VeriSign, Inc.
VERISIGN INC/CA (Form: 10-Q, Received: 11/06/2009 16:46:35)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 000-23593

 

 

VERISIGN, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   94-3221585

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

487 East Middlefield Road, Mountain View, CA   94043
(Address of principal executive offices)   (Zip Code)

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:

 

Class

 

Shares Outstanding October 31, 2009

Common stock, $.001 par value

 

192,345,267

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page
   PART I—FINANCIAL INFORMATION   

Item 1.

   Condensed Consolidated Financial Statements (Unaudited)    3

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    33

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    48

Item 4.

   Controls and Procedures    48
   PART II—OTHER INFORMATION   

Item 1.

   Legal Proceedings    50

Item 1A.

   Risk Factors    50

Item 2.

   Unregistered Sale of Equity Securities and Use of Proceeds    66

Item 6.

   Exhibits    67

Signatures

   69

 

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PART I—FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As required under Item 1—Condensed Consolidated Financial Statements (Unaudited) included in this section are as follows:

 

Financial Statement Description

   Page

•         Condensed Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008

   4

         Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2008

   5

         Condensed Consolidated Statement of Stockholders’ Equity and Comprehensive Income (Loss) for the Nine Months Ended September 30, 2009

   6

         Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008

   7

        Notes to Condensed Consolidated Financial Statements

   8

 

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VERISIGN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

     September 30,
2009
    December 31,
2008
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 1,432,306      $ 789,068   

Accounts receivable, net of allowance for doubtful accounts of $668 at September 30, 2009 and $1,208 at December 31, 2008

     73,247        83,749   

Prepaid expenses and other current assets

     151,003        268,178   

Assets held for sale

     240,202        483,840   
                

Total current assets

     1,896,758        1,624,835   
                

Property and equipment, net

     372,413        385,498   

Goodwill

     290,214        283,109   

Other intangible assets, net

     24,681        35,312   

Other assets

     37,397        38,118   
                

Total long-term assets

     724,705        742,037   
                

Total assets

   $ 2,621,463      $ 2,366,872   
                
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable and accrued liabilities

   $ 246,592      $ 263,535   

Accrued restructuring costs

     5,980        28,920   

Deferred revenues

     656,751        629,800   

Liabilities related to assets held for sale

     41,455        49,160   

Other current liabilities

     2,712        5,463   
                

Total current liabilities

     953,490        976,878   
                

Long-term deferred revenues

     224,541        215,281   

Long-term accrued restructuring costs

     3,114        3,037   

Convertible debentures, including contingent interest derivative

     571,526        568,712   

Other long-term liabilities

     86,692        84,543   
                

Total long-term liabilities

     885,873        871,573   
                

Total liabilities

     1,839,363        1,848,451   
                

Commitments and contingencies

    

Stockholders’ equity:

    

VeriSign, Inc. and subsidiaries stockholders’ equity:

    

Preferred stock—par value $.001 per share; Authorized shares: 5,000,000; Issued and outstanding shares: none

     —          —     

Common stock—par value $.001 per share; Authorized shares: 1,000,000,000; Issued and outstanding shares: 192,271,949 excluding 115,079,736 held in treasury, at September 30, 2009; and 191,547,795 excluding 112,717,587 held in treasury, at December 31, 2008

     307        304   

Additional paid-in capital

     22,009,195        21,891,786   

Accumulated deficit

     (21,286,483     (21,439,988

Accumulated other comprehensive income

     9,039        17,111   
                

Total VeriSign, Inc. and subsidiaries stockholders’ equity

     732,058        469,213   

Noncontrolling interest in subsidiary

     50,042        49,208   
                

Total stockholders’ equity

     782,100        518,421   
                

Total liabilities and stockholders’ equity

   $ 2,621,463      $ 2,366,872   
                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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VERISIGN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Revenues

   $ 257,995      $ 245,934      $ 769,609      $ 723,232   
                                

Costs and expenses:

        

Cost of revenues

     56,736        57,265        174,520        172,498   

Sales and marketing

     45,015        41,646        128,341        133,779   

Research and development

     24,940        21,764        72,976        70,528   

General and administrative

     42,634        49,677        134,721        152,742   

Restructuring, impairments and other charges

     10,428        5,909        15,673        107,293   

Amortization of other intangible assets

     3,112        2,500        9,394        7,675   
                                

Total costs and expenses

     182,865        178,761        535,625        644,515   
                                

Operating income

     75,130        67,173        233,984        78,717   

Other loss, net

     (8,669     (13,450     (23,228     (22,308
                                

Income from continuing operations before income taxes and loss from unconsolidated entities

     66,461        53,723        210,756        56,409   
                                

Income tax expense

     18,111        8,876        71,213        7,466   

Loss from unconsolidated entities, net of tax

     —          (2,509     —          (3,099
                                

Income from continuing operations, net of tax

     48,350        42,338        139,543        45,844   

Income (loss) from discontinued operations, net of tax

     6,249        (242,613     16,343        (321,463
                                

Net income (loss)

     54,599        (200,275     155,886        (275,619

Less: Net income attributable to noncontrolling interest in subsidiary

     (988     (815     (2,381     (2,710
                                

Net income (loss) attributable to VeriSign, Inc. and subsidiaries common stockholders

   $ 53,611      $ (201,090   $ 153,505      $ (278,329
                                

Basic income (loss) per share attributable to VeriSign, Inc. and subsidiaries common stockholders from:

        

Continuing operations

   $ 0.25      $ 0.21      $ 0.71      $ 0.22   

Discontinued operations

     0.03        (1.25     0.09        (1.62
                                

Net income (loss)

   $ 0.28      $ (1.04   $ 0.80      $ (1.40
                                

Diluted income (loss) per share attributable to VeriSign, Inc. and subsidiaries common stockholders from:

        

Continuing operations

   $ 0.24      $ 0.21      $ 0.71      $ 0.21   

Discontinued operations

     0.04        (1.24     0.08        (1.58
                                

Net income (loss)

   $ 0.28      $ (1.03   $ 0.79      $ (1.37
                                

Shares used to compute net income (loss) per share attributable to VeriSign, Inc. and subsidiaries common stockholders:

        

Basic

     192,619        193,853        192,527        198,622   
                                

Diluted

     193,472        195,930        193,235        202,951   
                                

Amounts attributable to VeriSign, Inc. and subsidiaries common stockholders:

        

Income from continuing operations, net of tax

   $ 47,362      $ 41,523      $ 137,162      $ 43,134   

Income (loss) from discontinued operations, net of tax

     6,249        (242,613     16,343        (321,463
                                

Net income (loss) attributable to VeriSign, Inc. and subsidiaries common stockholders

   $ 53,611      $ (201,090   $ 153,505      $ (278,329
                                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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VERISIGN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

    Total
Stockholders’
Equity
    VeriSign, Inc. and Subsidiaries Stockholders’ Equity     Noncontrolling
Interest In
Subsidiary
 
      Common Stock   Additional
Paid- In
Capital
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Income
    Total    
      Shares     Amount          

Balance at December 31, 2008

  $ 50,795      191,548      $ 304   $ 21,472,790      $ (21,439,410   $ 17,111      $ 50,795      $ —     

Cumulative adjustment to beginning balance upon adoption of FSP APB 14-1, codified into FASB ASC Subtopic 470-20 (Note 1)

    418,418      —          —       418,996        (578     —          418,418        —     

Cumulative adjustment to beginning balance upon adoption of FAS 160, codified into ASC 810 (Note 1)

    49,208      —          —       —          —          —          —          49,208   
                                                           

Adjusted balance at December 31, 2008

    518,421      191,548        304     21,891,786        (21,439,988     17,111        469,213        49,208   

Comprehensive income:

               

Net income

    155,886      —          —       —          153,505        —          153,505        2,381   

Other comprehensive income:

    —        —          —       —          —          —          —          —     

Foreign currency translation adjustments

    (9,039   —          —       —          —          (8,182     (8,182     (857

Change in unrealized gain on investments, net of tax

    207      —          —       —          —          110        110        97   
                                 

Total comprehensive income

    147,054      —          —       —          —          —          145,433        1,621   

Issuance of common stock under stock plans

    32,906      3,086        3     32,903        —          —          32,906        —     

