VeriSign, Inc.
VERISIGN INC/CA (Form: 10-Q, Received: 04/29/2011 10:40:05)
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 March 31, 2011

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.)

21355 Ridgetop Circle, Dulles, Virginia   20166
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (703) 948-3200

 

 

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 April 22, 2011

Common stock, $.001 par value

  168,471,815

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  
   PART I—FINANCIAL INFORMATION   

Item 1.

   Financial Statements      3   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      18   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      27   

Item 4.

   Controls and Procedures      27   
   PART II—OTHER INFORMATION   

Item 1.

   Legal Proceedings      28   

Item 1A.

   Risk Factors      28   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      44   

Item 6.

   Exhibits      45   

Signatures

     46   

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

As required under Item 1—Financial Statements included in this section are as follows:

 

Financial Statement Description

   Page

•       Condensed Consolidated Balance Sheets as of March  31, 2011 and December 31, 2010

   4       

•       Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010

   5       

•       Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010

   6       

•       Notes to Condensed Consolidated Financial Statements

   7       

 

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VERISIGN, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

     March 31,
2011
    December 31,
2010
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 1,440,826      $ 1,559,628   

Marketable securities

     506,014        501,238   

Accounts receivable, net

     15,852        14,874   

Prepaid expenses and other current assets

     97,406        102,217   
                

Total current assets

     2,060,098        2,177,957   
                

Property and equipment, net

     193,145        190,319   

Goodwill and other intangible assets, net

     54,823        55,146   

Other assets

     22,537        20,584   
                

Total long-term assets

     270,505        266,049   
                

Total assets

   $ 2,330,603      $ 2,444,006   
                
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable and accrued liabilities

   $ 159,627      $ 195,235   

Deferred revenues

     485,462        457,478   
                

Total current liabilities

     645,089        652,713   
                

Long-term deferred revenues

     213,484        205,560   

Convertible debentures, including contingent interest derivative

     583,852        581,626   

Long-term deferred tax liabilities

     317,944        309,696   

Other long-term liabilities

     24,906        17,981   
                

Total long-term liabilities

     1,140,186        1,114,863   
                

Total liabilities

     1,785,275        1,767,576   
                

Commitments and contingencies

    

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: 168,413,107, excluding 146,420,438 held in treasury, at March 31, 2011; and 172,736,281, excluding 140,576,600 held in treasury, at December 31, 2010

     315        313   

Additional paid-in capital

     20,869,501        21,040,919   

Accumulated deficit

     (20,322,697     (20,363,468

Accumulated other comprehensive loss

     (1,791     (1,334
                

Total stockholders’ equity

     545,328        676,430   
                

Total liabilities and stockholders’ equity

   $ 2,330,603      $ 2,444,006   
                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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VERISIGN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

    Three Months Ended
March 31,
 
    2011     2010  

Revenues

  $ 181,523      $ 161,582   
               

Costs and expenses

   

Cost of revenues

    40,869        38,814   

Sales and marketing

    22,391        21,310   

Research and development

    13,594        12,277   

General and administrative

    33,629        34,844   

Restructuring charges

    5,530        234   
               

Total costs and expenses

    116,013        107,479   
               

Operating income

    65,510        54,103   

Interest expense

    (11,820     (11,998

Non-operating income, net

    5,478        4,828   
               

Income from continuing operations before income taxes

    59,168        46,933   

Income tax expense

    (16,875     (16,924
               

Income from continuing operations, net of tax

    42,293        30,009   

(Loss) income from discontinued operations, net of tax

    (1,522     22,431   
               

Net income

    40,771        52,440   

Less: Net income from discontinued operations, net of tax,
attributable to noncontrolling interest in subsidiary

    —          (1,084
               

Net income attributable to Verisign stockholders

  $ 40,771      $ 51,356   
               

Basic income per share attributable to Verisign stockholders from:

   

Continuing operations

  $ 0.25      $ 0.16   

Discontinued operations

    (0.01     0.12   
               

Net income

  $ 0.24      $ 0.28   
               

Diluted income per share attributable to Verisign stockholders from:

   

Continuing operations

  $ 0.25      $ 0.16   

Discontinued operations

    (0.01     0.12   
               

Net income

  $ 0.24      $ 0.28   
               

Shares used to compute net income per share attributable to Verisign stockholders:

   

Basic

    170,193        183,174   
               

Diluted

    171,979        184,259   
               

Amounts attributable to Verisign stockholders:

   

Income from continuing operations, net of tax

  $ 42,293      $ 30,009   

(Loss) income from discontinued operations, net of tax

    (1,522     21,347   
               

Net income attributable to Verisign stockholders

  $ 40,771      $ 51,356   
               

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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VERISIGN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Three Months Ended
March 31,
 
     2011     2010  

Cash flows from operating activities:

    

Net income

   $ 40,771      $ 52,440   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation of property and equipment and amortization of other intangible assets

     13,968        21,905   

Stock-based compensation

     14,950        12,085   

Excess tax benefit associated with stock-based compensation

     (3,615     (8,097

Other, net

     2,129        6,270   

Changes in operating assets and liabilities, excluding the effects of acquisitions and divestitures:

    

Accounts receivable

     (985     4,579   

Prepaid expenses and other assets

     3,975        9,689   

Accounts payable and accrued liabilities

     (16,814     (33,734

Deferred revenues

     35,908        35,983   
                

Net cash provided by operating activities

     90,287        101,120   
                

Cash flows from investing activities:

    

Proceeds from maturities and sales of marketable securities and investments

     11,238        95,909   

Proceeds received from divestiture of businesses, net of cash contributed

     —          15,583   

Purchases of marketable securities and investments

     (18,008     (549,087

Purchases of property and equipment

     (15,565     (19,898

Other investing activities

     (1,181     —     
                

Net cash used in investing activities

     (23,516     (457,493
                

Cash flows from financing activities:

    

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

     16,550        17,393   

Repurchases of common stock

     (207,428     (53,753

Excess tax benefit associated with stock-based compensation

     3,615        8,097   

Other financing activities

     —          (346
                

Net cash used in financing activities

     (187,263     (28,609
                

Effect of exchange rate changes on cash and cash equivalents

     1,690        (2,154
                

Net decrease in cash and cash equivalents

     (118,802     (387,136

Cash and cash equivalents at beginning of period

     1,559,628        1,477,166   
                

Cash and cash equivalents at end of period

   $ 1,440,826      $ 1,090,030   
                

Supplemental cash flow disclosures:

    

Cash paid for interest, net of capitalized interest

   $ 20,062      $ 19,811   
    
                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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VERISIGN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

Interim Financial Statements

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared by VeriSign, Inc. (“Verisign” or the “Company”) in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, therefore, do not include all information and notes normally provided in audited financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and other adjustments) considered necessary for a fair presentation have been included. The results of operations for any interim period are not necessarily indicative of, nor comparable to, the results of operations for any other interim period or for a full fiscal year. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related notes contained in Verisign’s fiscal 2010 Annual Report on Form 10-K (the “2010 Form 10-K”) filed with the SEC on February 24, 2011.

Reclassifications

Certain reclassifications have been made to prior period amounts to conform to current period presentation. Such reclassifications have no effect on net income as previously reported.

Note 2. Cash, Cash Equivalents, and Marketable Securities

The following table summarizes the Company’s cash, cash equivalents, and marketable securities:

 

     March  31,
2011
     December  31,
2010
 
     
     (In thousands)  

Cash

   $ 109,065       $ 106,270   

Money market funds

     433,051         648,054   

Time deposits

     902,685         803,797   

Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies

     364,312         359,160   

Corporate debt securities

     136,689         141,338   

Debt securities issued by foreign governments

     5,013         5,040   
                 

Total

   $ 1,950,815       $ 2,063,659   
                 

Included in Cash and cash equivalents

   $ 1,440,826       $ 1,559,628   

Included in Marketable securities

   $ 506,014       $ 501,238   

Included in Other assets (Restricted cash)

   $ 3,975       $ 2,793   

 

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The following tables summarize the Company’s unrealized gains and losses, and fair value of debt and equity securities designated as available-for-sale investments. There were no investments classified as either held-to-maturity or trading as of March 31, 2011.

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  
     (In thousands)  

As of March 31, 2011:

          

Fixed income securities:

          

Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies

   $ 363,083       $ 1,994       $ (765   $ 364,312   

Corporate debt securities

     135,368         1,321         —          136,689   

Debt securities issued by foreign governments

     5,013         —           —          5,013   
                                  

Total fixed income securities

   $ 503,464       $ 3,315       $ (765   $ 506,014   
                                  

Included in Marketable securities

           $ 506,014   

As of December 31, 2010:

          

Fixed income securities:

          

Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies

   $ 357,135       $ 2,524       $ (499   $ 359,160   

Corporate debt securities

     140,009         1,329         —          141,338   

Debt securities issued by foreign governments

     5,038         2         —          5,040   
                                  

Total fixed income securities

   $ 502,182       $ 3,855       $ (499   $ 505,538   
                                  

Included in Cash and cash equivalents

           $ 4,300   

Included in Marketable securities

           $ 501,238   

The unrealized losses as of March 31, 2011, relate to debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies with an aggregate fair value of $121.3 million that have been in a continuous unrealized loss position for less than twelve months. The Company anticipates that it will recover the entire amortized cost basis of these debt securities and has determined that no other-than-temporary impairments associated with credit losses were required to be recognized during the three months ended March 31, 2011. The Company does not have the intent to sell any of these debt securities and it is more likely than not that it will not be required to sell them, before recovery of the entire amortized cost basis.

