of June 30, 2009, the consolidated accrued restructuring costs are $10.5 million and consist of the following:
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Table of ContentsCash payments totaling $9.0 million related to the abandonment of excess facilities will be paid over the respective lease terms, the longest of which extends through 2016. The present value of future cash payments related to lease terminations due to the abandonment of excess facilities is expected to be as follows:
As part of the 2008 Restructuring Plan, the Company anticipates recording additional charges related to its workforce reduction, excess facilities and other exit costs through 2009. The estimate of these charges is not yet finalized and the total amount and timing of these charges will depend upon the nature, timing, and extent of these future actions. Impairments and Other Charges
During the three and six months ended June 30, 2008, the Company recorded a goodwill impairment charge of $45.8 million in discontinued operations related to its divested Post-Pay business. During the three and six months ended June 30, 2008, the Company recorded a loss of $79.1 million in continuing operations as a result of the sale of certain Mountain View facilities. The sale of the Mountain View facilities was consummated as a result of the 2008 Restructuring Plan to divest or wind down the Company’s non-core businesses. Note 5. Goodwill The following table summarizes the changes in the carrying amount of goodwill allocated to the Company’s Internet Infrastructure and Identity Services (“3IS”) segment during the six months ended June 30, 2009. There is no goodwill allocated to the Company’s Other Services segment. For a description of our segments, see Note 10, “Segment Information.”
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Table of ContentsDuring the six months ended June 30, 2009, the Company disaggregated its ESS disposal group held for sale as of December 31, 2008, into the following three businesses: (i) GSC, (ii) iDefense, and (iii) MSS. The Company decided to retain its iDefense business and, accordingly, reclassified goodwill of $7.0 million allocated to iDefense as held and used in 2009. During the second quarter of 2009, the Company performed an annual impairment review of its Naming Services, Authentication Services and VeriSign Japan reporting units related to its core businesses, as well as for an indefinite-lived intangible asset related to the Company’s .name generic top-level domain. The estimated fair value of each reporting unit was computed using a combination of the income approach and the market valuation approach. The Company tested goodwill for each of these reporting units for impairment by comparing the fair value of the reporting unit to its carrying value. Each of the reporting units reviewed for impairment had a fair value in excess of its carrying value and no further analysis was required. The estimated fair value of the indefinite-lived intangible asset related to the Company’s .name generic top-level domain was computed using the income approach. There were no impairment charges for goodwill and other indefinite-lived intangible assets during the second quarter of 2009. Any changes to the Company’s business strategy, growth assumptions and/or discounted cash flow projections could result in an impairment of its indefinite-lived intangible asset in future periods. The indefinite-lived intangible asset has a carrying amount of $11.7 million as of June 30, 2009, and is included in Other intangible assets, net. During the second quarter of 2008, the Company recorded a goodwill impairment charge of $45.8 million in discontinued operations relating to its divested Post-Pay reporting unit. Note 6. Other Balance Sheet Items Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consist of the following:
As of June 30, 2009, the Company had an aggregate of $32.4 million held by The Reserve’s Primary Fund (the “Primary Fund”) and The Reserve International Liquidity Fund, Ltd. (the “International Fund”), classified as Prepaid expenses and other current assets due to the lack of an active market. During the six months ended June 30, 2009, the Company received distributions of $13.9 million and $104.0 million from the Primary Fund and the International Fund, respectively. As of June 30, 2009, Receivables from buyers consists of receivables related to sale consideration of $10.5 million and receivables for payments made on behalf of buyers under transition services agreements of $19.1 million for certain divested businesses.
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Table of ContentsProperty and Equipment, Net The following table presents the detail of Property and equipment, net:
Other Assets Other assets consist of the following:
Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities consist of the following:
Other Long-term Liabilities Other long-term liabilities consist of the following:
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Table of ContentsNote 7. Stockholders’ Equity Comprehensive Income (Loss) Comprehensive income (loss) consists of Net income (loss) adjusted for unrealized gains and losses on marketable securities classified as available-for-sale and foreign currency translation adjustments. The following table presents the components of Comprehensive income (loss):
Repurchase of Common Stock In 2006, the Board of Directors authorized a stock repurchase program (the “2006 Stock Repurchase Program”) with no expiration date to repurchase up to $1.0 billion of its common stock. During the three and six months ended June 30, 2009, VeriSign repurchased approximately 0.9 million shares of its common stock at an average stock price of $23.15 per share for an aggregate of $20.0 million under the 2006 Stock Repurchase Program. As of June 30, 2009, approximately $250.0 million is available under the 2006 Stock Repurchase Program. In 2008, the Board of Directors authorized the 2008 Stock Repurchase Program (the “2008 Stock Repurchase Program”) having an aggregate purchase price of up to $1.28 billion of its common stock. As of June 30, 2009, $680.0 million remained available for further repurchase under the 2008 Stock Repurchase Program.