Stock-based compensation

    41,449      —          —       41,429        —          —          41,429        20   

Dividend declared to noncontrolling interest in subsidiary

    (807   —          —       —          —          —          —          (807

Income tax associated with stock options

    94,759      —          —       94,759        —          —          94,759        —     

Repurchase of common stock

    (51,682   (2,362     —       (51,682     —          —          (51,682     —     
                                                           

Balance at September 30, 2009

  $ 782,100      192,272      $ 307   $ 22,009,195      $ (21,286,483   $ 9,039      $ 732,058      $ 50,042   
                                                           

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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VERISIGN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Nine Months Ended
September 30,
 
     2009     2008  

Cash flows from operating activities:

    

Net income (loss)

   $ 155,886      $ (275,619

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Loss (gain) on divestiture of businesses, net of tax

     46,000        (32,853

Depreciation of property and equipment

     52,321        85,593   

Amortization of other intangible assets

     9,394        22,758   

Estimated (reversals) losses on assets held for sale

     (33,293     308,765   

Stock-based compensation

     39,405        75,368   

Loss on sale and impairment of long-lived assets

     14,237        80,534   

Impairment of goodwill

     —          45,793   

Excess tax benefit associated with stock-based compensation

     (100,583     (7,094

Other, net

     (5,951     5,846   

Changes in operating assets and liabilities:

    

Accounts receivable, net

     14,519        30,547   

Prepaid expenses and other assets

     (7,271     12,093   

Accounts payable and accrued liabilities

     28,209        (116,273

Accrued restructuring costs

     (22,841     29,752   

Deferred revenues

     32,010        97,830   
                

Net cash provided by operating activities

     222,042        363,040   
                

Cash flows from investing activities:

    

Proceeds from maturities and sales of investments

     117,901        1,440   

Proceeds from sale of property and equipment

     —          48,843   

Purchases of property and equipment

     (66,067     (88,093

Reclassification of cash equivalents to short-term investments

     —          (248,403

Proceeds received from divestiture of businesses, net of cash provided

     282,178        60,613   

Investment in unconsolidated entities

     —          (15,679

Cash received from trust, previously restricted

     —          45,000   

Other investing activities

     (3,300     5,697   
                

Net cash provided by (used in) investing activities

     330,712        (190,582
                

Cash flows from financing activities:

    

Proceeds from issuance of common stock from option exercises and employee stock purchase plan

     32,906        120,591   

Repurchases of common stock

     (51,682     (1,276,683

Proceeds from credit facility

     —          200,000   

Repayment of short-term debt related to credit facility

     —          (200,000

Excess tax benefit associated with stock-based compensation

     100,583        7,094   

Dividend paid to noncontrolling interest in subsidiary

     (113     (741
                

Net cash provided by (used in) financing activities

     81,694        (1,149,739
                

Effect of exchange rate changes on cash and cash equivalents

     8,790        4,084   
                

Net increase (decrease) in cash and cash equivalents

     643,238        (973,197

Cash and cash equivalents at beginning of period

     789,068        1,376,722   
                

Cash and cash equivalents at end of period

   $ 1,432,306      $ 403,525   
                

Supplemental cash flow disclosures:

    

Cash paid for interest, net of capitalized interest

   $ 39,256      $ 35,677   
                

Dividend payable to noncontrolling interest in subsidiary

   $ 694      $ —     
                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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VERISIGN, 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.

The Company evaluated subsequent events through November 6, 2009, the date this Quarterly Report on Form 10-Q was filed with the SEC.

Reclassifications

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.

During the first quarter of 2009, the Company disaggregated its Enterprise and Security Services (“ESS”) disposal group held for sale, 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 for all periods presented.

Recent Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-13— Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force (“ASU 2009-13”). ASU 2009-13 addresses how to measure and allocate arrangement consideration to one or more units of accounting within a multiple-deliverable arrangement. ASU 2009-13 modifies the requirements for determining whether a deliverable can be treated as a separate unit of accounting by removing the criteria that objective evidence of fair value exist for the undelivered elements in order to account for those undelivered elements as a single unit of accounting. ASU 2009-13 is effective for the Company prospectively for revenue arrangements entered into or materially modified beginning January 1, 2011. Early adoption is permitted. Currently, the Company is evaluating the impact adoption will have on its financial condition and results of operations.

In October 2009, the FASB issued ASU No. 2009-14— Software (Topic 985): Certain Revenue Arrangements That Include Software Elements—a consensus of the FASB Emerging Issues Task Force (“ASU 2009-14”). ASU 2009-14 modifies the scope of the software revenue recognition guidance to exclude arrangements that contain tangible products for which the software element is “essential” to the functionality of

 

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the tangible products. ASU 2009-14 is effective for the Company prospectively for revenue arrangements entered into or materially modified beginning January 1, 2011. Early adoption is permitted. Currently, the Company is evaluating the impact adoption will have on its financial condition and results of operations.

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, ” codified into FASB Accounting Standards Codification (“ASC”) 810, Consolidation . The standard requires all entities to report noncontrolling 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 in its consolidated VeriSign Japan subsidiary of $49.2 million to Stockholders’ equity as of December 31, 2008.

Effective January 1, 2009, the Company retroactively adopted 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) ”, codified into FASB ASC Subtopic 470-20, Debt with Conversion and Other Options . The standard 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 the standard affected its 3.25% 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 the standard. See Note 9, “Junior Subordinated Convertible Debentures,” for further information regarding the adoption of the standard.

 

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The following tables present the effects of the retroactive adjustments to the Company’s Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2008:

 

     Three Months Ended September 30, 2008  
     As
Reported (1)
    Adoption of New
Accounting
Standard (2)
    Reclassification
to Continuing
Operations (3)
    As
Adjusted
 
     (In thousands, except per share data)  

Revenues

   $ 243,031      $ —        $ 2,903      $ 245,934   

Cost of revenues

     55,626        9 (4)      1,630        57,265   

Other costs and expenses

     119,961        20 (4)      1,515        121,496   
                                

Operating income

     67,444        (29     (242     67,173   

Other loss, net

     (12,689     (761 )(5)      —          (13,450
                                

Income from continuing operations before income taxes and loss from unconsolidated entities

     54,755        (790     (242     53,723   
                                

Income tax expense

     9,433        (557 )(6)      —          8,876   

Loss from unconsolidated entities, net of tax

     (2,509     —          —          (2,509
                                

Income from continuing operations, net of tax

     42,813        (233     (242     42,338   

Loss from discontinued operations, net of tax

     (242,830     (25 )(4)      242        (242,613
                                

Net loss

     (200,017     (258     —          (200,275

Less: Net income attributable to noncontrolling interest in subsidiary

     (815     —          —          (815
                                

Net loss attributable to VeriSign common stockholders

   $ (200,832   $ (258   $ —        $ (201,090
                                

Basic loss per share attributable to VeriSign common stockholders:

        

Continuing operations

   $ 0.22      $ (0.01   $ —        $ 0.21   

Discontinued operations

     (1.26     0.01        —          (1.25
                                

Net loss

   $ (1.04   $ —        $ —        $ (1.04
                                

Diluted loss per share attributable to VeriSign common stockholders:

        

Continuing operations

   $ 0.21      $ —        $ —        $ 0.21   

Discontinued operations

     (1.24     —          —          (1.24
                                

Net loss

   $ (1.03   $ —        $ —        $ (1.03
                                

Shares used to compute net loss per share attributable to VeriSign common stockholders:

        

Basic

     193,853            193,853   
                    

Diluted

     195,930            195,930   
                    

 

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     Nine Months Ended September 30, 2008  
     As
Reported (1)
    Adoption of New
Accounting
Standard (2)
    Reclassification
to Continuing
Operations (3)
    As
Adjusted
 
     (In thousands, except per share data)  

Revenues

   $ 714,726      $ —        $ 8,506      $ 723,232   

Cost of revenues

     167,776        9 (4)      4,713        172,498   

Other costs and expenses

     466,922        44 (4)      5,051        472,017   
                                

Operating income

     80,028        (53     (1,258     78,717   

Other loss, net

     (20,069     (2,239 )(5)      —          (22,308
                                

Income from continuing operations before income taxes and loss from unconsolidated entities