The following table presents the contractual maturities of the fixed income securities as of March 31, 2011:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  
     (In thousands)  

Due within one year

   $ 116,472       $ 490       $ —        $ 116,962   

Due after one year through three years

     386,992         2,825         (765     389,052   
                                  

Total

   $ 503,464       $ 3,315       $ (765   $ 506,014   
                                  

Net gains or losses recognized during the three months ended March 31, 2011 and 2010 related to sales of marketable securities were not material.

 

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Note 3. 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 March 31, 2011 and December 31, 2010:

 

            Fair Value Measurement Using  
     Total Fair
Value
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 
     (In thousands)  

As of March 31, 2011:

  

Assets:

           

Investments in money market funds

   $ 433,051       $ 433,051       $ —         $ —     

Investments in fixed income securities:

           

Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies

     364,312         —           364,312         —     

Corporate debt securities

     136,689         —           136,689         —     

Debt securities issued by foreign governments

     5,013         —           5,013         —     
                                   

Total

   $ 939,065       $ 433,051       $ 506,014       $ —     
                                   

Liabilities:

           

Contingent interest derivative on Convertible Debentures

   $ 10,950       $ —         $ —         $ 10,950   

Foreign currency forward contracts (1)

     121         —           121         —     
                                   

Total

   $ 11,071       $ —         $ 121       $ 10,950   
                                   

As of December 31, 2010:

           

Assets:

           

Investments in money market funds

   $ 648,054       $ 648,054       $ —         $ —     

Investments in fixed income securities:

           

Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies

     359,160         2,700         356,460         —     

Corporate debt securities

     141,338         —           141,338         —     

Debt securities issued by foreign governments

     5,040         —           5,040         —     
                                   

Total

   $ 1,153,592       $ 650,754       $ 502,838       $ —     
                                   

Liabilities:

           

Contingent interest derivative on Convertible Debentures

   $ 10,500       $ —         $ —         $ 10,500   

Foreign currency forward contracts (1)

     282         —           282         —     
                                   

Total

   $ 10,782       $ —         $ 282       $ 10,500   
                                   

 

(1) Included in Accounts payable and accrued liabilities

The fair value of the Company’s investments in certain money market funds approximates their face value. Such instruments are classified as Level 1 and are included in Cash and cash equivalents.

 

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The fair value of the Company’s investments in fixed income securities are obtained using the weighted-average price of available market prices for the underlying securities from various industry standard data providers, large financial institutions and other third-party sources. The fair value of U.S. Treasury bills is based on their quoted market prices. Such instruments are included in either Cash and cash equivalents or Marketable securities.

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 has utilized a valuation model based on simulations of stock prices, interest rates, credit ratings and bond prices to estimate the value of the contingent interest derivative. The inputs to the model include risk adjusted interest rates, volatility, average yield curve observations and stock price. As several significant inputs are not observable, the overall fair value measurement of the 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 three months ended March 31, 2011 and 2010:

 

     Three Months Ended
March 31,
 
     2011      2010  
     (In thousands)  

Beginning balance

   $ 10,500       $ 10,000   

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

     450         (469
                 

Ending balance

   $ 10,950       $ 9,531   
                 

Other

The Company’s other financial instruments include accounts receivable, restricted cash, and accounts payable. As of March 31, 2011, the carrying value of these financial instruments approximated their fair value. The fair value of the Company’s Convertible Debentures as of March 31, 2011, is $1.5 billion, and is based on quoted market prices.

Note 4. Other Balance Sheet Items

Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consist of the following:

 

     March  31,
2011
     December  31,
2010
 
     
     (In thousands)  

Accounts payable

   $ 15,990       $ 16,727   

Accrued employee compensation

     33,664         52,628   

Customer deposits, net

     16,101         18,681   

Payables to buyers

     10,513         11,337   

Taxes payable, deferred and other tax liabilities

     37,546         38,168   

Accrued restructuring costs

     16,349         17,460   

Other accrued liabilities

     29,464         40,234   
                 

Total accounts payable and accrued liabilities

   $ 159,627       $ 195,235   
                 

Accrued employee compensation primarily consists of employee accrued vacation, accrued payroll and taxes, accruals for employee contributions to the employee stock purchase plan, and accrued bonus. Payables to buyers primarily consists of amounts due to Symantec for certain post-closing purchase price adjustments related to the sale of the Authentication Services business and accrued bonus for employees associated with the

 

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Authentication Services business. Accrued bonus as of December 31, 2010, included in Accrued employee compensation was paid during the three months ended March 31, 2011. As of March 31, 2011, Accrued restructuring costs primarily represents restructuring costs related to the sale of the Authentication Services business. Other accrued liabilities consist primarily of interest on the Convertible Debentures, and accruals for products and services. Interest on the Convertible Debentures is paid semi-annually in arrears on August 15 and February 15.

Note 5. Restructuring Charges

2010 Restructuring Plan

In connection with the sale of the Authentication Services business and the migration of its corporate functions from its Mountain View, California facility to its facility in Dulles, Virginia, the Company initiated a restructuring plan in 2010, including workforce reductions, abandonment of excess facilities and other exit costs (the “2010 Restructuring Plan”).

Under the 2010 Restructuring Plan, the Company expects to incur total estimated pre-tax cash charges for severance costs and other related employee termination costs of $22.5 million, and excess facility exit costs of $11.5 million, of which the Company has recorded a total of $21.5 million, and $1.0 million, respectively, through March 31, 2011. Additionally, the Company recognized stock-based compensation expenses of $13.4 million, inclusive of amounts for discontinued operations, through March 31, 2011, upon acceleration of stock-based awards for employees notified of termination.

The following table presents the nature of the restructuring charges:

 

      Three Months Ended 
March 31,
 
     2011      2010  
     (In thousands)  

Workforce reduction

   $ 4,723       $ 1,711   

Excess facilities

     807         116   
                 

Total consolidated restructuring charges

   $ 5,530       $ 1,827   
                 

Amounts classified as continuing operations

   $ 5,530       $ 234   
                 

Amounts classified as discontinued operations

   $ —         $ 1,593   
                 

Amounts for the three months ended March 31, 2011 were incurred under the 2010 Restructuring Plan. Amounts for the three months ended March 31, 2010 were incurred under the previous 2008 Restructuring Plan.

 

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The following table presents a rollforward of the accrued restructuring costs:

 

     Accrued
Restructuring
Costs at
December 31, 2010
     Costs
Incurred
     Costs Paid or
Settled
    Stock-Based
Compensation
    Accrued
Restructuring
Costs at
March 31, 2011
 
     (In thousands)  

Workforce reduction

   $ 15,120       $ 4,723       $ (3,080   $ (2,989   $ 13,774   

Excess facilities

     3,098         807         (594     —          3,311   
                                          

Total accrued restructuring costs

   $ 18,218       $ 5,530       $ (3,674   $ (2,989   $ 17,085   
                                          

Current portion of accrued restructuring costs

             $ 16,349   
                  

Long-term portion of accrued restructuring costs

             $ 736   
                  

Note 6. Stockholders’ Equity

Comprehensive Income

Comprehensive income consists of Net income 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:

 

     Three Months Ended
March 31,
 
     2011     2010  
     (In thousands)  

Net income

   $ 40,771      $ 52,440   

Foreign currency translation adjustments

     28        (526

Change in unrealized gain on investments, net of tax

     (458     (240

Realized gain on investments, net of tax, included in net income

     (27     (46
                

Comprehensive income

     40,314        51,628   

Less: Comprehensive income attributable to noncontrolling interest in subsidiary

     —          893   
                

Comprehensive income attributable to Verisign stockholders

   $ 40,314      $ 50,735   
                

Repurchase of Common Stock

On July 27, 2010, the Board authorized the repurchase of up to approximately $1.1 billion of Verisign’s common stock, in addition to the $393.6 million of its common stock remaining available for repurchase under the previous 2008 Share Buyback Program, for a total repurchase of up to $1.5 billion of its common stock (collectively, the “2010 Share Buyback Program”). The 2010 Share Buyback Program has no expiration date. During the three months ended March 31, 2011, the Company repurchased 5.6 million shares of its common stock at an average stock price of $35.54 for an aggregate cost of $199.6 million under the 2010 Share Buyback Program. As of March 31, 2011, $1.2 billion remained available for further repurchase under the 2010 Share Buyback Program.

During the three months ended March 31, 2011, the Company placed 0.2 million shares at an average stock price of $34.47 for an aggregate cost of $7.8 million into treasury stock to cover tax withholdings upon vesting of RSUs.