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Table of ContentsNote 8. Calculation of Net Income (Loss) Per Share Attributable to VeriSign Common Stockholders The Company computes basic net income (loss) per share attributable to VeriSign common stockholders by dividing net income (loss) attributable to VeriSign common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income per share attributable to VeriSign common stockholders gives effect to dilutive potential common equivalent shares, including unvested stock options, unvested restricted stock units, employee stock purchases and the conversion spread relating to the Convertible Debentures using the treasury stock method. The following table presents the computation of basic and diluted net income (loss) per share attributable to VeriSign common stockholders:
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Table of ContentsWeighted-average potential shares of common stock do not include stock options with an exercise price that exceeded the average fair market value of VeriSign’s common stock for the periods presented. The following table sets forth the weighted-average potential shares of common stock that were excluded from the above calculation because their effect was anti-dilutive, and the respective weighted-average exercise prices of such weighted-average stock options outstanding:
Note 9. Junior Subordinated Convertible Debentures In 2007, the Company issued $1.25 billion principal amount of 3.25% convertible debentures due August 15, 2037, to an initial purchaser in a private offering. The Convertible Debentures are subordinated in right of payment to the Company’s existing and future senior debt and to the other liabilities of the Company’s subsidiaries. The Convertible Debentures are initially convertible, subject to certain conditions, into shares of the Company common stock at a conversion rate of 29.0968 shares of common stock per $1,000 principal amount of Convertible Debentures, representing an initial effective conversion price of approximately $34.37 per share of common stock. The conversion rate will be subject to adjustment for certain events as outlined in the Indenture governing the Convertible Debentures but will not be adjusted for accrued interest. As of June 30, 2009, the if-converted value of the Convertible Debentures does not exceed its principal amount. Effective January 1, 2009, the Company retroactively adopted FSP APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” FSP APB 14-1 specifies that issuers of convertible debt instruments should separately account for the liability (debt) and equity (conversion option) components of such instruments in a manner that reflects the borrowing rate for a similar non-convertible debt. The Company calculated the carrying value of the liability component at issuance as the present value of its cash flows using a discount rate of 8.5% (borrowing rate for similar non-convertible debt with no contingent payment options), adjusted for the fair value of the contingent interest feature, yielding an effective interest rate of 8.39%. The carrying value of the liability component was determined to be $550.5 million. The excess of the principal amount of the debt over the carrying value of the liability component is also called “debt discount” or “equity component” of the Convertible Debentures. The equity component of the Convertible Debentures on the date of issuance was $700.7 million. The debt discount will be amortized using the Company’s effective interest rate of 8.39% over the term of the Convertible Debentures as a non-cash charge to interest expense included in Other loss, net. As of June 30, 2009, the remaining term of the Convertible Debentures is 28.2 years.
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Table of ContentsThe table below presents the carrying amounts of the liability and equity components:
The table below presents the interest expense for the contractual interest and the amortization of debt discount:
The embedded features related to the contingent interest payments, over-allotment option, and the Company making specific types of distributions (e.g., extraordinary dividends) qualify as derivatives to be accounted for separately. The fair value of the derivatives at the date of issuance of the Convertible Debentures was $11.4 million including $7.8 million for the contingent interest payment features and $3.6 million for the over-allotment option feature, which is accounted for as a discount on the Convertible Debentures. The over-allotment feature was revalued at $12.6 million on the date of exercise at August 28, 2007, which is currently accounted for as a premium on the Convertible Debentures. The debt discount and the debt premium are being accreted to the face value of the Convertible Debentures as net interest expense over 30 years. The balances of the debt discount and debt premium are included in the carrying amount of the liability component. Note 10. Segment Information Description of segments The Company has the following two reportable segments: (1) 3IS, which consists of Naming Services and Authentication Services. Authentication Services is comprised of Business Authentication Services, formerly known as Secure Socket Layer (“SSL”) Certificate Services; and User Authentication Services, formerly known as Identity and Authentication Services; and (2) Other Services, which consists of the continuing operations of non-core businesses and legacy products and services from divested businesses. Naming Services is the authoritative directory provider of all .com, .net, .cc, .tv, .name and .jobs domain names. Business Authentication Services enable enterprises and Internet merchants to implement and operate
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Table of Contentssecure networks and websites that utilize SSL protocol. Business Authentication Services provide customers the means to authenticate themselves to their end users and website visitors and to encrypt communications between client browsers and Web servers. User Authentication Services include identity protection services, fraud detection services, managed public key infrastructure (“PKI”) services, and unified authentication services. User Authentication Services are intended to help enterprises secure intranets, extranets and other applications and devices, and provide authentication credentials. The Other Services segment consists of the continuing operations of the Company’s non-core Pre-Pay billing and payment (“Pre-Pay”) Services business, as well as legacy products and services from the divested Content Delivery Network business. The Company is in the process of winding down the operations of the Pre-Pay Services business. The segments were determined based on how the chief operating decision maker (“CODM”) views and evaluates VeriSign’s operations. VeriSign’s Chief Executive Officer on an interim basis has been identified as the CODM. Other factors, including customer base, homogeneity of products, technology and delivery channels, were also considered in determining the reportable segments. The following tables present the results of VeriSign’s reportable segments:
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A reconciliation of the totals reported for the reportable segments to the applicable line items in the Condensed Consolidated Statements of Operations is as follows:
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Table of ContentsGeographic Information The Company operates in the U.S.; Australia, Japan and Asia Pacific (“APAC”); Europe, the Middle East and Africa (“EMEA”); and certain other countries. The following table presents a comparison of the Company’s geographic revenues:
Revenues are generally attributed to the country of domicile and the respective regions in which the Company’s customers are located. The following table presents a comparison of property and equipment, net, by geographic region:
Assets are not tracked by segment and the CODM does not evaluate segment performance based on asset utilization. Major Customers One customer accounted for 15% and 14% of the Company’s revenues from continuing operations during the three and six months ended June 30, 2009, respectively. One customer accounted for 12% of the Company’s revenues from continuing operations for both the three and six months ended June 30, 2008. No customer accounted for 10% or more of accounts receivable at June 30, 2009, and December 31, 2008. Note 11. Other Loss, Net The following table presents the components of Other loss, net:
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Table of ContentsInterest income is earned principally from the investment of VeriSign’s surplus cash balances. Interest expense is derived principally from interest on VeriSign’s Convertible Debentures. During the six months ended June 30, 2009, Other, net, primarily consists of $3.3 million received from Certicom Corporation (“Certicom”) due to the termination of the acquisition agreement entered into with Certicom during the three months ended March 31, 2009, and foreign exchange rate gains and losses. During the six months ended June 30, 2008, Other, net primarily consists of net foreign exchange rate losses. Note 12. Income Taxes During the three and six months ended June 30, 2009, the Company recorded income tax expense for continuing operations of $29.6 million and $53.1 million, respectively. During the three and six months ended June 30, 2008, the Company recorded income tax benefit for continuing operations of $8.1 million and $1.4 million, respectively. On February 20, 2009, the State of California enacted changes in tax laws that are expected to have a beneficial impact on the Company’s effective tax rate beginning in 2011. As a result, the Company revalued certain state deferred tax assets and liabilities that are expected to reverse after the effective date of the change, and recognized a discrete income tax benefit adjustment of $4.1 million during the six months ended June 30, 2009. The Company applies a valuation allowance to certain deferred tax assets when management does not believe that it is more likely than not that they will be realized. These deferred tax assets consist primarily of investments with differing book and tax bases and net operating losses related to certain foreign operations. As of June 30, 2009, and December 31, 2008, the Company had gross unrecognized tax benefits for income taxes associated with uncertain tax positions of $33.5 million and $31.9 million, respectively. As of June 30, 2009 and December 31, 2008, $33.5 million and $31.7 million, respectively, of unrecognized tax benefit, including penalties and interest could affect the Company’s tax provision and effective tax rate. During the three and six months ended June 30, 2009, the Company recorded an increase in unrecognized tax benefits associated with uncertain tax positions of $0.6 million and $1.6 million, respectively. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of Income tax expense. During the three months ended June 30, 2009, and June 30, 2008, the Company expensed $0.3 million and $0.7 million, respectively, for interest and penalties related to income tax liabilities through Income tax expense. The Company is not currently under examination by the Internal Revenue Service or the Virginia Department of Revenue. The Company is currently under examination by the California Franchise Tax Board for the years ended December 31, 2004 and December 31, 2005. Because the Company uses historic net operating loss carryforwards and other tax attributes to offset its taxable income in current and future years’ income tax returns for U.S. Federal, California and Virginia, such attributes can be adjusted by these taxing authorities until the statute closes on the year in which such attribute was utilized. The Company is not currently under examination by the Japan National Tax Agency. The years which remain subject to examination by the Japan National Tax Agency are those ended on December 31, 2007 and December 31, 2008. The balance of the gross unrecognized tax benefits is not expected to materially change in the next 12 months.
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Table of ContentsNote 13. Fair Value of Financial Instruments Assets and Liabilities Measured at Fair Value on a Recurring Basis The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2009:
The fair value of the Company’s investments in certain money market funds and time deposits approximates their face value. Such instruments are classified as Level 1 and are included in Cash and cash equivalents. The fair value of the Company’s foreign currency forward contracts is based on foreign currency rates quoted by banks or foreign currency dealers and other public data sources. The Company recorded unrealized gains and losses related to changes in the fair value of its foreign currency forward contracts in Other loss, net. The Company recorded an unrealized gain of $1.6 million and an unrealized loss of $1.4 million during the three months ended June 30, 2009 and 2008, respectively, related to changes in the fair value of its foreign currency forward contracts. The Company recorded an unrealized gain of $0.7 million and an unrealized loss of $1.4 million during the six months ended June 30, 2009 and 2008, respectively, related to changes in the fair value of its foreign currency forward contracts. Equity investments relate to the Company’s investments in the securities of other public companies. The fair value of these investments is based on the quoted market prices of the underlying shares. Such investments are included in Prepaid expenses and other current assets. The Company’s Convertible Debentures have contingent interest payments that are considered to be an embedded derivative. The Company accounts for the embedded derivative separately from the Convertible Debentures at fair value, with gains and losses reported in Other loss, net. The Company has utilized a valuation model based on simulations of stock prices, interest rates, credit ratings and bond prices to estimate the value of the embedded derivative. The inputs to the model include risk adjusted interest rates, volatility and average yield curve observations and stock price. As several significant inputs are not observable, the overall fair value measurement of the embedded derivative is classified as Level 3.
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Table of ContentsThe following table summarizes the change in the fair value of the Company’s Level 3 contingent interest derivative on Convertible Debentures during the six months ended June 30, 2009 (in thousands):
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis The Company measures its disposal groups held for sale at the lower of their carrying amount or fair value less cost to sell. The following table summarizes the Company’s net assets of those disposal groups held for sale which are measured at fair value as of June 30, 2009:
The Company has classified the net assets of its disposal groups held for sale as Level 3 due to the lack of observable inputs to determine the fair values of such net assets. The fair value of net assets of disposal groups held for sale is determined considering active bids from potential buyers. Significant unobservable inputs used in the income or market valuation approaches primarily include internal cash flow projections, discount rates and control premium. Discount rates are calculated using mathematical models that utilize observable inputs such as risk-free interest rates and beta, adjusted for company specific characteristics. Control premium is determined based on industry studies. During the three months ended June 30, 2009, net assets of the disposal groups held for sale which are measured at fair value as of June 30, 2009, with a carrying amount of $138.9 million, were written up to their fair value of $154.5 million less costs to sell of $2.6 million (or $151.9 million), resulting in a net reversal of estimated losses previously reported of $15.6 million. During the six months ended June 30, 2009, the Company recorded a net gain of $11.7 million related to net reversals of estimated losses on the disposal groups which are measured at fair value as of June 30, 2009. Other The fair value of other financial instruments including accounts receivable, restricted cash and investments, and accounts payable, approximates the carrying amount, which is the amount for which the instrument could be exchanged in a current transaction between willing parties. The fair value of the Company’s Convertible Debentures at June 30, 2009, is $833.4 million, and is based on quoted market prices.