     59,959        (2,292     (1,258     56,409   
                                

Income tax expense

     8,519        (1,053 )(6)      —          7,466   

Loss from unconsolidated entities, net of tax

     (3,099     —          —          (3,099
                                

Income from continuing operations, net of tax

     48,341        (1,239     (1,258     45,844   

Loss from discontinued operations, net of tax

     (322,655     (66 )(4)      1,258        (321,463
                                

Net loss

     (274,314     (1,305     —          (275,619

Less: Net income attributable to noncontrolling interest in subsidiary

     (2,710     —          —          (2,710
                                

Net loss attributable to VeriSign common stockholders

   $ (277,024   $ (1,305   $ —        $ (278,329
                                

Basic loss per share attributable to VeriSign common stockholders:

        

Continuing operations

   $ 0.23      $ —        $ (0.01   $ 0.22   

Discontinued operations

     (1.62     (0.01     0.01        (1.62
                                

Net loss

   $ (1.39   $ (0.01   $ —        $ (1.40
                                

Diluted loss per share attributable to VeriSign common stockholders:

        

Continuing operations

   $ 0.22      $ —        $ (0.01   $ 0.21   

Discontinued operations

     (1.58     (0.01     0.01        (1.58
                                

Net loss

   $ (1.36   $ (0.01   $ —        $ (1.37
                                

Shares used to compute net loss per share attributable to VeriSign common stockholders:

        

Basic

     198,622            198,622   
                    

Diluted

     202,951            202,951   
                    

 

(1) As reported in or derived from the Company’s 2008 Form 10-K, except per share amounts and Net income attributable to noncontrolling interest in subsidiary. Per share amounts have been adjusted to present the net loss per share attributable to VeriSign common stockholders. Net income attributable to noncontrolling interest in subsidiary has been presented to derive the net loss attributable to VeriSign common stockholders.

 

(2) Adjustment upon adoption of FSP APB 14-1, codified into ASC FASB Subtopic 470-20, Debt with Conversion and Other Options .

 

(3) Reclassification of the results of operations of the Company’s iDefense business from discontinued operations to continuing operations.

 

(4) Cost of revenues, Other costs and expenses and Loss from discontinued operations, net of tax, increased during the three and nine months ended September 30, 2008, due to additional depreciation expense recorded retroactively as result of an increase in capitalized interest costs.

 

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(5) Other loss, net, increased during the three and nine months ended September 30, 2008, primarily due to additional interest expense recorded retroactively.

 

(6) Income tax expense decreased during the three and nine months ended September 30, 2008, primarily due to a decrease in income from continuing operations before taxes.

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:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
   2009    2008    2009    2008
   (In thousands)

Cost of revenues

   $ 1,886    $ 1,721    $ 5,349    $ 6,231

Sales and marketing

     2,350      712      7,496      6,931

Research and development

     1,789      1,499      4,798      5,803

General and administrative

     4,080      4,568      15,048      21,193

Restructuring and other charges

     137      3,151      935      8,323
                           

Stock-based compensation for continuing operations

     10,242      11,651      33,626      48,481

Stock-based compensation for discontinued operations

     1,067      7,386      5,779      26,887
                           

Total consolidated stock-based compensation

   $ 11,309    $ 19,037    $ 39,405    $ 75,368
                           

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:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
       2009         2008         2009         2008    

Stock options:

        

Volatility

   40   35   46   35

Risk-free interest rate

   2.07   2.87   1.56   2.77

Expected term

   3.29      3.41      3.67      3.29   

Dividend yield

   Zero      Zero      Zero      Zero   

Employee stock purchase plan awards:

        

Volatility

   44   36   50   36

Risk-free interest rate

   0.54   2.28   0.50   2.31

Expected term

   1.25      1.25      1.25      1.25   

Dividend yield

   Zero      Zero      Zero      Zero   

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 anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of

 

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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:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
   2009     2008     2009     2008  
   (In thousands)  

Stock options

   $ 2,897      $ 3,699      $ 9,688      $ 15,664   

Employee stock purchase plans

     2,468        4,729        7,856        19,423   

Restricted stock units

     6,044        5,565        22,010        20,751   

Stock options/awards acceleration

     596        5,808        1,985        21,438   

Capitalization (1)

     (696     (764     (2,134     (1,908
                                

Total consolidated stock-based compensation

   $ 11,309      $ 19,037      $ 39,405      $ 75,368   
                                

 

(1) The capitalized amount is included in Property and equipment, net.

During the nine months ended September 30, 2009 and 2008, 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.

During the nine months ended September 30, 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 nine months ended September 30, 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. This strategy calls for the divesture or winding down of the following remaining non-core businesses in the Company’s portfolio as of September 30, 2009: GSC (sold in October 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 (sold in October 2009), Content Portal Services (“CPS”), and Mobile Delivery Gateway (“MDG”) Services. 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 September 30, 2009, and their results of operations have been classified as discontinued operations for all periods presented.

During the first quarter of 2009, the Company disaggregated its ESS disposal group held for sale into the following three businesses: (i) GSC, (ii) iDefense and (iii) MSS. The Company decided to retain its iDefense

 

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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 during 2009

On July 6, 2009, the Company sold its MSS business which 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 the MSS Business’ security platform and experienced security staff for a net cash consideration of $42.9 million. During the nine months ended September 30, 2009, the Company recorded a loss on sale of $5.3 million, net of an income tax expense of $12.9 million, and reversal of estimated losses on disposal recorded prior to sale.

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 nine months ended September 30, 2009, the Company recorded a gain on sale of $7.2 million, net of an income tax benefit of $5.2 million, and 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 nine months ended September 30, 2009, the Company recorded a loss on sale of $57.3 million, net of an income tax expense of $55.3 million, and 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. During the quarter ended September 30, 2009, the Company determined the final working capital adjustment associated with the Communication Services business of $3.8 million which was received by the Company during the quarter.

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 September 30, 2009 and December 31, 2008:

 

     September 30,
2009
   December 31,
2008
     (In thousands)

Assets:

     

Accounts receivable

   $ 24,552    $ 58,588

Other current assets

     50,047      63,516

Goodwill

     97,712      237,177

Other long-lived assets

     67,891      124,559
             

Total assets held for sale

   $ 240,202    $ 483,840
             

Liabilities:

     

Accounts payable and accrued liabilities

   $ 36,027    $ 35,853

Deferred revenues

     5,428      13,307
             

Total liabilities related to assets held for sale

   $ 41,455    $ 49,160
             

 

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Table of Contents

As of September 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. On October 1, 2009, the Company sold its GSC business for cash consideration of $4.9 million.

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.

On October 23, 2009, the Company sold its MMM Services business for cash consideration of $174.5 million after preliminary adjustments to reflect the parties’ estimate of working capital. The divestiture transaction will be subject to a final adjustment to reflect the actual working capital balance as of the closing date.

Mobile Delivery Gateway Services

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.

Content Portal Services

CPS enables a seamless end-to-end business solution focused on providing best-in-class digital content portal services. CPS can be used as a content delivery platform for games, ringtones, and other content services. CPS is provided to mobile carriers and media companies primarily located in Canada.

In October 2009, the Company decided to wind down the operations of the CPS business after termination of active negotiations with a potential buyer. The Company expects the wind-down to be completed no later than the end of 2010.

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 duration 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.