 

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Note 7. Calculation of Net Income per Share Attributable to Verisign Stockholders

The Company computes basic net income per share attributable to Verisign stockholders by dividing net income attributable to Verisign stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income per share attributable to Verisign stockholders gives effect to dilutive potential common shares, including outstanding stock options, unvested RSUs, conversion spread relating to the Convertible Debentures, and employee stock purchases using the treasury stock method. The following table presents the computation of weighted-average shares used in the calculation of basic and diluted net income per share attributable to Verisign stockholders:

 

     Three Months Ended
March 31,
 
     2011      2010  
     (In thousands)  

Weighted-average number of common shares outstanding

     170,193         183,174   

Weighted-average potential shares of common stock outstanding:

     

Stock options

     445         336   

Unvested restricted stock units

     814         749   

Conversion spread related to Convertible Debentures

     506         —     

Employee stock purchase plan

     21         —     
                 

Shares used to compute diluted net income per share attributable to Verisign stockholders

     171,979         184,259   
                 

The following table presents 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 the weighted-average stock options outstanding:

 

     Three Months Ended
March 31,
 
               2011                           2010             
     (In thousands, except per share data)  

Weighted-average stock options outstanding

     301         4,436   

Weighted-average exercise price

   $ 38.24       $ 30.63   

Weighted-average restricted stock units outstanding

     32         56   

Employee stock purchase plan

     510         1,387   

Note 8. 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
March 31,
 
     2011      2010  
     (In thousands)  

Stock-based compensation:

     

Cost of revenues

   $ 1,990       $ 921   

Sales and marketing

     1,854         1,120   

Research and development

     1,518         1,070   

General and administrative

     6,599         5,229   

Restructuring charges

     2,989         112   
                 

Stock-based compensation for continuing operations

     14,950         8,452   

Discontinued operations

     —           3,633   
                 

Total stock-based compensation expense

   $ 14,950       $ 12,085   
                 

 

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The following table presents the nature of the Company’s total stock-based compensation, inclusive of amounts for discontinued operations:

 

     Three Months Ended
March 31,
 
     2011     2010  
     (In thousands)  

Stock-based compensation:

    

Stock options

   $ 1,463      $ 2,316   

Employee stock purchase plan

     1,180        2,729   

Restricted stock units

     10,215        6,949   

RSUs/Stock options acceleration

     2,989        570   

Capitalization (Included in Property and equipment, net)

     (897     (479
                

Total stock-based compensation expense

   $ 14,950      $ 12,085   
                

Note 9. Non-operating Income, Net

The following table presents the components of Non-operating income, net:

 

     Three Months Ended
March 31,
 
         2011           2010    
     (In thousands)  

Interest and dividend income

   $ 2,091      $ 1,093   

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

     (450     469   

Income from transition services agreements

     3,462        3,020   

Other, net

     375        246   
                

Total non-operating income, net

   $ 5,478      $ 4,828   
                

Interest and dividend income is earned principally from Verisign’s surplus cash balances and marketable securities. Income from transition services agreements includes fees generated from services provided to the purchasers of divested businesses for a certain period of time to ensure and facilitate the transfer of business operations.

Note 10. Discontinued Operations

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 the Authentication Services business and certain other completed divestitures. These activities are transitional in nature and generally result from agreements ensuring and facilitating the orderly transfer of business operations. The nature, magnitude and duration of the agreements vary depending on the specific circumstances of the service, location or business need. The existing agreements include the following: data center hosting and information services. As of March 31, 2011, the existing agreements have remaining terms from 1 to 28 months in length.

 

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The following table presents the revenues and the components of discontinued operations, net of tax, attributable to Verisign stockholders:

 

     Three Months Ended
March 31,
 
     2011     2010  
     (In thousands)  

Revenues

   $ 44      $ 102,821   
                

Income from discontinued operations before income taxes

   $ 3,206      $ 32,660   

Income tax expense

     (4,728     (10,229
                

(Loss) income from discontinued operations

     (1,522     22,431   

Less: Income from discontinued operations, net of tax, attributable to noncontrolling interest in subsidiary

     —          (1,084
                

Total (loss) income from discontinued operations, net of tax, attributable to Verisign stockholders

   $ (1,522   $ 21,347   
                

Income from discontinued operations before income taxes for the three months ended March 31, 2011 primarily represents adjustments to gains or losses on divestitures completed in 2009, as a result of the resolution of certain retained litigation of a divested business. Income tax expense for discontinued operations for the three months ended March 31, 2011 includes a $2.9 million discrete charge attributable to a change in the purchase price allocation prepared for income tax purposes related to the divestiture of the Authentication Services business as agreed by the parties in April 2011. Income from discontinued operations before income taxes for the three months ended March 31, 2010, represents the results of operations of the Authentication Services business, and adjustments to gains and losses on divestitures completed in 2009, as a result of certain one-time employee termination costs and settlement of certain retained litigation of the divested businesses.

Note 11. Income Taxes

The following table presents the income tax expense from continuing operations and the effective tax rate:

 

     Three Months Ended
March 31,
 
     2011     2010  
     (Dollars in thousands)  

Income tax expense from continuing operations

   $ 16,875      $ 16,924   

Effective tax rate

     29     36

The effective tax rate for the three months ended March 31, 2011 differs from the statutory federal rate of 35% due to state taxes, the effect of non-US operations, and tax benefits from foreign income taxed at lower rates. The effective tax rate for the three months ended March 31, 2010 differs from the statutory federal rate of 35% due to state taxes, the effect of non-US operations, non-deductible stock-based compensation expense, and tax benefits from foreign income taxed at lower rates.

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. Deferred tax assets offset by a valuation allowance relate primarily to investments with differing book and tax bases and net operating losses in certain foreign jurisdictions.

As of March 31, 2011 and December 31, 2010, the Company had gross unrecognized tax benefits for income taxes associated with uncertain tax positions of $36.2 million and $28.8 million, respectively. During the three months ended March 31, 2011, the Company recorded an increase in unrecognized tax benefits of $7.4 million related to current period activities. As of March 31, 2011 and December 31, 2010, $31.0 million and

 

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$24.9 million, respectively, of unrecognized tax benefits, including penalties and interest, would affect the Company’s effective tax rate if realized. The balance of the gross unrecognized tax benefits is expected to increase in the next 12 months.

In accordance with its accounting policy, the Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. Interest and penalties related to income tax liabilities, recognized through income tax expense during the three months ended March 31, 2011 and 2010, were not material.

The Company’s major taxing jurisdictions are the U.S., the states of California and Virginia, and Switzerland. The Company’s tax returns are not currently under examination by these taxing jurisdictions. 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 the U.S., California and Virginia, such attributes can be adjusted by these taxing authorities until the statute closes on the year in which such attributes were utilized. The open years in Switzerland are the 2006 tax year and forward.

Note 12. Contingencies

Legal Proceedings

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 operated 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 operated 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 defendants’ motion to dismiss the Herbert matter was denied by the district court on December 3, 2007 and that ruling was appealed. On July 8, 2010, the Court of Appeals for the Ninth Circuit dismissed the appeal for lack of jurisdiction and remanded the case to the district court. The Bentley and Herbert cases, although not consolidated, are proceeding on a coordinated basis before the same judge in the District Court. Certain defendants have asserted indemnity claims against Verisign in connection with these matters.

Verisign has been named as a defendant in litigation brought by the plaintiff Coalition for Internet Corporation for Assigned Names and Numbers Transparency, Inc. (“CFIT”) asserting claims, among others, under Sections 1 and 2 of the Sherman Antitrust Act (the “Sherman Act”) in connection with the .com and .net Registry Agreements. Following the dismissal with prejudice of CFIT’s second amended complaint by the United States District Court for the Northern District of California on May 14, 2007, and CFIT’s appeal to the U.S. Court of Appeals for the Ninth Circuit, the case was remanded to the U.S. District Court for the Northern District of California by an Order and Amended Opinion issued on July 9, 2010. Upon remand, the District Court scheduled (i) a trial to begin December 5, 2011, (ii) a summary judgment hearing on threshold issues (including standing, the role of the U.S. government and ICANN, immunity, as well as CFIT’s right to a jury trial) for March 2011 and (iii) a final summary judgment hearing for October 2011. On December 16, 2010, the District Court granted CFIT’s unopposed motion for leave to file a third amended complaint. The third amended complaint contained new allegations regarding the .net Registry Agreement, sought disgorgement of profits, eliminated all claims for damages and removed all claims regarding the alleged expiring names registration services market. Verisign filed a motion to dismiss CFIT’s third amended complaint on December 30, 2010. A hearing on Verisign’s motion to dismiss was held on February 4, 2011, whereupon the District Court took the matter under advisement. On February 11, 2011, the District Court issued an order granting Verisign’s motion to dismiss CFIT’s third amended complaint (the “Order”). The Order dismissed the complaint in its entirety, with

 

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leave, in part, to amend the complaint again. First, the Order dismissed the complaint in its entirety on the grounds that the third amended complaint failed to identify members of CFIT or their continuous standing to assert the claims in the complaint against Verisign. The Order granted CFIT leave to amend the complaint to the extent CFIT can sufficiently allege standing from the commencement of the action. Second, the Order dismissed the claims concerning the .net Registry Agreement on the grounds that CFIT’s allegations were too conclusory to plausibly state a claim for relief. The Order granted CFIT leave to amend its claims concerning the .net Registry Agreement to the extent it could allege specific facts sufficient to state a claim for relief. Third, the Order dismissed without leave to amend CFIT’s claim for disgorgement of domain name registration fees CFIT alleges were improperly collected. Finally, the Order denied CFIT’s request for a jury trial. Thus, any claims in the case should be tried to the District Court rather than a jury. Verisign filed a motion for summary judgment on February 4, 2011 on certain threshold issues as discussed above. The district court heard oral argument on the motion on March 11, 2011 and thereafter took the matter under advisement. CFIT filed a Fourth Amended Complaint on February 22, 2011. The Fourth Amended Complaint again asserts claims under Sections 1 and 2 of the Sherman Act with respect to the . com Registry Agreement. It does not assert any claims, however, for damages or disgorgement with respect to the .com Registry Agreement. The Fourth Amended Complaint also does not assert any claims with respect to the . net Registry Agreement. Verisign filed an Answer to the Fourth Amended Complaint on March 8, 2011.