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Table of ContentsNote 14. Contingencies Legal Proceedings On September 7, 2001, NetMoneyIN, an Arizona corporation, filed a complaint alleging patent infringement against VeriSign and several other previously-named defendants in the U.S. District Court for the District of Arizona asserting infringement of certain patents. The complaint alleged that VeriSign’s Payflow payment products and services directly infringe certain claims of NetMoneyIN’s three patents and requested the Court to enter judgment in favor of NetMoneyIN, a permanent injunction against the defendants’ alleged infringing activities, an order requiring defendants to provide an accounting for NetMoneyIN’s damages, to pay NetMoneyIN such damages and three times that amount for any willful infringers, and an order awarding NetMoneyIN attorney fees and costs. NetMoneyIN has withdrawn its allegations of infringement of one of the patents and the Court has dismissed with prejudice all claims of infringement of such patent. In its ruling on the claim construction issues, the Court found some of the claims asserted against VeriSign to be valid. NetMoneyIN may file an appeal after a final judgment seeking to overturn this ruling. Only one claim remains in the case. On July 13, 2007, the Court issued an order granting summary judgment in favor of VeriSign based on the Court’s finding that such claim is invalid, and denying all other pending dispositive motions. On August 29, 2007, plaintiff filed a Notice of Appeal. On September 19, 2007, the U.S. Court of Appeals for the Federal Circuit docketed the appeal. On October 20, 2008, the appellate court issued a decision that affirmed in part and reversed in part the summary judgment order and remanded the case for further proceedings in the trial court. VeriSign and NetMoney entered into a settlement agreement in July 2009. The case against VeriSign has been dismissed. On July 6, 2006, a stockholder derivative complaint (Parnes v. Bidzos, et al., and VeriSign) was filed against VeriSign in the U.S. District Court for the Northern District of California, as a nominal defendant, and certain of its current and former directors and executive officers related to certain historical stock option grants. The complaint seeks unspecified damages on behalf of VeriSign, constructive trust and other equitable relief. Two other derivative actions were filed, one in the U.S. District Court for the Northern District of California (Port Authority v. Bidzos, et al., and VeriSign), and one in the Superior Court of the State of California, Santa Clara County (Port Authority v. Bidzos, et al., and VeriSign) on August 14, 2006. The state court derivative action is stayed pending resolution of the federal actions. The current directors and officers named in this state action are D. James Bidzos, William L. Chenevich, Roger H. Moore and Louis A. Simpson. The Company is named as a nominal defendant in these actions. The federal actions have been consolidated and plaintiffs filed a consolidated complaint on November 20, 2006. The current directors and officers named in this consolidated federal action are D. James Bidzos, William L. Chenevich, Roger H. Moore, Louis A. Simpson and Timothy Tomlinson. Motions to dismiss the consolidated federal court complaint were heard on May 23, 2007. Those motions were granted on September 14, 2007. On November 16, 2007, a second amended shareholder derivative complaint was filed in the federal action wherein the Company was again named as a nominal defendant. By stipulation and Court order, defendants’ obligation to respond to the second amended shareholder derivative complaint has been continued pending informal efforts by the parties to resolve the action. On May 15, 2007, a putative class action (Mykityshyn v. Bidzos, et al., and VeriSign) was filed in Superior Court for the State of California, Santa Clara County, naming the Company and certain current and former officers and directors, alleging false representations and disclosure failures regarding certain historical stock option grants. The plaintiff purports to represent all individuals who owned the Company’s common stock between April 3, 2002, and August 9, 2006. The complaint seeks rescission of amendments to the 1998 and 2006 Option Plans and the cancellation of shares added to the 1998 Option Plan. The complaint also seeks to enjoin the Company from granting any stock options and from allowing the exercise of any currently outstanding options granted under the 1998 and 2006 Option Plans. The complaint seeks an unspecified amount of compensatory damages, costs and attorneys fees. The identical case was filed in the Superior Court for the State of California, Santa Clara County under a separate name (Pace. v. Bidzos, et al., and VeriSign) on June 19, 2007, and on October 3, 2007 (Mehdian v. Bidzos, et al.). On December 3, 2007, a consolidated complaint was filed in Superior Court for the State of California, Santa Clara County. The current directors and officers named in this consolidated class action are D. James Bidzos, William L. Chenevich, Roger H. Moore, Louis A. Simpson and
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Table of ContentsTimothy Tomlinson. VeriSign and the individual defendants dispute all of these claims. Defendants’ collective pleading challenges to the putative consolidated class action complaint were granted with leave to amend in August 2008. By stipulation and Court order, plaintiff’s obligation to file an amended consolidated class action complaint has been continued pending informal efforts by the parties to resolve the action. On November 7, 2006, a judgment was entered against VeriSign by a trial court in Terni, Italy, in the matter of Penco v. VeriSign, Inc. in the amount of Euro 5.8 million plus fees arising from a lawsuit brought by a former consultant who claimed to be owed commissions. The Company was granted a stay on execution of the judgment and the Company filed an appeal. On July 9, 2008, the appellate court rejected all of plaintiff’s claims. On or about April 2, 2009, plaintiff filed an appeal in the Supreme Court of Cassation, Rome, Italy. VeriSign filed a Writ of Reply on May 5, 2009. While the Company cannot predict the outcome of these proceedings, it believes the allegations against it are without merit. On May 31, 2007, plaintiffs Karen Herbert, et al., on behalf of themselves and a nationwide class of consumers (“Herbert”), filed a complaint against VeriSign, m-Qube, Inc., and other defendants alleging that defendants collectively operate an illegal lottery under the laws of multiple states by allowing viewers of the NBC television show “Deal or No Deal” to incur premium text message charges in order to participate in an interactive television promotion called “Lucky Case Game.” The lawsuit is pending in the U.S. District Court for the Central District of California, Western Division. On June 5, 2007, plaintiffs Cheryl Bentley, et al., on behalf of themselves and a nationwide class of consumers (“Bentley”), filed a complaint against VeriSign, m-Qube, Inc., and other defendants alleging that defendants collectively operate an illegal lottery under the laws of multiple states by allowing viewers of the NBC television show “The Apprentice” to incur premium text message charges in order to participate in an interactive television promotion called “Get Rich With Trump.” The Bentley matter is currently stayed. A motion to dismiss ruling in Herbert is on appeal in the U.S. Court of Appeals for the Ninth Circuit. While the Company cannot predict the outcome of any of these matters, it believes that the allegations in each of them are without merit and intends to vigorously