 

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Table of Contents

During the three months ended September 30, 2009, the Company recorded net gains on disposal, and net reversals of estimated losses on disposal of $5.0 million which are included in discontinued operations. During the nine months ended September 30, 2009, the Company recorded net losses on disposal, and net reversals of estimated losses on disposal of $5.2 million which are included in discontinued operations. During the three and nine months ended September 30, 2008, the Company recorded net losses on disposal, and estimated losses on disposal, of $236.4 million and $273.2 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 disposal 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 discontinued operations, net of tax:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
   2009     2008     2009     2008  
   (In thousands)  

Revenues

   $ 40,544      $ 141,883      $ 212,981      $ 448,979   
                                

(Loss) income before income taxes

   $ (5,707   $ 10,348      $ 27,930      $ (40,589

Income tax (benefit) expense

     (6,937     16,583        6,346        7,659   
                                

Gain (loss) from discontinued operations

     1,230        (6,235     21,584        (48,248
                                

Gain (loss) on sale of discontinued operations and estimated (losses) reversals on assets held for sale, before income taxes

     17,028        (236,738     43,099        (276,539

Income tax expense (benefit)

     12,009        (360     48,340        (3,324
                                

Gain (loss) on sale of discontinued operations

     5,019        (236,378     (5,241     (273,215
                                

Total income (loss) from discontinued operations, net of tax

   $ 6,249      $ (242,613   $ 16,343      $ (321,463
                                

Note 4. Restructuring, Impairments and Other Charges

A comparison of restructuring, impairments and other charges is presented below:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2009    2008    2009    2008
     (In thousands)

Restructuring charges for continuing operations

   $ 744    $ 5,895    $ 5,927    $ 28,210

Impairments for continuing operations

     9,684      —        9,684      —  

Other charges for continuing operations

     —        14      62      79,083
                           

Total restructuring, impairments and other charges for continuing operations

     10,428      5,909      15,673      107,293
                           

Restructuring charges for discontinued operations

     2,046      7,058      4,959      30,422

Impairments for discontinued operations

     —        —        —        45,793
                           

Total restructuring charges and impairments for discontinued operations

     2,046      7,058      4,959      76,215
                           

Total consolidated restructuring, impairments and other charges

   $ 12,474    $ 12,967    $ 20,632    $ 183,508
                           

 

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Table of Contents

Restructuring 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 September 30, 2009, VeriSign recorded a total of $80.5 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:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
   2009    2008     2009    2008
   (In thousands)

Continuing operations:

          

Workforce reduction—severance and benefits

   $ 467    $ 1,408      $ 3,598    $ 17,161

Workforce reduction—stock-based compensation

     138      3,762        936      8,324
                            

Total workforce reduction

     605      5,170        4,534      25,485

Excess facilities

     139      979        1,393      1,267

Other exit costs

     —        (254     —        1,458
                            

Total restructuring charges for continuing operations

   $ 744    $ 5,895      $ 5,927    $ 28,210
                            

Discontinued operations:

          

Workforce reduction—severance and benefits

   $ 1,585    $ 3,621      $ 3,768    $ 22,705

Workforce reduction—stock-based compensation

     458      3,437        1,049      7,717
                            

Total workforce reduction

     2,043      7,058        4,817      30,422

Excess facilities

     3      —          142      —  

Other exit costs

     —        —          —        —  
                            

Total restructuring charges for discontinued operations

   $ 2,046    $ 7,058      $ 4,959    $ 30,422
                            

Consolidated:

          

Workforce reduction—severance and benefits

   $ 2,052    $ 5,029      $ 7,366    $ 39,866

Workforce reduction—stock based compensation

     596      7,199        1,985      16,041
                            

Total workforce reduction

     2,648      12,228        9,351      55,907

Excess facilities

     142      979        1,535      1,267

Other exit costs

     —        (254     —        1,458
                            

Total consolidated restructuring charges

   $ 2,790    $ 12,953      $ 10,886    $ 58,632
                            

As of September 30, 2009, the consolidated accrued restructuring costs are $9.1 million and consist of the following:

 

     Accrued
Restructuring
Costs at
December 31, 2008
   Restructuring
Charges
   Cash
Payments
    Non-cash     Accrued
Restructuring
Costs at
September 30, 2009
     (In thousands)

Workforce reduction

   $ 25,374    $ 9,351    $ (28,993   $ (1,985   $ 3,747

Excess facilities

     6,583      1,535      (2,421     (350     5,347
                                    

Total accrued restructuring costs

   $ 31,957    $ 10,886    $ (31,414   $ (2,335   $ 9,094
                                    

Included in current portion of accrued
restructuring costs

   

  $ 5,980
                

Included in long-term portion of accrued
restructuring costs

   

  $ 3,114
                

 

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Cash payments totaling $8.3 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:

 

     Contractual
Lease
Payments
   Anticipated
Sublease
Income
    Net
   (In thousands)

2009 (remaining 3 months)

   $ 960    $ (225   $ 735

2010

     2,522      (528     1,994

2011

     2,309      (505     1,804

2012

     589      (223     366

2013

     421      (279     142

Thereafter

     942      (636     306
                     
   $ 7,743    $ (2,396   $ 5,347
                     

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

The following table presents the consolidated impairments and other charges, inclusive of amounts for discontinued operations:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
       2009        2008        2009        2008  
     (In thousands)    (In thousands)

Impairments for continuing operations

   $ 9,684    $ —      $ 9,684    $ —  

Impairments for discontinued operations

     —        —        —        45,793

Other charges for continuing operations

     —        14      62      79,083
                           

Total consolidated impairments and other charges

   $ 9,684    $ 14    $ 9,746    $ 124,876
                           

During the three and nine months ended September 30, 2009, the Company recorded an impairment charge of $9.7 million related to its .name generic top-level domain (“gTLD”) intangible asset. See Note 5, “Goodwill and Other Intangible Assets” for further information.

During the nine months ended September 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 nine months ended September 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.

 

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Note 5. Goodwill and Other Intangible Assets

The following table summarizes the changes in the carrying amount of goodwill during the nine months ended September 30, 2009.

 

     (In thousands)

Balance at December 31, 2008

   $ 283,109

Reclassification from assets held for sale

     7,000

Other adjustments (1)

     105
      

Balance at September 30, 2009

   $ 290,214
      

 

(1) Other adjustments consist of foreign exchange fluctuations.

During the first quarter of 2009, the Company disaggregated its ESS disposal group held for sale, 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.

The Company performs its annual impairment review of goodwill pertaining to its Naming Services, Authentication Services and VeriSign Japan reporting units, during the second quarter. During our 2009 annual impairment test, the Company determined that each of the reporting units had a fair value in excess of its carrying value and no further analysis was required.

Due to a strategic change in the planned use of our indefinite-lived .name gTLD intangible asset during the third quarter of 2009, the Company performed an impairment assessment. The Company considered both the market and the income approaches. Based on the income approach using market participant assumptions, which was determined to be the highest and best use of this asset, the Company has concluded that the fair value of the . name gTLD intangible asset has been reduced below its carrying value. The estimated fair value of the intangible asset related to the Company’s .name gTLD intangible asset was computed to be $2.0 million, and as a result the Company recorded an impairment charge of $9.7 million during the quarter ended September 30, 2009. The Company also determined that the intangible asset has a finite life for which amortization costs will be recorded over its estimated useful life on a straight-line basis.

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.

All impairment charges are recorded to Restructuring, impairments and other charges within our condensed consolidated statements of operations.

Note 6. Other Balance Sheet Items

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

 

     September 30,
2009
   December 31,
2008
     (In thousands)

Prepaid expenses

   $ 25,068    $ 22,775

Deferred tax assets

     70,454      64,482

Non-trade receivables

     15,165      13,054

Receivables from buyers

     6,233      14,899

Funds held by the Reserve

     32,445      150,346

Other

     1,638      2,622
             

Total prepaid expenses and other current assets

   $ 151,003    $ 268,178
             

 

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As of September 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 for these investments. During the nine months ended September 30, 2009, the Company received distributions of $13.9 million and $104.0 million from the Primary Fund and the International Fund, respectively. During October 2009, the Company received a distribution of $2.4 million from the Primary Fund.

As of September 30, 2009, Receivables from buyers consists of receivables related to sale consideration of $2.5 million and receivables for payments made on behalf of buyers under transition services agreements of $3.7 million for certain divested businesses.