Indemnifications

In connection with the sale of the Authentication Services business to Symantec, the Company has agreed to indemnify Symantec for certain potential legal claims arising from the operation of the Authentication Services business for a period of sixty months after the closing of the sale transaction. The Company’s indemnification obligations in this regard are triggered only when indemnifiable claims exceed in the aggregate $4 million. Thereafter, the Company is obligated to indemnify Symantec for 50% of all indemnifiable claims. The Company’s maximum indemnification obligation with respect to these claims is capped at $125 million.

While certain legal proceedings and related indemnification obligations to which the Company is a party specify the amounts claimed, such claims may not represent reasonably possible losses. Given the inherent uncertainties of the litigation, the ultimate outcome of these matters cannot be predicted at this time, nor can the amount of possible loss or range of loss, if any, be reasonably estimated, except in circumstances where an aggregate litigation accrual has been recorded for probable and reasonably estimable loss contingencies. A determination of the amount of accrual required, if any, for these contingencies is made after careful analysis of each matter. The required accrual may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters. The Company does not believe that any such matter currently being reviewed will have a material adverse effect on its financial condition or results of operations.

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 13. Subsequent Events

On April 27, 2011, the Board declared a special dividend of $2.75 per share of the Company’s common stock, totaling approximately $463.3 million. The special dividend will be paid on May 18, 2011 to shareholders of record as of the close of business on May 9, 2011. Further, the Board has designated the special dividend as an extraordinary dividend for the purposes of the indenture governing the Convertible Debentures. As a result, contingent interest of $100.0 million will also be paid on May 18, 2011 to the holders of record of the Convertible Debentures at the close of business on May 9, 2011.

 

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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 2011 and our 2010 Form 10-K, which was filed on February 24, 2011, 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 a provider of Internet infrastructure services. By leveraging our global infrastructure, we provide network confidence and availability for mission-critical Internet services, such as domain name registry services and infrastructure assurance services. Our service capabilities enable domain name registration through our registrar partners and provide network availability for registrars and Internet users alike.

Our business consists of one reportable segment, namely Naming Services, which consists of Registry Services and Network Intelligence and Availability (“NIA”) Services. Registry Services operates the authoritative directory of all .com, .net, .cc, .tv, and .name domain names and the back-end systems for all . gov , .jobs and .edu domain names. As of March 31, 2011, we had approximately 108.0 million domain names registered under the .com and .net registries, our principal registries. The number of domain names registered is largely driven by continued growth in online advertising, e-commerce, and the number of Internet users, which is partially driven by greater availability of broadband, as well as advertising and promotional activities carried out by us and third-party registrars. Although growth in absolute number of registrations remains greatest in mature markets such as the U.S., growth on an annual percentage basis is expected to be greatest in markets outside of the U.S. over the long-term. NIA Services provides infrastructure assurance to organizations and is comprised of Verisign iDefense Security Intelligence Services, Managed Domain Name System Services, and Distributed Denial of Service mitigation. Revenues from NIA Services are not significant.

Business Highlights and Trends—Three months ended March 31, 2011

 

   

We recorded revenues of $181.5 million during the three months ended March 31, 2011, an increase of 12%, as compared to the same period last year. The increase was primarily due to a 9% year-over-year increase in active domain names ending in .com and .net and increases in our .com and .net registry fees in July 2010.

 

   

We recorded operating income of $65.5 million during the three months ended March 31, 2011, an increase of 21%, as compared to the same period last year. The increase was primarily due to an increase in our revenues.

 

   

We repurchased 5.6 million shares of our common stock under the 2010 Share Buyback Program for an aggregate cost of $199.6 million during the three months ended March 31, 2011.

 

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We generated cash flows from operating activities of $90.3 million during the three months ended March 31, 2011, a decrease of 11% as compared to the same period last year. The decrease was primarily due to the elimination of cash flows from the divested Authentication Services business.

Results of Operations

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

 

     Three Months Ended
March 31,
 
     2011     2010  

Revenues

     100     100
                

Costs and expenses

    

Cost of revenues

     23        24   

Sales and marketing

     12        13   

Research and development

     7        8   

General and administrative

     19        22   

Restructuring charges

     3        —     
                

Total costs and expenses

     64        67   
                

Operating income

     36        33   

Interest expense

     (7     (7

Non-operating income, net

     3        3   
                

Income from continuing operations before income taxes

     32        29   
                

Income tax expense

     (9     (10

Income from continuing operations, net of tax

     23        19   

(Loss) income from discontinued operations, net of tax

     (1     14   
                

Net income

     22        33   

Less: Net income from discontinued operations attributable to noncontrolling interest in subsidiary

     —          (1
                

Net income attributable to Verisign stockholders

     22     32
                

Revenues

Revenues related to our Registry Services are primarily derived from registrations for domain names in the .com, .net, .cc, .tv , . name, .gov, and .jobs domain name registries. Revenues from .cc, .tv, .name, .gov, and .jobs are not significant. For domain names registered with the .com  and .net registries, we receive a fee from third-party registrars per annual registration that is fixed pursuant to our agreements with ICANN. Individual customers, called registrants, 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, in each case as impacted by continued growth in online advertising, e-commerce, and the number of Internet users, which is partially driven by greater availability of broadband, as well as advertising and promotional activities carried out by us and third-party registrars. On July 1, 2010, we increased our .com domain name registration fees by 7% from $6.86 to $7.34. We have the contractual right to increase the fees for .com domain name registrations by up to 7% either in 2011 or in 2012 prior to the end of the current agreement with ICANN on November 30, 2012. On July 1, 2010, we increased our .net domain name registration fees by 10% from $4.23 to $4.65. We have the contractual right to increase the fees for .net domain name registrations by up to 10% in 2011. We offer promotional marketing programs for our registrars based upon market conditions and the business environment in which the registrars operate. 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. Revenues from NIA Services are not significant.

 

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A comparison of revenues is presented below:

 

     Three Months Ended March 31,  
     %  
     2011      Change     2010  
     (Dollars in thousands)  

Revenues

   $ 181,523         12   $ 161,582   

The following table compares domain names ending in .com and .net managed by our Registry Services business:

 

     March  31,
2011
     %
Change
    March  31,
2010
 
       

Active domain names ending in .com and .net

     108.0 million         9     99.3 million   

Our revenues increased by $19.9 million during the three months ended March 31, 2011, as compared to the same period last year, primarily due to a 9% year-over-year increase in the number of domain names ending in .com and .net and increases in our .com and .net registry fees in July 2010 as per our agreements with ICANN.

The growth in the number of active domain names was primarily driven by continued Internet growth and domain name promotional programs. We expect to see continued growth in the number of active domain names in 2011 as a result of further Internet growth. In addition, we expect to see continued growth internationally in both .com and .net domain name bases, especially in markets that we have targeted through our marketing programs. We expect revenues to increase in fiscal 2011 as compared to fiscal 2010 as a result of continued growth in the number of active domain names ending in .com and .net and implementation of the fee increase which became effective in July 2010 as domain names are renewed at the increased price.

New TLDs may be introduced by ICANN, including new IDN TLDs and ccTLDs in 2011 and new gTLDs in 2012. We cannot assess the impact, if any, the introduction of these new TLDs will have on our revenues and results of operations. See Item 1A. “Risk Factors—The business environment is highly competitive and, if we do not compete effectively, we may suffer price reductions, reduced gross margins and loss of market share ,” of this Form 10-Q .

Geographic revenues

We operate in the U.S.; Australia, China, India and other Asia Pacific countries (“APAC”); Europe, the Middle East and Africa (“EMEA”); and certain other countries including Canada and Latin American countries.

The following table presents a comparison of our geographic revenues:

 

     Three Months Ended March 31,  
     %  
     2011      Change     2010  
     (Dollars in thousands)  

U.S.

   $ 111,383         11   $ 100,589   

APAC

     27,601         15     23,903   

EMEA

     25,059         14     21,899   

Other

     17,480         15     15,191   
                   

Total revenues

   $ 181,523         $ 161,582   
                   

Revenues are generally attributed to the country of domicile and the respective regions in which our customers are located.

 

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Revenues from each of the respective regions increased during the three months ended March 31, 2011, as compared to the same period last year, primarily driven by an increase in the number of domain names ending in .com and .net and increases in our .com and .net registry fees in July 2010. The increase in the number of domain names ending in .com and .net was driven by continued Internet growth and domain name promotional programs.

We expect to continue to see strong growth in certain international regions, resulting from greater broadband and Internet penetration and expanding e-commerce as electronic means of payments are increasingly adopted.

Cost of revenues

Cost of revenues consist primarily of salaries and employee benefits expenses for our personnel that manage the operational systems, depreciation expenses, operational costs associated with the delivery of our services, fees paid to ICANN, customer support and training, consulting and development services, costs of facilities and computer equipment used in these activities, 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 March 31,  
   2011      %
Change
    2010  
       
     (Dollars in thousands)  

Cost of revenues

   $ 40,869         5   $ 38,814   

Cost of revenues increased during the three months ended March 31, 2011, as compared to the same period last year, primarily due to increases in salary and employee benefits expenses, and depreciation expenses, partially offset by a decrease in allocated overhead expenses. Salary and employee benefits expenses increased by $2.0 million, primarily due to an increase in average headcount to support Registry Services, and an increase in stock-based compensation expenses due to additional vested RSUs granted during the three months ended March 31, 2011, to option holders, as they did not participate in the December 2010 special cash dividend. Depreciation expenses increased by $1.2 million, primarily due an increase in capitalized hardware and software to support investments in infrastructure projects, and accelerated depreciation on an abandoned software project. Allocated overhead expenses decreased by $2.2 million, primarily due to a decrease in allocable indirect costs and a decrease in proportional headcount within the cost of revenues function as a result of the divestiture of the Authentication Services business.