defend against them. On September 12, 2008, Leon Stambler filed a declaratory judgment complaint against VeriSign in the U.S. District Court for the Eastern District of Texas. The complaint seeks an order permitting Stambler to proceed with patent infringement actions against VeriSign SSL certificate customers in actions in which VeriSign is not a party in view of Stambler’s prior unsuccessful action in 2003 against VeriSign on the same patents in which a verdict was returned against Stambler and a judgment was entered thereon. VeriSign has received requests to indemnify certain SSL certificate customers in the patent infringement actions brought by Stambler. VeriSign and Stambler entered into a confidential settlement agreement on June 1, 2009. The confidential settlement agreement with Stambler does not resolve the indemnity requests received from certain SSL certificate customers. The declaratory judgment complaint against VeriSign was dismissed on June 8, 2009. On June 5, 2009, the U.S. Court of Appeals for the Ninth Circuit reversed and remanded a district court order dismissing a second amended complaint filed by plaintiff Coalition for ICANN Transparency, Inc. (“CFIT”). CFIT filed its initial complaint and an application for a temporary restraining order against VeriSign and ICANN in the U.S. District Court for the Northern District of California on November 28, 2005, asserting claims under Sections 1 and 2 of the Sherman Antitrust Act (the “Sherman Act”), the Cartwright Act, and Cal. Bus. & Prof. Code § 17200. The district court denied CFIT’s application for a temporary restraining order on November 30, 2005. Shortly after the action was initiated and CFIT’s application was denied, the district court granted defendants’ Motion for Judgment on the Pleadings on February 28, 2006, with leave to amend. CFIT filed a First Amended Complaint on March 14, 2006. The Court granted defendants’ Motion to Dismiss the First Amended Complaint, with leave to amend, on December 8, 2006. CFIT filed a Second Amended Complaint on December 28, 2006; ICANN was not included as a defendant in the Second Amended Complaint. The Second Amended Complaint, which VeriSign has not yet answered, asserted claims, among others, under Sections 1 and 2 of the Sherman Act against VeriSign, challenging in part VeriSign’s conduct in entering into, and the pricing, renewal and certain other terms of, the .com and .net registry agreements with ICANN. The same renewal and pricing terms in the .com registry agreement are incorporated by reference in the Cooperative Agreement between VeriSign and the U.S. Department of Commerce, which approved the .com Registry Agreement as in the
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Table of Contentspublic interest. The Court granted VeriSign’s Motion to Dismiss the Second Amended Complaint on May 14, 2007, without leave to amend, and entered judgment for VeriSign. CFIT filed a Notice of Appeal to the U.S. Court of Appeals for the Ninth Circuit on June 13, 2007. After briefing, the appeal was argued on December 8, 2008. The Ninth Circuit filed its Opinion reversing and remanding the dismissal of the Second Amended Complaint on June 5, 2009. VeriSign filed a motion for rehearing in the Ninth Circuit on July 2, 2009. While the Company cannot predict the outcome of these proceedings, it believes the allegations against it are without merit and intends to vigorously defend against them. VeriSign is involved in various other investigations, claims and lawsuits arising in the normal conduct of its business, none of which, in its opinion will have a material effect on its business. The Company cannot assure you that it will prevail in any litigation. Regardless of the outcome, any litigation may require the Company to incur significant litigation expense and may result in significant diversion of management attention. Note 15. Subsequent Events On July 6, 2009, the Company sold its MSS business for a net consideration of $42.9 million.
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You should read the following discussion in conjunction with the interim unaudited Condensed Consolidated Financial Statements and related notes. 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 involve risks and uncertainties, including, among other things, statements regarding our anticipated costs and expenses and revenue mix. 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 the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q or Current Reports on Form 8-K that we file in 2009 and our 2008 Form 10-K, which was filed on March 3, 2009, 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 publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document. Overview We are the trusted provider of Internet infrastructure services for the networked world. We offer a comprehensive spectrum of products and services that help a growing number of organizations and individuals to communicate and conduct commerce with confidence. We have the following two reportable segments: Internet Infrastructure and Identity Services (“3IS”) which consists of Naming Services and Authentication Services. Authentication Services is comprised of Business Authentication Services, formerly known as Secure Socket Layer (“SSL”) Certificate Services; and User Authentication Services, formerly known as Identity and Authentication Services; and (2) Other Services, which consists of the continuing operations of non-core businesses and legacy products and services from divested businesses. See Note 10, “Segment Information,” for further information regarding our reportable segments. In our 2008 Form 10-K, we presented VeriSign Japan as a separate component of our 3IS segment. Beginning in the first quarter of 2009, we have reclassified the results of operations of VeriSign Japan into the results of operations of our Authentication Services which is also a component of our 3IS segment, as VeriSign Japan is a majority-owned subsidiary whose operations primarily consist of Business and User Authentication Services. Naming Services is the authoritative directory provider of all .com, .net, .cc, .tv, .name and .jobs domain names. Business Authentication Services enable enterprises and Internet merchants to implement and operate secure networks and websites that utilize SSL protocol. Business Authentication Services provide customers the means to authenticate themselves to their end users and website visitors and to encrypt communications between client browsers and Web servers. User Authentication Services includes identity protection services, fraud detection services, managed public key infrastructure (“PKI”) services, and unified authentication services. User Authentication Services are intended to help enterprises secure intranets, extranets and other applications and devices, and provide authentication credentials. The Other Services segment consists of the continuing operations of our non-core Pre-Pay billing and payment (“Pre-Pay”) Services business, as well as legacy products and services from the divested Content Delivery Network (“CDN”) business. We are in the process of winding down the operations of the Pre-Pay Services business. During the fourth quarter of 2007, we announced a change to our business strategy to allow management to focus its attention on our core competencies and to make additional resources available to invest in our core