Property and Equipment, Net

The following table presents the detail of Property and equipment, net:

 

     September 30,
2009
    December 31,
2008
 
     (In thousands)  

Land

   $ 133,746      $ 133,746   

Buildings

     130,748        135,242   

Computer equipment and software

     333,775        342,470   

Capital work in progress

     16,937        16,595   

Office equipment, furniture and fixtures

     15,005        15,491   

Leasehold improvements

     53,296        52,690   
                

Total cost

     683,507        696,234   

Less: accumulated depreciation and amortization

     (311,094     (310,736
                

Total property and equipment, net

   $ 372,413      $ 385,498   
                

Other Assets

Other assets consist of the following:

 

     September 30,
2009
   December 31,
2008
     (In thousands)

Long-term deferred tax assets

   $ 4,990    $ 2,562

Long-term investments

     6,746      5,996

Debt issuance costs

     12,545      13,233

Long-term restricted cash

     1,895      1,858

Security deposits and other

     11,221      14,469
             

Total other assets

   $ 37,397    $ 38,118
             

Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consist of the following:

 

     September 30,
2009
   December 31,
2008
     (In thousands)

Accounts payable

   $ 23,661    $ 30,690

Accrued employee compensation

     74,019      109,958

Customer deposits, net

     22,314      30,432

Taxes payable and other tax liabilities

     51,463      18,173

Other accrued liabilities

     75,135      74,282
             

Total accounts payable and accrued liabilities

   $ 246,592    $ 263,535
             

 

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Other Long-term Liabilities

Other long-term liabilities consist of the following:

 

     September 30,
2009
   December 31,
2008
     (In thousands)

Other long-term liabilities

   $ 2,277    $ 161

Long-term tax liability

     13,831      15,549

Deferred tax liability

     70,584      68,833
             

Total other long-term liabilities

   $ 86,692    $ 84,543
             

Note 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):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  
     (In thousands)  

Net income (loss)

   $ 54,599      $ (200,275   $ 155,886      $ (275,619

Foreign currency translation adjustments

     5,820        284        (9,039     9,401   

Change in unrealized (loss) gain on investments, net of tax

     (82     (91     207        (407
                                

Comprehensive income (loss)

     60,337        (200,082     147,054        (266,625

Less: Comprehensive income attributable to noncontrolling interest in subsidiary

     3,645        1,225        1,621        6,383   
                                

Comprehensive income (loss) attributable to VeriSign Inc. common stockholders

   $ 56,692      $ (201,307   $ 145,433      $ (273,008
                                

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. In January 2008, the Board of Directors authorized additional repurchases of up to $600.0 million of the Company’s common stock to be conducted through an accelerated share repurchase agreement and the repurchase of $600.0 million of the Company’s common stock was completed in February 2008. In August 2008, the Board of Directors authorized the repurchase of up to an additional $680.0 million of the Company’s common stock with no expiration date in addition to the $320.0 million of the Company’s common stock available for repurchase under the 2006 Stock Repurchase Program (collectively, the “2008 Share Buyback Program”). During the three months ended September 30, 2009, VeriSign repurchased approximately 1.2 million shares of its common stock at an average stock price of $21.54 for an aggregate of $25.0 million under the 2008 Share Buyback Program. During the nine months ended September 30, 2009, VeriSign repurchased approximately 2.0 million shares of its common stock at an average stock price of $22.23 for an aggregate of $45.0 million under the 2008 Stock Buyback Program. As of September 30, 2009, approximately $905.0 million is available under the 2008 Share Buyback Program.

 

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Note 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 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:

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2009   2008     2009   2008  
    (In thousands, except per share data)  

Income (loss) attributable to VeriSign common stockholders:

       

Income from continuing operations, net of tax

  $ 47,362   $ 41,523      $ 137,162   $ 43,134   

Income (loss) from discontinued operations, net of tax

    6,249     (242,613     16,343     (321,463
                           

Net income (loss) attributable to VeriSign common stockholders

  $ 53,611   $ (201,090   $ 153,505   $ (278,329
                           

Weighted-average shares:

       

Weighted-average shares of common stock outstanding

    192,619     193,853        192,527     198,622   

Weighted-average potential shares of common stock outstanding:

       

Stock options

    266     1,154        269     1,805   

Unvested restricted stock awards

    587     923        439     1,111   

Conversion spread related to Convertible Debentures

    —       —          —       1,103   

Employee stock purchase plans

    —       —          —       310   
                           

Shares used to compute diluted net income (loss) per share attributable to VeriSign common stockholders

    193,472     195,930        193,235     202,951   
                           

Income (loss) per share attributable to VeriSign common stockholders:

       

Basic:

       

Continuing operations

  $ 0.25   $ 0.21      $ 0.71   $ 0.22   

Discontinued operations

    0.03     (1.25     0.09     (1.62
                           

Net income (loss)

  $ 0.28   $ (1.04   $ 0.80   $ (1.40
                           

Diluted:

       

Continuing operations

  $ 0.24   $ 0.21      $ 0.71   $ 0.21   

Discontinued operations

    0.04     (1.24     0.08     (1.58
                           

Net income (loss)

  $ 0.28   $ (1.03   $ 0.79   $ (1.37
                           

 

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Weighted-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:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
         2009            2008            2009            2008    
     (In thousands, except per share data)

Weighted-average stock options outstanding

     6,630      4,353      7,398      3,356

Weighted-average exercise price

   $ 28.24    $ 33.09    $ 28.25    $ 33.53

Weighted-average restricted stock awards outstanding

     307      657      1,302      251

Employee stock purchase plans

     338      346      398      115

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’s 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 September 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, codified in ASC 470-20, Debt with Conversion and Other Options . The standard 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 September 30, 2009, the remaining term of the Convertible Debentures is 27.9 years.

The table below presents the carrying amounts of the liability and equity components:

 

     September 30,
2009
    December 31,
2008
 
     (In thousands)  

Carrying amount of equity component (net of issuance costs of $14,449)

   $ 686,221      $ 686,221   
                

Principal amount of Convertible Debentures

   $ 1,250,000      $ 1,250,000   

Unamortized discount of liability component

     (687,224     (691,837
                

Carrying amount of liability component

     562,776        558,163   

Contingent interest derivative

     8,750        10,549   
                

Convertible debentures, including contingent interest derivative

   $ 571,526      $ 568,712   
                

 

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The table below presents the interest expense for the contractual interest and the amortization of debt discount:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  
     (Dollars in thousands)     (Dollars in thousands)  

Effective interest rate

     8.39     8.39     8.39     8.39

Interest expense—contractual interest

   $ 10,156      $ 10,156      $ 30,469      $ 30,469   

Interest expense—amortization of discount on the liability component

   $ 1,576      $ 1,452      $ 4,632      $ 4,250   

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 and (2) Other Services.

The 3IS segment consists of Naming Services and Authentication Services. Naming Services is the authoritative directory provider of all .com, .net, .cc, .tv , . name and .jobs domain names. 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. 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 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 business and legacy products and services from divested businesses. The Company is in the process of winding down the operations of its 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 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.

 

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The following tables present the results of VeriSign’s reportable segments:

 

     Three months ended
September 30, 2009
   Three months ended
September 30, 2008
     3IS    Other
Services
   Total
Segments
   3IS    Other
Services
   Total
Segments
     (In thousands)    (In thousands)

Revenues:

                 

Naming Services

   $ 155,480    $ —      $ 155,480    $ 141,838    $ —      $ 141,838

Authentication Services

     101,428      —        101,428      99,484      —        99,484

Other Services

     —        1,087      1,087      —        4,612      4,612
                                         

Total revenues

     256,908      1,087      257,995      241,322      4,612      245,934

Cost of revenues

     47,574      515      48,089      41,415      2,098      43,513
                                         
   $ 209,334    $ 572    $ 209,906    $ 199,907    $ 2,514    $ 202,421
                                         
     Nine months ended
September 30, 2009
   Nine months ended
September 30, 2008
     3IS    Other
Services
   Total
Segments
   3IS    Other
Services
   Total
Segments
     (In thousands)    (In thousands)

Revenues:

                 

Naming Services

   $ 457,206    $ —      $ 457,206    $ 403,034    $ —      $ 403,034

Authentication Services

     307,162      —        307,162      296,582      —        296,582

Other Services

     —        5,241      5,241      —        23,616      23,616
                                         

Total revenues

     764,368      5,241      769,609      699,616      23,616      723,232

Cost of revenues

     140,933      2,753      143,686      119,033      9,294      128,327
                                         
   $ 623,435    $ 2,488    $ 625,923    $ 580,583    $ 14,322    $ 594,905
                                         

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:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  
     (In thousands)  

Total revenues from reportable segments

   $ 257,995      $ 245,934      $ 769,609      $ 723,232   

Total cost of revenues from reportable segments

     48,089        43,513        143,686        128,327   

Unallocated operating expenses (1)

     134,776        135,248        391,939        516,188   
                                

Operating income

     75,130        67,173        233,984        78,717   

Other loss, net

     (8,669     (13,450     (23,228     (22,308
                                

Income from continuing operations before income taxes and loss from unconsolidated entities

   $ 66,461      $ 53,723      $ 210,756      $ 56,409   
                                

 

(1) Unallocated operating expenses include unallocated cost of revenues, sales and marketing, research and development, general and administrative, restructuring, impairments and other charges, and amortization of other intangible assets.