We expect cost of revenues as a percentage of revenues to remain consistent during the remainder of 2011 as compared to the three months ended March 31, 2011.

Sales and marketing

Sales and marketing expenses consist primarily of salaries and employee benefits expenses, sales commissions, sales operations, 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 March 31,  
   2011      %
Change
    2010  
       
     (Dollars in thousands)  

Sales and marketing

   $ 22,391         5   $ 21,310   

 

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Sales and marketing expenses increased during the three months ended March 31, 2011, as compared to the same period last year, primarily due to an increase in salary and employee benefits expenses, partially offset by a decrease in allocated overhead expenses. Salary and employee benefits expenses increased by $2.5 million, primarily due to an increase in average headcount to support our sales force, and an increase in stock-based compensation expenses due to additional vested RSUs granted during the three months ended March 31, 2011, to option holders, as they did not participate in the December 2010 special cash dividend. Allocated overhead expenses decreased by $1.7 million, primarily due to a decrease in allocable indirect costs and a decrease in proportional headcount within the sales and marketing function as a result of the divestiture of the Authentication Services business.

We expect sales and marketing expenses as a percentage of revenues to increase slightly during the remainder of 2011 as compared to the three months ended March 31, 2011, as a result of investments in our sales force and certain marketing initiatives.

Research and development

Research and development expenses consist primarily of costs related to research and development personnel, including salaries and employee benefits expenses, consulting fees, the cost of facilities, computer and communications equipment, support services used in our 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 March 31,  
   2011      %
Change
    2010  
       
     (Dollars in thousands)  

Research and development

   $ 13,594         11   $ 12,277   

Research and development expenses increased during the three months ended March 31, 2011, as compared to the same period last year, primarily due to an increase in salary and employee benefits expenses. Salary and employee benefits expenses increased by $1.7 million, primarily due to an increase in average headcount to support the development of our DNS infrastructure and new services, and an increase in stock-based compensation expenses due to additional vested RSUs granted during the three months ended March 31, 2011, to option holders, as they did not participate in the December 2010 special cash dividend.

We expect research and development expenses as a percentage of revenues to remain consistent during the remainder of 2011 as compared to the three months ended March 31, 2011.

General and administrative

General and administrative expenses consist primarily of salaries and employee benefits 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, and bad debt expense, offset by allocations of indirect costs such as facilities and shared services expenses to other cost types. All allocations of indirect costs are included in continuing operations.

A comparison of general and administrative expenses is presented below:

 

     Three Months Ended March 31,  
   2011      %
Change
    2010  
       
     (Dollars in thousands)  

General and administrative

   $ 33,629         (3 %)    $ 34,844   

 

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General and administrative expenses decreased during the three months ended March 31, 2011, as compared to the same period last year, primarily due to decreases in occupancy expenses and depreciation expenses, partially offset by a decrease in corporate overhead expenses allocated to other cost-types. Occupancy expenses decreased by $2.1 million, primarily due to lower rent expenses as the lease for certain office buildings expired in 2010. Depreciation expenses decreased by $1.9 million, primarily due to accelerated depreciation on an abandoned software project during the three months ended March 31, 2010, and ceasing further depreciation on corporate assets held for sale in May 2010, the results of operations of which were classified as continuing operations until the third quarter of 2010. Corporate overhead expenses allocated to other cost types decreased by $4.6 million, primarily due to a decrease in allocable indirect costs and proportionately higher headcount in the general and administrative function as a result of the divestiture of the Authentication Services business. Salary and employee benefits expenses remained consistent primarily due to a decrease in average headcount due to the divestiture of the Authentication Services business, offset by a $3.2 million increase in stock-based compensation expenses due to additional vested RSUs granted during the three months ended March 31, 2011, to option holders, as they did not participate in the December 2010 special cash dividend.

We expect general and administrative expenses as a percentage of revenues to decrease during the remainder of 2011 as compared to the three months ended March 31, 2011, as we continue to realize post-divestiture cost reductions in our general and administrative function.

Restructuring charges

2010 Restructuring Plan

In connection with the sale of the Authentication Services business and the migration of our corporate functions from our Mountain View, California facility to our facility in Dulles, Virginia, we initiated a restructuring plan in 2010, including workforce reductions, abandonment of excess facilities and other exit costs (the “2010 Restructuring Plan”).

Under the 2010 Restructuring Plan, we expect to incur total estimated pre-tax cash charges for severance costs and other related employee termination costs of $22.5 million, and excess facility exit costs of $11.5 million, of which we have recorded a total of $21.5 million, and $1.0 million, respectively, through March 31, 2011. Additionally, we recognized stock-based compensation expenses of $13.4 million, inclusive of amounts for discontinued operations, through March 31, 2011, upon acceleration of stock-based awards for employees notified of termination and expect to recognize further expenses for employees to be terminated in the future. However, at this time, we are not able, in good faith, to make a determination of the estimated amount or range of amounts thereon. We expect to recognize all remaining cash and stock-based restructuring charges over the next several quarters through the end of fiscal 2011.

The following table presents the nature of our restructuring charges:

 

     Three Months Ended
March  31,
 
     2011      2010  
     (In thousands)  

Workforce reduction

   $ 4,723       $ 1,711   

Excess facilities

     807         116   
                 

Total consolidated restructuring charges

   $ 5,530       $ 1,827   
                 

Amounts classified as continuing operations

   $ 5,530       $ 234   
                 

Amounts classified as discontinued operations

   $ —         $ 1,593   
                 

Amounts for the three months ended March 31, 2011 were incurred under the 2010 Restructuring Plan. Amounts for the three months ended March 31, 2010 were incurred under the previous 2008 Restructuring Plan.

 

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Non-operating income, net

Non-operating income, net, consists primarily of interest earned on our cash, cash equivalents, and marketable securities, net gains or losses on the sale and impairment of investments, net gains or losses on the divestiture of certain businesses, realized and unrealized gains and losses on the contingent interest derivative on the Convertible Debentures, income from transition services agreements, and the net effect of foreign currency gains and losses.

A comparison of non-operating income, net, is presented below:

 

     Three Months Ended
March  31,
 
     2011     2010  
     (In thousands)  

Interest and dividend income

   $ 2,091      $ 1,093   

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

     (450     469   

Income from transition services agreements

     3,462        3,020   

Other, net

     375        246   
                

Total non-operating income, net

   $ 5,478      $ 4,828   
                

Non-operating income, net, increased during the three months ended March 31, 2011, as compared to the same period last year, primarily due to an increase in interest and dividend income, partially offset by unrealized losses on the contingent interest derivative on Convertible Debentures. Interest and dividend income increased due to investing in marketable securities, which have higher interest rates as compared to money market funds, and higher cash and cash equivalents, as a result of the proceeds from the sale of the Authentication Services business.

Income taxes

The following table presents the income tax expense from continuing operations and the effective tax rates:

 

     Three Months Ended
March  31,
 
     2011     2010  
     (Dollars in thousands)  

Income tax expense from continuing operations

   $ 16,875      $ 16,924   

Effective tax rate

     29     36

The effective tax rate for the three months ended March 31, 2011 differs from the statutory federal rate of 35% due to state taxes, the effect of non-US operations, and tax benefits from foreign income taxed at lower rates. The effective tax rate for the three months ended March 31, 2010 differs from the statutory federal rate of 35% due to state taxes, the effect of non-US operations, non-deductible stock-based compensation expense, and tax benefits from foreign income taxed at lower rates. As of March 31, 2011, we plan to continue with our policy of permanently reinvesting all foreign earnings. The difference in effective tax rates for the three months ended March 31, 2011 and the three months ended March 31, 2010 primarily relates to the ratio of foreign income, taxed at lower rates, to domestic income.

Income from discontinued operations, net of tax

For a period of time, we will continue to generate cash flows and will report income statement activity in continuing operations that are associated with the Authentication Services business and certain other completed divestitures. These activities are transitional in nature and generally result from agreements ensuring and

 

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facilitating the orderly transfer of business operations. The nature, magnitude and duration of the agreements vary depending on the specific circumstances of the service, location or business need. The existing agreements include the following: data center hosting and information services. As of March 31, 2011, the existing agreements have remaining terms from 1 to 28 months in length.

The following table presents the revenues and the components of income from discontinued operations, net of tax, attributable to Verisign stockholders:

 

     Three Months Ended
March 31,
 
     2011     2010  
     (In thousands)  

Revenues

   $ 44      $ 102,821   
                

Income from discontinued operations before income taxes

   $ 3,206      $ 32,660   

Income tax expense

     (4,728     (10,229
                

(Loss) income from discontinued operations

     (1,522     22,431   

Less: Income from discontinued operations, net of tax, attributable to noncontrolling interest in subsidiary

     —          (1,084
                

Total (loss) income from discontinued operations, net of tax, attributable to Verisign stockholders

   $ (1,522   $ 21,347   
                

Income from discontinued operations before income taxes for the three months ended March 31, 2011 primarily represents adjustments to gains or losses on divestitures completed in 2009, as a result of the resolution of certain retained litigation of a divested business. Income tax expense for discontinued operations for the three months ended March 31, 2011 includes a $2.9 million discrete charge attributable to a change in the purchase price allocation prepared for income tax purposes related to the divestiture of the Authentication Services business as agreed by the parties in April 2011. Income from discontinued operations before income taxes for the three months ended March 31, 2010, represents the results of operations of the Authentication Services business, and adjustments to gains and losses on divestitures completed in 2009, as a result of certain one-time employee termination costs and settlement of certain retained litigation of the divested businesses.