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Table of Contentsbusinesses. The strategy calls for a divestiture or winding down of all the non-core businesses. These businesses, except the Pre-Pay Services business, are classified as disposal groups held for sale as of June 30, 2009, and their results of operations have been classified as discontinued operations for all periods presented. The continued execution of our divestiture plan is subject to the availability of financing, identification of buyers, and general market conditions, including further developments in the current global economic environment and potential continued deterioration of the credit markets. While we are executing our divestiture plan, we will experience additional risks, including, but not limited to the disruption of our business and the potential loss of key employees; difficulties separating operations, services, products and personnel; the potential damage to relationships with our existing customers; and the delay in completion of transition services. For example, our divestiture plan requires a substantial amount of management, administrative and operational resources. Once our divestiture plan is completed, the scale and scope of our operations will decrease in absolute terms, which we expect will allow our remaining core services to benefit from a more efficient and streamlined operational structure. However, we cannot assure you that we will be able to achieve the full strategic and financial benefits we expect from the divestiture of our non-core businesses and there is no guarantee that the planned divestitures will occur or will not be significantly delayed, all of which may result in future variability in our results of operations. By divesting our non-core businesses, additional resources should be available to invest in our core services that will remain: Naming Services and Authentication Services. Our Core Services Our core services consist of our Naming Services and Authentication Services. Naming Services As of June 30, 2009, we had approximately 93.5 million domain names registered under the .com and .net registries, which are our principal registries. The number of domain names registered is largely driven by Internet usage and broadband penetration rates. Although growth in absolute number of registrations remains greatest in mature markets such as the United States (“U.S.”) and Western Europe, growth on an annual percentage basis is expected to be greatest in markets outside of the U.S. and Western Europe where Internet penetration has demonstrated the greatest potential for growth. We are largely insulated from the risk posed by fluctuations in exchange rates due to the fact that all revenues paid to us for .com and .net registrations are in U.S. dollars. Authentication Services Business Authentication Services We currently offer the following Business Authentication Services: VeriSign®, thawte®, and GeoTrust® branded SSL certificates. As of June 30, 2009, we had an installed base of SSL certificates of approximately 1.2 million. The major factors impacting the growth and performance of our Business Authentication Services are the penetration and adoption of the Internet, especially through broadband services, the spread of e-commerce, the utilization of electronic means for executing financial transactions (such as credit card payments), and the extent to which advertising through search engines encourages consumers to engage in e-commerce. As a result of the growing impact of the Internet on global commercial transactions and the current economic environment, we expect continued but slowing revenue growth in our business, primarily in markets outside of the U.S. where e-commerce has the largest growth potential. User Authentication Services As with our Business Authentication Services, the major factors impacting the growth and performance of our User Authentication Services are the penetration and adoption of the Internet, especially through broadband services, the spread of e-commerce, the utilization of electronic means for executing financial transactions (such as credit card payments), and the extent to which advertising through search engines encourages consumers to engage in e-commerce.
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Table of ContentsFrom time to time we engage in promotional activities in both our Naming Services and Authentication Services. Business Highlights and Trends—Three and six months ended June 30, 2009
Assets Held for Sale and Discontinued Operations During the first quarter of 2009, we disaggregated our Enterprise and Security Services (“ESS”) disposal group held for sale as of December 31, 2008, into the following three businesses: (i) Global Security Consulting (“GSC”), (ii) iDefense Security Intelligence Services (“iDefense”) and (iii) Managed Security Services (“MSS”). We decided to retain our iDefense business and, accordingly, reclassified the assets and liabilities related to iDefense as held and used in 2009. We also reclassified the historical results of operations of iDefense from discontinued operations to continuing operations as part of Naming Services for all periods presented. See Note 3, “Assets Held for Sale and Discontinued Operations,” of our Notes to Condensed Consolidated Financial Statements for further information. As of June 30, 2009, businesses classified as held for sale and presented as discontinued operations are the following: Global Security Consulting Our GSC business, part of our former ESS disposal group, helps companies understand corporate security requirements, comply with all applicable regulations, identify security vulnerabilities, reduce risk, and meet the security compliance requirements applicable to the particular business and industry.
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Table of ContentsManaged Security Services Our MSS business, part of our former ESS disposal group, enables enterprises to effectively monitor and manage their network security infrastructure 24 hours per day, every day of the year, while reducing the associated time, expense, and personnel commitments by relying on VeriSign’s security platform and experienced security staff. We sold our MSS business on July 6, 2009, for a net consideration of $42.9 million. Messaging Services Our Messaging Services business consists of the following two businesses: Messaging and Mobile Media Services Our Messaging and Mobile Media (“MMM”) Services business consists of the InterCarrier Messaging, PictureMail, Premium Messaging Gateway, and Mobile Enterprise Service offerings. The MMM Services business is an industry-leading global provider of short-messaging, multimedia messaging, and mobile content application services. MMM Services enables messages and multimedia content to be sent globally across any wireless operator and mobile device. MMM Services offers the global connectivity, network reliability, and scalability necessary to capitalize on the fast growing global messaging and media content markets. m-Qube Services Our m-Qube Services business is comprised of Mobile Delivery Gateway (“MDG”) Services and CPS. MDG Services offer solutions to manage the complex operator interfaces, relationships, distribution, reporting and customer service for the delivery of premium mobile content to customers. MDG messaging aggregation services enable short messaging and multimedia messaging service connectivity for content providers, aggregators and others to all wireless subscribers of certain carriers and/or countries and regions. MDG services enable content providers to more rapidly expand their global reach. CPS enables a seamless end-to-end business solution focused on providing best-in-class digital content storefront services. CPS can be used as a content delivery platform for games, ringtones, and other content services. CPS are provided to mobile carriers and media companies primarily located in Canada. Subsequent Events On July 6, 2009, we sold our MSS business for a net consideration of $42.9 million.