 

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Geographic Information

The Company operates in the U.S.; Australia, Japan and other Asia Pacific countries (“APAC”); Europe, the Middle East and Africa (“EMEA”); and certain other countries. The following table presents a comparison of the Company’s geographic revenues:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2009    2008    2009    2008
     (In thousands)

U.S.  

   $ 147,485    $ 146,732    $ 448,721    $ 427,122

APAC

     49,001      44,180      142,969      132,828

EMEA

     42,563      38,970      124,468      116,560

Other

     18,946      16,052      53,451      46,722
                           

Total revenues

   $ 257,995    $ 245,934    $ 769,609    $ 723,232
                           

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:

 

     September 30,
2009
   December 31,
2008
     (In thousands)

U.S.  

   $ 347,769    $ 357,607

APAC

     15,301      19,176

EMEA

     9,300      8,686

Other

     43      29
             

Total property and equipment, net

   $ 372,413    $ 385,498
             

Assets are not tracked by segment and the CODM does not evaluate segment performance based on asset utilization. The Company’s goodwill balance is allocated entirely to its 3IS reportable segment.

Major Customers

One customer accounted for 16% and 15% of the Company’s revenues from continuing operations during the three and nine months ended September 30, 2009, respectively. One customer accounted for 14% and 13% of the Company’s revenues from continuing operations for the three and nine months ended September 30, 2008. No customer accounted for 10% or more of accounts receivable at September 30, 2009, and December 31, 2008.

 

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Note 11. Other Loss, Net

The following table presents the components of Other loss, net:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  
     (In thousands)  

Interest income

   $ 791      $ 3,981      $ 3,359      $ 15,004   

Interest expense

     (11,867     (11,045     (35,477     (32,790

Net gain (loss) on sale and impairment of investments

     5        (6,829     (41     (6,571

Net gain on divestiture of businesses

     —          —          909        1,564   

Unrealized gain (loss) on contingent interest derivative on convertible debentures

     750        (420     1,799        1,664   

Income from transition services agreements

     1,230        1,224        3,069        2,590   

Other, net

     422        (361     3,154        (3,769
                                

Total other loss, net

   $ (8,669   $ (13,450   $ (23,228   $ (22,308
                                

Interest 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 nine months ended September 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. During the nine months ended September 30, 2008, Other, net, primarily consists of net foreign exchange rate losses. During the three months ended September 30, 2009 and 2008, Other, net, primarily consists of net foreign exchange rate gains and losses, respectively.

Note 12. Income Taxes

During the three and nine months ended September 30, 2009, the Company recorded income tax expense for continuing operations of $18.1 million and $71.2 million, respectively. During the three and nine months ended September 30, 2008, the Company recorded income tax expense for continuing operations of $8.9 million and $7.5 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 nine months ended September 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 September 30, 2009, and December 31, 2008, the Company had gross unrecognized tax benefits for income taxes associated with uncertain tax positions of $28.2 million and $31.9 million, respectively. During the three and nine months ended September 30, 2009, the Company recorded a reduction in unrecognized tax benefits of $5.3 million and $3.7 million, respectively. Of the decrease of $5.3 million for the three months ended September 30, 2009, $3.0 million was related to lapses in the applicable statute of limitations, $2.0 million was related to tax positions taken during a prior period, and $0.3 million was related to current period activities. Of the decrease of $3.7 million for the nine months ended September 30, 2009, $3.0 million was related to lapses in the applicable statute of limitations, $2.0 million was related to tax positions taken during a prior period, and an increase of $1.3 million was related to tax positions taken during the current year. As of September 30, 2009 and December 31, 2008, $28.8 million and $31.7 million, respectively, of unrecognized tax benefits, including penalties and interest, would affect the Company’s effective tax rate if realized.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of Income tax expense. During the three and nine months ended September 30, 2009, the Company expensed

 

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$0.1 million and $0.7 million, respectively, for interest and penalties related to income tax liabilities through Income tax expense. During the three and nine months ended September 30, 2008, the Company expensed $0.4 million and $1.3 million, respectively, for interest and penalties related to income tax liabilities through Income tax expense.

The Company’s major taxing jurisdictions are the Internal Revenue Service, the California Franchise Tax Board, the Japan National Tax Agency and the State of Virginia Department of Revenue. 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.

Note 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 September 30, 2009:

 

     Total Fair Value
as of September 30,
2009
   Fair Value Measurement Using
        Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
     (In thousands)

Assets:

           

Investments in money market funds and time deposits

   $ 1,342,689    $ 1,342,689    $ —      $ —  

Equity investments

     338      338      —        —  

Foreign currency forward contracts

     19      —        19      —  
                           

Total

   $ 1,343,046    $ 1,343,027    $ 19    $ —  
                           

Liabilities:

           

Contingent interest derivative on Convertible Debentures

     8,750    $ —      $ —        8,750
                           

Total

   $ 8,750    $ —      $ —      $ 8,750
                           

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 $0.5 million and an unrealized loss of $0.3 million during the three months ended September 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 $1.2 million and an unrealized loss of $1.7 million during the nine months ended September 30, 2009 and 2008, respectively, related to changes in the fair value of its foreign currency forward contracts.

 

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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.

The following table summarizes the change in the fair value of the Company’s Level 3 contingent interest derivative on Convertible Debentures during the nine months ended September 30, 2009 (in thousands):

 

Fair value at December 31, 2008

   $ 10,549   

Unrealized gain on contingent interest derivative on Convertible Debentures (1)

     (1,799
        

Fair value at September 30, 2009

   $ 8,750   
        

 

(1) Included in Other loss, net.

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 September 30, 2009:

 

     Fair Value
Measurement
Using
Significant
Unobservable
Inputs
(Level 3)
   Total gain for the
three months
ended

September 30,
2009
    Total gain for the
nine months
ended
September 30,
2009
 
     (In thousands)  

Net assets of disposal groups held for sale

   $ 198,576    $ 21,629  (1)    $ 33,293  (1) 

 

(1) Included in income (loss) from discontinued operations, net of tax.

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.

During the three months ended September 30, 2009, net assets of the disposal groups held for sale which are measured at fair value as of September 30, 2009, with a carrying amount of $177.0 million, were written up to their fair value of $198.6 million less costs to sell of $2.2 million (or $196.4 million), resulting in a net reversal of estimated losses previously reported of $21.6 million.

During the nine months ended September 30, 2009, the Company recorded a net gain of $33.3 million related to net reversals of estimated losses on the disposal groups which are measured at fair value as of September 30, 2009.

Other

The fair value of other financial instruments including accounts receivable, restricted cash and investments, and accounts payable, approximates their 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 September 30, 2009, is $1.1 billion, and is based on quoted market prices.

 

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Note 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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Timothy 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 the 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. Certain indemnity requests from customers are still pending. 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 Internet Corporation for Assigned Names and Numbers (“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

 

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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 public 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 October 1, 2009, the Company sold its GSC business for cash consideration of $4.9M subject to certain adjustments related to employees’ compensation.

On October 23, 2009, the Company sold its MMM Services business, for cash consideration of $174.5 million after preliminary adjustments to reflect the parties’ estimate of working capital. The divestiture transaction will be subject to a final adjustment to reflect the actual working capital balance as of the closing date.

During October 2009, the Company received a distribution of $2.4 million from the Primary Fund.

During October 2009, the Company decided to wind down the operations of the CPS business after termination of active negotiations with a potential buyer. The Company expects the wind-down to be completed no later than the end of 2010.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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: (1) 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,” of our Notes to Condensed Consolidated Financial Statements 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 business and legacy products and services from divested businesses. We are in the process of winding down the operations of our Pre-Pay billing and payment (“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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businesses. The strategy called 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 September 30, 2009, and their results of operations have been classified as discontinued operations for all periods presented. We continue to be responsible for a portion of our contingent and other corporate liabilities and transition services following the divestiture of certain businesses. There is a possibility that we will incur costs and expenses associated with the management of the contingent and other corporate liabilities, including requests for indemnification by the buyers. In addition, the transition services agreements may be required for longer periods of time than anticipated by management and may be more costly to complete than the buyers are contractually obligated to pay us. By divesting our non-core businesses, additional resources should be available to invest in our core services that remain: Naming Services and Authentication Services.