Liquidity and Capital Resources

 

     March 31,
2011
     December 31,
2010
 
     (In thousands)  

Cash and cash equivalents

   $ 1,440,826       $ 1,559,628   

Marketable securities

     506,014         501,238   
                 

Total

   $ 1,946,840       $ 2,060,866   
                 

As of March 31, 2011, our principal source of liquidity was $1.4 billion of cash and cash equivalents and $506.0 million of marketable securities. In summary, our cash flows for the three months ended March 31, 2011 and 2010 are as follows:

 

     Three Months Ended
March 31,
 
     2011     2010  
     (In thousands)  

Net cash provided by operating activities

   $ 90,287      $ 101,120   

Net cash used in investing activities

     (23,516     (457,493

Net cash used in financing activities

     (187,263     (28,609

Effect of exchange rate changes on cash and cash equivalents

     1,690        (2,154
                

Net decrease in cash and cash equivalents

   $ (118,802   $ (387,136
                

 

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A significant amount of our cash and cash equivalents are held by our foreign subsidiaries. Our intent is to permanently reinvest a significant portion of our earnings from foreign operations, and current plans do not anticipate that we will need funds generated from foreign operations to fund our domestic operations. In the event funds from foreign operations are needed to fund operations in the U.S. and if U.S. tax has not already been previously provided, we would be required to accrue and pay additional U.S. taxes in order to repatriate these funds.

Cash flows from operating activities

Our largest source of operating cash flows is cash collections from our customers. Our primary uses of cash from operating activities are for personnel-related expenditures and other general operating expenses, including payments related to taxes and facilities.

Net cash provided by operating activities decreased primarily due to a decrease in cash received from customers resulting from a decrease in consolidated revenues due to the divestiture of the Authentication Services business in 2010, coupled with the timing of receipts from customers. The decrease is partially offset by a decrease in cash payments to suppliers and employees, primarily resulting from the divestiture of the Authentication Services business in 2010 and lower average headcount in 2011; an increase in interest income resulting from investments in higher interest rate marketable securities; and lower income taxes payable before consideration of excess tax benefits from exercises of stock options and other employee stock purchases.

Cash flows from investing activities

The changes in cash flows from investing activities primarily relate to the divestiture of businesses, timing of purchases, maturities and sales of investments, and purchases of property and equipment.

Net cash used in investing activities decreased primarily due to decreases in purchases of marketable securities and investments, and property and equipment, partially offset by a decrease in proceeds from maturities and sales of marketable securities and investments, and proceeds received during the three months ended March 31, 2010 for businesses divested in 2009.

Cash flows from financing activities

The changes in cash flows from financing activities primarily relate to stock repurchases and stock option exercise activities.

Net cash used in financing activities increased primarily due to an increase in stock repurchases and a decrease in realized excess tax benefits from exercises of stock options and the employee stock purchase plan.

Other Liquidity and Capital Resources Information

As of March 31, 2011, our principal source of liquidity was $1.4 billion of cash and cash equivalents and $506.0 million of marketable securities. The marketable securities consist of debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies, and corporate debt securities meeting the criteria of our investment policy, which is focused on the preservation of our capital through investment in investment grade securities. The cash equivalents consist mainly of time deposits and amounts deposited in money market funds. As of March 31, 2011, $506.0 million of marketable securities were invested in fixed income securities, of which $117.0 million had maturities within one year and $389.0 million had maturities between one and three years. Our cash and cash equivalents are readily accessible. For additional information on our investment portfolio, see Note 2, “Cash, Cash Equivalents, and Marketable Securities,” of our Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

 

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On April 27, 2011, our Board declared a special dividend of $2.75 per share of our common stock, totaling approximately $463.3 million. The special dividend will be paid on May 18, 2011 to shareholders of record as of the close of business on May 9, 2011. Further, our Board has designated the special dividend as an extraordinary dividend for the purposes of the indenture governing the Convertible Debentures. As a result, contingent interest of $100.0 million will also be paid on May 18, 2011 to the holders of record of the Convertible Debentures at the close of business on May 9, 2011.

We believe existing cash, cash equivalents and marketable securities, together with funds generated from operations should be sufficient to meet our working capital, capital expenditure requirements, declared dividend and resulting contingent interest payments of $463.3 million and $100.0 million, respectively, and to service our debt for the next 12 months. We regularly assess our cash management approach and activities in view of our current and potential future needs.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant changes in our market risk exposures since December 31, 2010.

 

ITEM 4. CONTROLS AND PROCEDURES

Based on our management’s evaluation, with the participation of our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer), as of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Inherent Limitations of Disclosure Controls and Internal Control over Financial Reporting

Because of its inherent limitations, our internal control over financial reporting may not prevent material errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The continued effectiveness of our internal control over financial reporting is subject to risks, including that the control may become inadequate because of changes in conditions or that the degree of compliance with our policies or procedures may deteriorate.

 

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PART II—OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

The information set forth under “Legal Proceedings” in Note 12, “Contingencies,” of our Notes to Condensed Consolidated Financial Statements in Part I, Item 1, of this Quarterly Report on Form 10-Q is incorporated herein by reference.

 

ITEM 1A. RISK FACTORS

In addition to other information in this Form 10-Q, the following risk factors should be carefully considered in evaluating us and our business because these factors currently have a significant impact or may have a significant impact on our business, operating results or financial condition. Actual results could differ materially from those projected in the forward-looking statements contained in this Form 10-Q as a result of the risk factors discussed below and elsewhere in this Form 10-Q and in other filings we make with the SEC.

Risks relating to our business

Our operating results may fluctuate and our future revenues and profitability are uncertain.

Our operating results have varied in the past and may fluctuate significantly in the future as a result of a variety of factors, many of which are outside our control. These factors include the following:

 

   

the current global economic environment as well as its impact on e-commerce, financial services, and the communications and Internet industries;

 

   

volume of new domain name registrations and customer renewals in our Naming Services businesses;

 

   

the long sales and implementation cycles for, and potentially large order sizes of, some of our services and the timing and execution of individual customer contracts;

 

   

our success in direct marketing, and, in the case of our Registry Services business, the scope and success of marketing efforts by third-party registrars, and market acceptance of our services by our existing customers and by new customers;

 

   

customer renewal rates and turnover of customers of our services, and in the case of our Registry Services business, the customers of the distributors of our services;

 

   

continued development of our distribution channels for our products and services, both in the U.S. and abroad;

 

   

the impact of price changes in our products and services or our competitors’ products and services;

 

   

the impact of decisions by distributors to offer competing products or modify or cease their marketing practices;

 

   

seasonal fluctuations in business activity;

 

   

changes in marketing expenses related to promoting and distributing our services or changes in marketing expenses related to promoting and distributing services provided by third-party registrars or their resellers;

 

   

potential attacks by nefarious actors, which could threaten the perceived reliability of our products and services;

 

   

potential attacks on the service offerings of our distributors, such as distributed denial-of-service (“DDoS”) attacks, which could limit the availability of their service offerings and their ability to offer our products and services;

 

   

potential disruptions in regional registration behaviors due to catastrophic natural events or armed conflict;

 

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changes in the level of spending for information technology-related products and services by our customers; and

 

   

the uncertainties, costs and risks as a result of the sale of our Authentication Services business, including any income statement charges we incur in connection therewith and costs related to our transition services agreements and any retained liability related to existing and future claims or retained litigation.

Our operating expenses may increase. If an increase in our expenses is not accompanied by a corresponding increase in our revenues, our operating results will suffer, particularly as revenues from some of our services are recognized ratably over the term of the service, rather than immediately when the customer pays for them, unlike our sales and marketing expenditures, which are expensed in full when incurred.

Due to all of the above factors, our revenues and operating results are difficult to forecast. Therefore, we believe that period-to-period comparisons of our operating results will not necessarily be meaningful, and you should not rely upon them as an indication of future performance. Also, operating results may fall below our expectations and the expectations of securities analysts or investors in one or more future periods. If this were to occur, the market price of our common stock would likely decline.

Our operating results may continue to be adversely affected as a result of the sluggish economic recovery, unfavorable market and economic, social and political conditions.

An unstable global economic, social and political environment may have a negative impact on demand for our services, our business and our foreign operations, including in particular the recent hostilities in the Middle East and natural disasters in Japan and elsewhere. The economic, social and political environment has or may negatively impact, among other things:

 

   

our customers’ continued growth and development of their businesses and our customers’ ability to continue as going concerns or maintain their businesses, which could affect demand for our products and services;

 

   

current and future demand for our services, including decreases as a result of reduced spending on information technology and communications by our customers;

 

   

price competition for our products and services;

 

   

the price of our common stock;

 

   

our liquidity;

 

   

our ability to service our debt, to obtain financing or assume new debt obligations;

 

   

our ability to obtain payment for outstanding debts owed to us by our customers or other parties with whom we do business; and

 

   

our ability to execute on any stock repurchase plans.

In addition, to the extent that the economic, social and political environment impacts specific industry and geographic sectors in which many of our customers are concentrated, that may further negatively impact our business. If the economic, social, political and market conditions in the U.S. and globally do not improve, or if they further deteriorate, we may experience material adverse impacts on our business, operating results and financial position as a consequence of the above factors or otherwise.

We may experience significant fluctuations in our financial results.