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Table of ContentsResults of Operations The following table presents information regarding our results of operations as a percentage of revenues:
Revenues We have two reportable segments: 3IS and Other Services. A comparison of revenues is presented below:
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Table of ContentsThe changes in revenues during the three and six months ended June 30, 2009, are described in the segment discussions that follow. 3IS: Naming Services Revenues related to our Naming Services are derived from registrations for domain names in the .com, .net, .cc, .tv, .name and .jobs domain name registries. Revenues from .cc, .tv, .name and .jobs are not significant. For domain names registered with the .com and .net registries, we receive a fee per annual registration that is fixed pursuant to our agreements with the Internet Corporation for Assigned Names and Numbers (“ICANN”). Individual customers contract directly with third-party registrars or their resellers, and the third-party registrars in turn register the .com, .net, .cc, .tv, .name and .jobs domain names with VeriSign. Changes in revenues are driven largely by increases in the number of new domain name registrations and the renewal rate for existing registrations, as well as fee increases as permitted under our agreements with ICANN. As of June 30, 2009, we have the contractual right to increase the fees for .com domain name registrations up to 7% each year during any two years over the remaining term of our agreement with ICANN through November 30, 2012. As of June 30, 2009, we have the contractual right to increase the fees for .net domain name registrations up to 10% each year during the remaining three years of our agreement with ICANN through June 30, 2011. We frequently offer promotional marketing programs for our registrars based upon market conditions and the business environment in which the registrars operate. The following table compares active domain names ending in .com and .net managed as part of our Naming Services as of June 30, 2009 and 2008:
During the three and six months ended June 30, 2009, the growth in the number of domain names registered was primarily driven by continued Internet growth and adoption primarily within international markets and new domain name promotion programs. We expect that new name registrations and renewals from customers engaged in the business of registering domain names for the purpose of on-line advertising networks will continue to have a diminishing impact on our domain name base through 2009. During 2008, we started seeing signs of the slowing of growth in some areas of new traditional name registrations due to the current macro-economic environment. We expect that the current and expected state of the economic environment may contribute to a continued slowing of growth rates in 2009 for the total worldwide domain name zone as well as for the .com and .net domain name zones under our management, even as we continue to add to the net names in our domain name zones in absolute terms. We continue to experience growth in targeted international markets where we have focused efforts to develop regions of growth with potential in both our .com and .net domain name zones over time. Our Naming Services revenues increased during the three and six months ended June 30, 2009, as compared to the same periods last year, primarily due to a 7% year-over-year increase in the number of active domain names ending in .com and .net and increases in our .com and .net registry fees in October 2008 of 7% and 10%, respectively, to $6.86 and $4.23, respectively as per our agreements with ICANN. Authentication Services Our Authentication Services revenues increased during the three and six months ended June 30, 2009, as compared to the same periods last year, primarily due to an 11% year-over-year increase in the installed base of SSL certificates and increased demand for our unified authentication and identity protection services.
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Table of ContentsBusiness Authentication Services Revenues related to our Business Authentication Services are derived from licensing and service fees charged to our customers for the issuance of SSL certificates that authenticate their identity to the third parties with whom they carry out secured transactions. Revenues in the Business Authentication Services are related to fees charged per certificate, which are based upon a number of factors, including: (i) the brand name under which the certificate is issued, which determines the level of encryption and rigor of authentication; (ii) the number of servers authenticated, and (iii) the duration of the certification. The following table compares the approximate installed base of SSL certificates in our Business Authentication Services as of June 30, 2009 and 2008:
During the three and six months ended June 30, 2009, our installed base of SSL certificates from our GeoTrust® and thawte® brands increased at a higher rate than our higher-priced VeriSign® brand, and as a result, our average-unit-revenue decreased compared to prior periods. We expect that the number of our SSL certificates issued will continue to increase at a higher rate than the revenues recognized from our Business Authentication Services. As we have a market share leadership at the high end of the SSL certificates market, our unit growth rate for the high end is limited by the overall segment growth. In the mid and low segments, we expect to see good growth opportunities for market share gains as these markets are growing faster than the high end market. Our Extended Validation (“EV”) SSL certificate sales, while still a small portion of our Business Authentication Services, continue to increase year-over-year. Due to the effect of the economic slowdown, however, EV SSL certificates’ adoption has slowed as large-scale customers delay their orders. We expect the mainstream adoption of EV SSL certificates will be deferred until we see improvements in the macro-economic environment. The weakening economy is affecting our Business Authentication Services and, while we expect to experience growth, we expect those growth rates to decline in 2009 compared to 2008. User Authentication Services Revenues related to our User Authentication Services are derived from one-time credential sales to customers seeking network services and one-time set-up fees. We also charge an annual service fee based upon the number of individual users authorized by the customer to access its network and a customer support fee. Our managed PKI services are characterized by lower growth rates than other product lines within User Authentication Services, reflecting the greater maturity of our managed PKI services. We expect User Authentication Services revenues to continue to grow in 2009 primarily from growth in our VeriSign Identity Protection (“VIP”) services and fraud detection services, but at a lower growth rate than in 2008. Other Services Other services revenues are derived from our non-core Pre-Pay Services business as well as legacy products and services from divested businesses. We are in the process of winding down the operations of our Pre-Pay Services business. Other services revenues decreased during the three and six months ended June 30, 2009, as compared to the same periods last year, primarily due to a decrease in revenues from our Pre-Pay Services business resulting from management’s decision to wind down the business, the divestiture of our CDN business in 2008 and termination of revenues from a service agreement with our former Jamba joint ventures.