Our Core Services

Our core services consist of our Naming Services and Authentication Services.

Naming Services

As of September 30, 2009, we had approximately 94.9 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 September 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

We currently offer the following User Authentication Services: VeriSign Identity Protection (“VIP”), managed PKI, unified authentication and fraud detection 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.

We frequently engage in promotional activities in both our Naming Services and Authentication Services.

 

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Business Highlights and Trends—Three and nine months ended September 30, 2009

 

   

We recorded revenues of $258.0 and $769.6 million during the three and nine months ended September 30, 2009, an increase of 5% and 6%, respectively, as compared to the same periods last year. The increase was primarily due to an increase in revenues from both our Naming Services and our Authentication Services.

 

   

We recorded income from continuing operations of $47.4 million and $137.2 million during the three and nine months ended September 30, 2009, respectively, compared to income from continuing operations of $41.5 million and $43.1 million during the three and nine months ended September 30, 2008, respectively. The increase is primarily due to an increase in revenues, a decrease in operating costs and expenses due to the implementation of strategic cost-saving initiatives and a decrease in Restructuring, impairments and other charges.

 

   

On July 6, 2009, we sold our Managed Security Services (“MSS”) business for a net cash consideration of $42.9 million. During the three and nine months ended September 30, 2009, the Company recorded a loss on sale of $5.3 million, net of an income tax expense of $12.9 million, and reversal of estimated losses on disposal recorded prior to sale.

 

   

We received $13.9 million and $104.0 million from the Reserve’s Primary Fund (the “Primary Fund”) and the Reserve International Liquidity Fund, Ltd. (the “International Fund”) during the nine months ended September 30, 2009, respectively. As of September 30, 2009, we have an aggregate of $32.4 million outstanding in the Primary Fund and the International Fund.

 

   

On May 5, 2009, we sold our Real-Time Publisher (“RTP”) Services business. During the nine months ended September 30, 2009, we recorded a gain on sale of $7.2 million, net of an income tax benefit of $5.2 million, and reversal of estimated losses on disposal recorded prior to sale.

 

   

On May 1, 2009, we sold our Communications Services business to Transaction Network Services, Inc. (“TNS”) for cash consideration of $226.2 million. During the nine months ended September 30, 2009, we recorded a loss on sale of $57.3 million, net of an income tax expense of $55.3 million, and estimated losses on disposal recorded prior to sale.

 

   

On April 10, 2009, we sold our International Clearing business which enables financial settlement and call data settlement for wireless and wireline carriers. During the nine months ended September 30, 2009, we 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 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) 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 September 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

 

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security compliance requirements applicable to the particular business and industry. On October 1, 2009, we sold our GSC business for cash consideration of $4.9 million.

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.

On October 23, 2009, we sold our MMM Services business, for cash consideration of $174.5 million after preliminary adjustments to reflect the parties’ estimate of working capital. The divestiture transaction will be subject to a final adjustment to reflect the actual working capital balance as of the closing date.

Mobile Delivery Gateway Services

Our Mobile Delivery Gateway (“MDG”) Services business offers 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.

Content Portal Services

Our Content Portal Services (“CPS”) business 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.

In October 2009, we decided to wind down the operations of the CPS business after termination of active negotiations with a potential buyer. We expect the wind-down to be completed no later than the end of 2010.

 

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Results of Operations

The following table presents information regarding our results of operations as a percentage of revenues:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Revenues

   100   100   100   100
                        

Costs and expenses

        

Cost of revenues

   22      23      23      24   

Sales and marketing

   17      17      17      18   

Research and development

   10      9      9      10   

General and administrative

   17      20      18      21   

Restructuring, impairments and other charges

   4      3      2      15   

Amortization of other intangible assets

   1      1      1      1   
                        

Total costs and expenses

   71      73      70      89   
                        

Operating income

   29      27      30      11   

Other loss, net

   (3   (5   (3   (3
                        

Income from continuing operations before income taxes and loss from unconsolidated entities

   26      22      27      8   
                        

Income tax expense

   7      4      9      1   

Loss from unconsolidated entities, net of tax

   —        (1   —        —     
                        

Income from continuing operations, net of tax

   19      17      18      7   

Income (loss) from discontinued operations, net of tax

   2      (99   2      (45
                        

Net income (loss)

   21      (82   20      (38

Less: Net income attributable to noncontrolling interest in subsidiary

   —        —        —        —     
                        

Net income (loss) attributable to VeriSign common stockholders

   21   (82 %)    20   (38 %) 
                        

Revenues

We have two reportable segments: 3IS and Other Services. A comparison of revenues is presented below:

 

     Three Months Ended
September 30,
   %
Change
    Nine Months Ended
September 30,
   %
Change
 
   2009    2008      2009    2008   
     (Dollars in thousands)          (Dollars in thousands)       

3IS:

                

Naming Services

   $ 155,480    $ 141,838    10   $ 457,206    $ 403,034    13

Authentication Services

     101,428      99,484    2     307,162      296,582    4
                                

Total 3IS

     256,908      241,322    6     764,368      699,616    9

Other Services

     1,087      4,612    (76 %)      5,241      23,616    (78 %) 
                                

Total revenues

   $ 257,995    $ 245,934    5   $ 769,609    $ 723,232    6
                                

 

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The changes in revenues during the three and nine months ended September 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 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 September 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 September 30, 2009, we have the contractual right to increase the fees for .net domain name registrations up to 10% each year during the remaining term of our agreement with ICANN through June 30, 2011. We 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 September 30, 2009 and 2008:

 

     September 30,    %
Change
 
     2009    2008   

Active domain names ending in .com and .net

   94.9 million    89.4 million    6

During the three and nine months ended September 30, 2009, the growth in the number of domain names registered was primarily driven by continued Internet growth and adoption mostly within international markets and new domain name promotional 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 saw slowing growth in traditional name registrations because of macro-economic conditions. We expect that the current state of the economic environment may contribute to a continued slowing of growth rates in 2009 for the total domain name base as well as for the .com and .net domain name base under our management, even as we continue to add to the net names in our domain name base in absolute terms. We continue to experience international growth in both . com and .net domain name bases, especially in markets that we have targeted through our promotional programs or otherwise.

Our Naming Services revenues increased during the three and nine months ended September 30, 2009, as compared to the same periods last year, primarily due to a 6% 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% (to $6.86) and 10% (to $4.23), respectively, as per our agreements with ICANN.

Authentication Services

Our Authentication Services revenues are derived from our Business Authentication Services and User Authentication Services business.

 

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Business 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 for the installed base of SSL certificates in our Business Authentication Services as of September 30, 2009 and 2008:

 

     September 30,    %
Change
 
     2009    2008   

Installed base of SSL certificates

   1,196,000    1,095,000    9

The following table compares the annualized average-unit-revenue for the installed base of SSL certificates in our Business Authentication Services:

 

     Three Months Ended
September 30,
   %
Change
    Nine Months Ended
September 30,
   %
Change
 
         2009            2008              2009            2008       

Annualized average-unit-revenue (1)

   $ 234    $ 251    (7 %)    $ 236    $ 247    (4 %) 

 

(1) Annualized average-unit revenue represents SSL Certificate Services revenues recorded for the period, excluding revenues from our affiliates and our majority owned subsidiary VeriSign Japan, over the installed base of SSL certificates as of the end of the corresponding period. The installed base includes all SSL certificates (including our affiliates and VeriSign Japan).

During the three and nine months ended September 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 annualized 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 position 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, we have experienced price pressure on the VeriSign and thawte ® brands, as customers are increasingly requesting discounts. 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 VIP services, but at a lower growth rate than in 2008.

 

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Our Authentication Services revenues increased during the three and nine months ended September 30, 2009, as compared to the same periods last year, primarily due to a 9% year-over-year increase in the installed base of SSL certificates, although this increase was offset by a decline in average-unit-revenue per certificate sold, and an increase in demand for our identity protection services and our fraud detection services.