The successful operation of our business depends on numerous factors, many of which are not entirely under our control, including, but not limited to, the following:

 

   

the use of the Internet and other Internet Protocol (“IP”) networks, and the extent to which domain names are used for e-commerce and communications;

 

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changes in customer behavior, Internet platforms and web-browsing patterns;

 

   

growth in demand for our services;

 

   

the competition for any of our services;

 

   

the perceived security of e-commerce and communications over the Internet and other IP networks;

 

   

the perceived security of our services, technology, infrastructure and practices;

 

   

the loss of customers through industry consolidation or customer decisions to deploy in-house or competitor technology and services;

 

   

our continued ability to maintain our current, and enter into additional, strategic relationships;

 

   

our ability to successfully market our services to new and existing distributors and customers;

 

   

our success in attracting, integrating, training, retaining and motivating qualified personnel;

 

   

our response to competitive developments;

 

   

the successful introduction, and acceptance by our customers, of new products and services, including our NIA Services;

 

   

potential disruptions in regional registration behaviors due to catastrophic natural events and armed conflict;

 

   

seasonal fluctuations in business activity; and

 

   

the successful introduction of enhancements to our services to address new technologies and standards and changing market conditions.

Issues arising from our agreements with the Internet Corporation for Assigned Names and Numbers (“ICANN”), the U.S. Department of Commerce (“DOC”) and the U.S. General Services Administration (“GSA”) could harm our Registry Services business.

We are parties to agreements (i) with the DOC with respect to certain aspects of the DNS, (ii) with ICANN and the DOC as the exclusive registry of domain names within the .com gTLD and (iii) with ICANN with respect to being the exclusive registry for the .net and .name gTLDs.

We face risks arising from our agreements with ICANN and the DOC, including the following:

 

   

there can be no assurance that the terms of the . net Registry Agreement will be approved substantially in the form as posted by ICANN on April 11, 2011 or at all, or that the renewal will occur by July 1, 2011, which could have a material adverse effect on our business;

 

   

ICANN could adopt or promote policies, procedures or programs that are unfavorable to us as the registry operator of the .com , .net and .name gTLDs, that are inconsistent with our current or future plans, or that affect our competitive position;

 

   

the .com Registry Agreement may not renew when it expires in 2012, which could have a material adverse effect on our business;

 

   

under certain circumstances, ICANN could terminate one or more of our agreements to be the registry for the .com , .net or .name gTLDs and the DOC could refuse to grant its approval to the renewal of the .com Registry Agreement, which, in the case of the .com and .net Registry Agreements, could have a material adverse impact on our business;

 

   

the DOC’s or ICANN’s interpretation of provisions of our Registry Agreements with either of them could differ from ours;

 

   

under certain circumstances, the GSA could terminate our agreement to be the registry for the .gov gTLD, which could have a material adverse impact on how the Registry Services business is perceived; and

 

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our Registry Services business faces, and could continue to face, legal or other challenges resulting from our activities or the activities of registrars and registrants, and any adverse outcome from such matters could have a material adverse effect on our business.

In addition, under the . com , . net and . name Registry Agreements, we are prohibited from holding a greater than 15% ownership interest in any ICANN accredited registrar. This prohibition on cross-ownership currently applies to all seventeen ICANN gTLDs, but does not apply to ccTLDs. ICANN has proposed allowing the operators of new gTLDs to also own, be owned 100% by, or otherwise be affiliated with, a registrar. If this proposal is adopted, the impact to the distribution channel is uncertain but could have a material adverse effect on our business.

Challenges to Internet administration could harm our Registry Services business.

Risks we face from challenges by third parties, including governmental authorities in the U.S. and other countries, to our role in the ongoing operation of the Internet include:

 

   

legal, regulatory or other challenges could be brought, including challenges to the agreements governing our relationship with the DOC or ICANN, or to the legal authority underlying the roles and actions of the DOC, ICANN or us;

 

   

the U.S. Congress could take action that is unfavorable to us;

 

   

ICANN could fail to maintain its role, potentially resulting in instability in DNS administration; and

 

   

some governments and governmental authorities outside the U.S. have in the past disagreed, and may in the future disagree, with the actions, policies or programs of ICANN, the U.S. Government and us relating to the DNS. The Affirmation of Commitments established several multi-party review panels and contemplates a greater involvement by foreign governments and governmental authorities in the oversight and review of ICANN. These periodic review panels may take positions that are unfavorable to Verisign.

As a result of these and other risks, it may be difficult for us to introduce new services in our Registry Services business and we could also be subject to additional restrictions on how this business is conducted, which may not also apply to our competitors.

Our international operations subject our business to additional economic risks that could have an adverse impact on our revenues and business.

As of March 31, 2011, we had 145, or 14% of our employees outside the U.S. Expansion into international markets has required and will continue to require significant management attention and resources. We may also need to tailor some of our services for a particular market and to enter into international distribution and operating relationships. We have limited experience in localizing our services and in developing international distribution or operating relationships. We may not succeed in expanding our services into new international markets or expand our presence in existing markets. Failure to do so could harm our business. Moreover, local laws and customs in many countries differ significantly from those in the U.S. In many foreign countries, particularly in those with developing economies, it is common for others to engage in business practices that are prohibited by our internal policies and procedures or U.S. law or regulations applicable to us. There can be no assurance that all of our employees, contractors and agents will not take actions in violation of such policies, procedures, laws and/or regulations. Violations of laws, regulations or key control policies by our employees, contractors or agents could result in financial reporting problems, fines, penalties, or prohibition on the importation or exportation of our products and services and could have a material adverse effect on our business. In addition, we face risks inherent in doing business on an international basis, including, among others:

 

   

competition with foreign companies or other domestic companies entering the foreign markets in which we operate;

 

   

differing and uncertain regulatory requirements;

 

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legal uncertainty regarding liability, enforcing our contracts and compliance with foreign laws;

 

   

tariffs and other trade barriers and restrictions;

 

   

difficulties in staffing and managing foreign operations;

 

   

longer sales and payment cycles;

 

   

problems in collecting accounts receivable;

 

   

currency fluctuations, as a small portion of our international revenues are not always denominated in U.S. dollars and some of our costs are denominated in foreign currencies;

 

   

high costs associated with repatriating profits to the U.S.;

 

   

potential problems associated with adapting our services to technical conditions existing in different countries;

 

   

difficulty of verifying customer information;

 

   

political instability;

 

   

failure of foreign laws to protect our U.S. proprietary rights adequately;

 

   

more stringent privacy policies in some foreign countries;

 

   

export and import restrictions on cryptographic technology and products incorporating that technology;

 

   

additional vulnerability from terrorist groups targeting U.S. interests abroad;

 

   

seasonal reductions in business activity; and

 

   

potentially adverse tax consequences.

We are exposed to risks faced by financial institutions.

The hedging transactions we have entered into expose us to credit risk in the event of default by one of our counterparties. Despite the risk control measures we have in place, a default by one of our counterparties, or liquidity problems in the financial services industry in general, could have a material adverse effect on our business, financial condition and results of operations.

Our marketable securities portfolio could experience a decline in market value, which could materially and adversely affect our financial results.

As of March 31, 2011, we had $2.0 billion in cash, cash equivalents, marketable securities and restricted cash, of which $506.0 million was invested in marketable securities. The marketable securities consist of debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies, corporate debt securities, and debt securities issued by foreign governments meeting the criteria of our investment policy, which is focused on the preservation of our capital through the investment in investment grade securities. We currently do not use derivative financial instruments to adjust our investment portfolio risk or income profile.

These investments, as well as any cash deposited in bank accounts, are subject to general credit, liquidity, market and interest rate risks, which may be exacerbated by unusual events, such as the Euro-zone crisis, which has affected various sectors of the financial markets and led to global credit and liquidity issues. Over the past several years, the volatility and disruption in the global credit market reached unprecedented levels. If the global credit market does not improve or deteriorates further, our investment portfolio may be impacted and we could determine that some of our investments have experienced an other-than-temporary decline in fair value, requiring an impairment charge which could adversely impact our financial results.

 

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Governmental regulation and the application of existing laws may slow business growth, increase our costs of doing business, create potential liability and have an adverse effect on our business.

Application of new and existing laws and regulations to the Internet and communications industry can be unclear. The costs of complying or failing to comply with these laws and regulations could limit our ability to operate in our current markets, expose us to compliance costs and substantial liability and result in costly and time-consuming litigation.

Foreign, federal or state laws could have an adverse impact on our business, financial condition, results of operations, and our ability to conduct business in certain foreign countries. For example, laws designed to restrict who can register domain names, the on-line distribution of certain materials deemed harmful to children, on-line gambling, counterfeit goods, and cybersquatting; laws designed to require registrants to provide additional documentation or information in connection with domain name registrations; and laws designed to promote cyber security may impose significant additional costs on our business or subject us to additional liabilities. We have a number of contracts pursuant to which we provide services to the U.S. government and even though these contracts are immaterial, they impose compliance costs, including compliance with the Federal Acquisition Regulation, that could be significant to the Company.

Due to the nature of the Internet, it is possible that state or foreign governments might attempt to regulate Internet transmissions or prosecute us for violations of their laws. We might unintentionally violate such laws, such laws may be modified and new laws may be enacted in the future. Any such developments could increase the costs of regulatory compliance for us, affect our reputation, force us to change our business practices or otherwise materially harm our business. In addition, any such new laws could impede growth of or result in a decline in domain name registrations, as well as impact the demand for our services.

We may be exposed to potential risks if we were to determine we do not have an effective system of disclosure controls or internal controls over financial reporting.

As a public company, the Company is subject to the rules and regulations of the SEC, including those that require the Company to report on and receive an attestation from its independent registered public accounting firm regarding the Company’s internal control over financial reporting.