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Table of ContentsOur expectations and trends for our segments are based on what we are observing and can project about the current macro-economic environment. Our outlook is subject to broader changes in the market and could alter significantly over time. Geographic Revenues We operate in the U.S.; Australia, Japan and Asia Pacific (“APAC”); Europe, the Middle East and Africa (“EMEA”); and certain other countries. A comparison of our geographic revenues is presented below:
Revenues are generally attributed to the country of domicile and the respective regions in which our customers are located. Revenues from the U.S. increased during the three and six months ended June 30, 2009, as compared to the same periods last year, primarily due to increases in revenues from our Naming Services and Authentication Services. Revenues from the EMEA region increased during the three and six months ended June 30, 2009, as compared to the same periods last year, primarily due to an increase in revenues from our Naming Services. Revenues from the APAC region increased during the six months ended June 30, 2009, as compared to the same period last year, primarily due to an increase in revenues from our Authentication Services. Revenues from Other regions increased during the three and six months ended June 30, 2009, as compared to the same periods last year, primarily due to increases in revenues from our Naming Services and Authentication Services. Mature markets, such as the U.S. and Western Europe, where broadband and e-commerce have seen strong market penetration, may be expected to see consistent incremental growth reflecting the maturity of these markets. We expect to see larger increases in revenues from other EMEA and APAC countries driven by greater growth in international regions, resulting from greater broadband and Internet penetration and expanding e-commerce as electronic means of payment are increasingly adopted. Cost of revenues Cost of revenues consist primarily of costs related to providing digital certificate enrollment and issuance services, billing services, operational costs associated with the delivery of our services, customer support and
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Table of Contentstraining, consulting and development services, labor costs to provide security, costs of facilities and computer equipment used in these activities and allocations of indirect costs such as corporate overhead. All allocations of indirect costs are included in continuing operations. A comparison of cost of revenues is presented below:
Cost of revenues increased during the three and six months ended June 30, 2009, as compared to the same periods last year, primarily due to increases in registry fees paid to ICANN to maintain domain name registrations and outside consulting costs, and telecommunication expenses, partially offset by decreases in salary and employee benefits, and allocated overhead expenses. Registry fees paid to ICANN increased primarily due to an increase in the number of .com and .net domain names registered coupled with an increase in the cost of registry fees effected in the latter half of fiscal 2008 per the ICANN agreement. Outside consulting costs increased primarily resulting from an increase in projects associated with our Naming Services. Telecommunication expenses increased primarily due to increased spending on capacity for global constellation sites that support our .com and .net registries and an increase in expenses to support our new data centers that became operational in the latter half of 2008. Salary and employee benefits, which include stock-based compensation, and allocated overhead expenses decreased primarily due to a reduction in average headcount resulting from the 2008 restructuring plan and decreased corporate overhead expenses. Sales and marketing Sales and marketing expenses consist primarily of salaries, sales commissions, sales operations 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 the Internet, television, radio, print and direct mail advertising costs and allocations of indirect costs such as corporate overhead. All allocations of indirect costs are included in continuing operations. A comparison of sales and marketing expenses is presented below:
Sales and marketing expenses increased during the three months ended June 30, 2009, as compared to the same period last year, primarily due to an increase in advertising and marketing expenses, partially offset by a decrease in salary and employee benefits and travel expenses. Advertising and marketing expenses increased primarily due to increased spending as a result of management’s strategy to increase market penetration of our Business Authentication Services. Salary and employee benefits, which include stock-based compensation, decreased primarily due to lower average headcount resulting from the 2008 restructuring plan. Travel expenses decreased primarily due to lower average headcount and management’s cost-saving initiatives. Sales and marketing expenses decreased during the six months ended June 30, 2009, as compared to the same period last year, primarily due to a decrease in salary and employee benefits, and travel expenses. Salary and employee benefits, which include stock-based compensation, decreased primarily due to lower average headcount resulting from the 2008 restructuring plan and the divestiture of our Content Delivery Network (“CDN”) business in April 2008. Travel expenses decreased primarily due to lower average headcount and management’s cost-saving initiatives.
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Table of ContentsResearch 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 and the costs of facilities, computer and communications equipment, support services used in service and technology development and allocations of indirect costs such as corporate overhead. All allocations of indirect costs are included in continuing operations. A comparison of research and development expenses is presented below:
Research and development expenses decreased during the three and six months ended June 30, 2009, as compared to the same periods last year, primarily due to decreases in salary and employee benefits, partially offset by an increase in depreciation expenses. Salary and employee benefits, which include stock-based compensation, decreased primarily due to lower average headcount resulting from the 2008 restructuring plan, the divestiture of our CDN business in April 2008, and the ongoing wind-down of our Pre-Pay Services business. Depreciation expenses increased primarily due to an increase in capitalized projects placed into service during the latter half of 2008. 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, facilities, computer and communications equipment, management information systems, support services, professional services fees, certain tax and license fees, bad debt expense and allocations of indirect costs such as corporate overhead. All allocations of indirect costs are included in continuing operations. A comparison of general and administrative expenses is presented below:
General and administrative expenses decreased during the three and six months ended June 30, 2009, as compared to the same periods last year, primarily due to decreases in salary and employee benefits, and contractor and professional services; partially offset by an increase in legal expenses. Salary and employee benefits, which include stock-based compensation, decreased primarily due to lower average headcount resulting from the 2008 restructuring plan. Contractor and professional services decreased primarily due to decreased professional services costs incurred for accounting and auditing services. Legal expenses increased primarily due to reversals of certain previously accrued litigation expenses recorded in the first half of 2008.
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Table of ContentsRestructuring, impairments and other charges A comparison of restructuring, impairments and other charges is presented below:
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