Other Services

Other services revenues are derived from the continuing operations of our non-core businesses and 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 nine months ended September 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 and the termination of revenues from a service agreement with our former Jamba joint ventures.

Our 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 change significantly over time.

Geographic Revenues

We operate in the U.S.; Australia, Japan and other Asia Pacific countries (“APAC”); Europe, the Middle East and Africa (“EMEA”); and certain other countries.

A comparison of our geographic revenues is presented below:

 

     Three Months Ended
September 30,
   %
Change
    Nine Months Ended
September 30,
   %
Change
 
     2009    2008      2009    2008   
     (Dollars in thousands)          (Dollars in thousands)       

U.S.  

   $ 147,485    $ 146,732    1   $ 448,721    $ 427,122    5

APAC

     49,001      44,180    11     142,969      132,828    8

EMEA

     42,563      38,970    9     124,468      116,560    7

Other

     18,946      16,052    18     53,451      46,722    14
                                

Total revenues

   $ 257,995    $ 245,934    5   $ 769,609    $ 723,232    6
                                

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 nine months ended September 30, 2009, as compared to the same periods last year, primarily due to increases in revenues from our Naming Services. Revenues from the APAC region increased during the three and nine months ended September 30, 2009, as compared to the same period last year, primarily due to an increase in revenues from our Naming Services and Authentication Services. Revenues from the EMEA region increased during the three and nine months ended September 30, 2009, as compared to the same periods last year, primarily due to an increase in revenues from our Naming Services and Authentication Services. Revenues from Other regions increased during the three and nine months ended September 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

 

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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, registry fees, customer support and training, 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:

 

     Three Months Ended
September 30,
   %
Change
    Nine Months Ended
September 30,
   %
Change
 
     2009    2008      2009    2008   
     (Dollars in thousands)          (Dollars in thousands)       

Cost of revenues

   $ 56,736    $ 57,265    (1 %)    $ 174,520    $ 172,498    1

Cost of revenues decreased during the three months ended September 30, 2009, primarily due to decreases of allocated overhead expenses, contract and professional services and partially offset by increases in direct cost of revenues, salary and benefit expenses and telecommunications expenses. Allocated overhead expenses decreased primarily due to a decrease in corporate overhead operating expenses during the quarter ended September 30, 2009. Contract and professional services decreased primarily due to a decrease in the services of outside contractors and the conversion of contractors to employees. Direct cost of revenues increased primarily due to an increase in quarterly registry fees. Salary and benefits expenses increased primarily due to an increase in headcount to support our core services. Telecommunications expense increased primarily due to upgrades to support our current constellation sites to support our .com and .net registrations and our Delaware Data Center.

Cost of revenues increased during the nine months ended September 30, 2009, primarily due to increases in direct cost of revenues, telecommunication expenses and depreciation charges, partially offset by decreases in allocated overhead expenses, salary and benefit expenses and contract and professional services. Direct cost of revenues increased primarily due to an increase in quarterly registry fees and outside consulting costs. Telecommunications expenses increased primarily due to upgrades to support our current constellation sites to support our .com and .net registrations and our Delaware Data Center. Depreciation expenses increased primarily due to the increase in depreciation expense related to Delaware Data Center being placed into service in July 2008. Salary and benefit expenses decreased primarily due to decreases in expenses related to bonuses and stock-based compensation that resulted from the 2008 Restructuring Plan.

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:

 

     Three Months Ended
September 30,
   %
Change
    Nine Months Ended
September 30,
   %
Change
 
     2009    2008      2009    2008   
     (Dollars in thousands)          (Dollars in thousands)       

Sales and marketing

   $ 45,015    $ 41,646    8   $ 128,341    $ 133,779    (4 %) 

 

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Sales and marketing expenses increased during the three months ended September 30, 2009, primarily due to increases in salary and benefits expenses and contract and professional services expenses, partially offset by a decrease in advertising and marketing expense. Salary and benefits expenses increased primarily due to an increase in headcount to support our core services. Contract and professional services expenses increased primarily due to using third-party professional services for international marketing initiatives for our Naming Services business and an increase in outside contractors to support both our Naming Services and Business Authentication Services businesses. Advertising and marketing expenses decreased primarily due to a targeted marketing campaign during the three months ended September 30, 2008 that supported our Business Authentication Services business.

Sales and marketing expenses decreased during the nine months ended September 30, 2009, primarily due to decreases in salary and benefits, and travel expenses, partially offset by an increase in contract and professional services expenses. Salary and benefit expenses decreased primarily due to a decrease in headcount as a result of the 2008 Restructuring Plan and the divestiture of our CDN business in April 2008. Travel expenses decreased primarily due to lower average headcount and management’s cost-savings initiatives. Contract and professional services expenses increased primarily due to using third-party professional services for international marketing initiatives for our Naming Services business and an increase in outside contractors to support both our Naming Services and Business Authentication Services businesses.

We expect sales and marketing expenses to increase slightly as a percentage of revenue in fiscal 2010, primarily due to an increase in advertising and marketing spending.

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 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:

 

     Three Months Ended
September 30,
   %
Change
    Nine Months Ended
September 30,
   %
Change
 
     2009    2008      2009    2008   
     (Dollars in thousands)          (Dollars in thousands)       

Research and development

   $ 24,940    $ 21,764    15   $ 72,976    $ 70,528    3

Research and development expenses increased during the three and nine months ended September 30, 2009, primarily due to increases in salary and benefits expenses and depreciation expenses. Salary and benefits expenses increased during the three months ended September 30, 2009, primarily due to an increase in headcount to support our core services, but decreased during the nine months ended September 30, 2009, primarily due to lower average headcount as a result from the 2008 Restructuring Plan and the divestiture of our CDN business in April 2008. Depreciation expense increased primarily due to capitalized projects placed into service in 2009 and during fourth quarter 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.

 

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A comparison of general and administrative expenses is presented below:

 

     Three Months Ended
September 30,
   %
Change
    Nine Months Ended
September 30,
   %
Change
 
     2009    2008      2009    2008   
     (Dollars in thousands)          (Dollars in thousands)       

General and administrative

   $ 42,634    $ 49,677    (14 %)    $ 134,721    $ 152,742    (12 %) 

General and administrative expenses decreased during the three and nine months ended September 30, 2009, primarily due to decreases in salary and benefits expenses, travel expenses, contract and professional services expenses, and depreciation expenses. Salary and benefits expenses decreased primarily due to lower average headcount as a result of the 2008 Restructuring Plan. Travel expenses decreased primarily due to lower average headcount and management’s cost-savings initiatives. Contract and professional services expenses decreased primarily due to decreased professional services costs incurred for accounting and auditing services and a decrease in outside contractors. Legal expenses decreased during the three months ended September 30, 2009, primarily due to decreases in outside counsel fees and litigation expenses.

We expect general and administrative expense to decrease slightly as a percentage of revenues in fiscal 2010, primarily due to reduction in shared services expenses, resulting from our substantial completion of planned divestitures.

Restructuring, impairments and other charges

A comparison of restructuring, impairments and other charges is presented below:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2009    2008    2009    2008
     (In thousands)

Restructuring charges for continuing operations

   $ 744    $ 5,895    $ 5,927    $ 28,210

Impairments for continuing operations

     9,684      —        9,684      —  

Other charges for continuing operations

     —        14      62      79,083
                           

Total restructuring, impairments and other charges for continuing operations

     10,428      5,909      15,673      107,293
                           

Restructuring charges for discontinued operations

     2,046      7,058      4,959      30,422

Impairments for discontinued operations

     —        —        —        45,793
                           

Total restructuring charges and impairments for discontinued operations

     2,046      7,058      4,959      76,215
                           

Total consolidated restructuring, impairments and other charges

   $ 12,474    $ 12,967    $ 20,632    $ 183,508
                           

Restructuring Charges

As part of our divestiture strategy, we initiated a restructuring plan in the first quarter of 2008 (“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 September 30, 2009, we recorded $80.5 million in restructuring charges, inclusive of amounts for discontinued operations, under our 2008 Restructuring Plan.

 

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The following table presents the nature of the restructuring charges:

 

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