As a result of the transitioning of key corporate functions to our Dulles, Virginia office and potential voluntary employee attrition, there is an increased risk of our failing to maintain an effective system of disclosure controls or internal controls over financial reporting, including satisfaction of the requirements of the Sarbanes-Oxley Act of 2002. Although we believe that we have adequately planned to address this risk, despite our efforts, if we were to fail to maintain an effective system of disclosure controls or internal control over financial reporting, we may not be able to accurately or timely report on our financial results or adequately identify and reduce fraud. As a result, the financial position of the Company could be harmed and current and potential future stockholders could lose confidence in us and/or our reported financial results, which may cause a negative effect on our stock price; and we could be exposed to litigation or regulatory proceedings, which may be costly or divert management attention.

We rely on third parties who maintain and control root zone servers and route Internet communications.

We currently administer and operate only two of the thirteen root zone servers. The others are administered and operated by independent operators on a non-regulated basis. Root zone servers are name servers that contain authoritative data for the very top of the DNS hierarchy. These servers have the software and data needed to locate name servers that contain authoritative data for the top-level domains. These root zone servers are critical to the functioning of the Internet. Consequently, our Registry Services business could be harmed if these independent operators fail to maintain these servers properly or abandon these servers, which would place additional capacity demands on the two root zone servers we operate.

 

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Further, our Registry Services business could be harmed if any of the independent operators fails to include or provide accessibility to the data that it maintains in the root zone servers that it controls.

Changes in customer behavior, either as a result of evolving technologies or user practices, may impact the demand for domain names.

Currently, Internet users navigate to a website either by directly typing its domain name into a web browser or through the use of a search engine. If (i) web browser or Internet search technologies were to change significantly; (ii) Internet search engines changed the value of their algorithms on the use of a domain for finding a website; (iii) Internet users were to shift away from direct navigation; (iv) Internet users were to increase the use of web and phone applications to locate and access content; or (v) Internet users were to increase the use of second or third level domains or alternate identifiers, such as social networking sites, in each case the demand for domain names could decrease.

Changes in the level of spending on on-line advertising and/or the way that on-line networks compensate owners of websites, could impact the demand for domain names.

Some domain name registrars and registrants seek to generate revenue through advertising on their websites; changes in the way these registrars and registrants are compensated (including changes in methodologies and metrics) by advertisers and advertisement placement networks, such as Google and Yahoo!, could adversely affect the market for those domain names favored by such registrars and registrants resulting in a decrease in demand and/or the renewal rate for those domain names. As a result of the general economic environment, spending on on-line advertising and marketing may not increase or may be reduced, which in turn, may result in a further decline in the demand for those domain names.

Undetected or unknown defects in our services could harm our business and future operating results.

Services as complex as those we offer or develop could contain undetected defects or errors. Despite testing, defects or errors may occur in our existing or new services, which could result in compromised customer data, loss of or delay in revenues, loss of market share, failure to achieve market acceptance, diversion of development resources, injury to our reputation, tort or warranty claims, increased insurance costs or increased service and warranty costs, any of which could harm our business. The performance of our services could have unforeseen or unknown adverse effects on the networks over which they are delivered as well as on third-party applications and services that utilize our services, which could result in legal claims against us, harming our business. Furthermore, we often provide implementation, customization, consulting and other technical services in connection with the implementation and ongoing maintenance of our services, which typically involves working with sophisticated software, computing and communications systems. Our failure or inability to meet customer expectations in a timely manner could also result in loss of or delay in revenues, loss of market share, failure to achieve market acceptance, injury to our reputation and increased costs.

If we encounter system interruptions, we could be exposed to liability and our reputation and business could suffer.

We depend on the uninterrupted operation of our various systems, secure data centers and other computer and communication networks. Our systems and operations are vulnerable to damage or interruption from:

 

   

power loss, transmission cable cuts and other telecommunications failures;

 

   

damage or interruption caused by fire, earthquake, and other natural disasters;

 

   

attacks by hackers or nefarious actors;

 

   

computer viruses or software defects; and

 

   

physical or electronic break-ins, sabotage, intentional acts of vandalism, terrorist attacks and other events beyond our control.

 

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Most of our systems are located at, and most of our customer information is stored in, our facilities in New Castle, Delaware; Dulles, Virginia; and Fribourg, Switzerland. To the extent we are unable to partially or completely switch over to secondary or tertiary sites, any damage or failure that causes interruptions in any of these facilities or our other computer and communications systems could materially harm our business. Although we carry insurance for property damage and business interruption, we do not carry insurance or financial reserves for interruptions or potential losses arising from terrorism.

In addition, our Registry Services business and certain of our other services depend on the efficient operation of the Internet connections from customers to our secure data centers and from our customers to the Shared Registration System. These connections depend upon the efficient operation of Internet service providers and Internet backbone service providers, all of which have had periodic operational problems or experienced outages in the past.

A failure in the operation of our top-level domain name zone servers, the domain name root zone servers, or other events could result in the deletion of one or more domain names from the Internet for a period of time. In the event that a registrar has not implemented back up services recommended by us in conformance with industry best practices, a failure in the operation of our Shared Registration System could result in the inability of one or more other registrars to register and maintain domain names for a period of time. A failure in the operation or update of the master database that we maintain could also result in the deletion of one or more top-level domains from the Internet and the discontinuation of second-level domain names in those top-level domains for a period of time. Any of these problems or outages could decrease customer satisfaction, harming our business or resulting in adverse publicity that could adversely affect the market’s perception of the security of e-commerce and communications over IP networks as well as of the security or reliability of our services.

If we experience security breaches, we could be exposed to liability and our reputation and business could suffer.

We retain certain customer information in our secure data centers and various registration systems. It is critical to our business strategy that our facilities and infrastructure remain secure and are perceived by the marketplace to be secure. The Shared Registration System, the domain name root zone servers and top-level domain name zone servers that we operate are critical hardware and software to our Registry Services operations. Therefore, we may have to expend significant time and money to maintain or increase the security of our facilities and infrastructure. Despite our security measures, our infrastructure may be vulnerable to physical break-ins, computer viruses, attacks by hackers or nefarious actors or similar disruptive problems. It is possible that we may have to expend additional financial and other resources to address such problems. Any physical or electronic break-in or other security breach or compromise of the information stored at our secure data centers and domain name registration systems may jeopardize the security of information stored on our premises or in the computer systems and networks of our customers. In such an event, we could face significant liability, customers could be reluctant to use our services and we could be at risk for loss of various security and standards-based compliance certifications needed for certain of our businesses. Such an occurrence could also result in adverse publicity and therefore adversely affect the market’s perception of the security of e-commerce and communications over IP networks as well as of the security or reliability of our services.

We rely on our intellectual property, and any failure by us to protect, or any misappropriation of, our intellectual property could harm our business.

Our success depends in part on our internally developed technologies and intellectual property. Despite our precautions, it may be possible for a third party to copy or otherwise obtain and use our trade secrets or other forms of our intellectual property without authorization. Furthermore, the laws of foreign countries may not protect our proprietary rights in those countries to the same extent U.S. law protects these rights in the U.S. In addition, it is possible that others may independently develop substantially equivalent intellectual property. If we do not effectively protect our intellectual property, our business could suffer. Additionally, we have filed patent

 

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applications with respect to certain of our technology in the U.S. Patent and Trademark Office and patent offices outside the U.S. Patents may not be awarded with respect to these applications and even if such patents are awarded, such patents may not provide us with sufficient protection of our intellectual property. In the future, we may have to resort to litigation to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. This type of litigation, regardless of its outcome, could result in substantial costs and diversion of management attention and technical resources.

We also license third-party technology that is used in our products and services to perform key functions. These third-party technology licenses may not continue to be available to us on commercially reasonable terms or at all. Our business would suffer if we lost the rights to use certain of these technologies. Additionally, another party could claim that the licensed software infringes a patent or other proprietary right. Litigation between the licensor and a third-party or between us and a third-party could lead to royalty obligations for which we are not indemnified or for which indemnification is insufficient, or we may not be able to obtain any additional license on commercially reasonable terms or at all. The loss of or our inability to obtain or maintain any of these technology licenses could harm our business.

We rely on the strength of our Verisign brand to differentiate ourselves in the marketing of our products. Dilution of the strength of our brand could harm our business. We are at risk that we will be unable to register, build equity in, or enforce the new logo for the Company.

We could become subject to claims of infringement of intellectual property of others, which could be costly to defend and could harm our business.

Claims relating to infringement of intellectual property of others or other similar claims have been made against us in the past and could be made against us in the future. It is possible that we could become subject to additional claims for infringement of the intellectual property of third parties. The international launch of the new logo for the Company could present additional potential risks for third party claims of infringement. Any claims, with or without merit, could be time consuming, result in costly litigation and diversion of technical and management personnel attention, cause delays in our business activities generally, or require us to develop a non-infringing logo or technology or enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may not be available on acceptable terms or at all. If a successful claim of infringement was made against us, we could be required to pay damages or have portions of our business enjoined. If we could not identify and adopt an alternative non-infringing logo, develop non-infringing technology or license the infringed or similar technology on a timely and cost-effective basis, our business could be harmed.

In addition, legal standards relating to the validity, enforceability, and scope of protection of intellectual property rights in Internet-related businesses are uncertain and still evolving. Because of the growth of the Internet and Internet-related businesses, patent applications are continuously being filed in connection with Internet-related technology. There are a significant number of U.S. and foreign patents and patent applications in our areas of interest, and we believe that there has been, and is likely to continue to be, significant litigation in the industry regarding patent and other intellectual property rights.

We are involved in a number of claims, lawsuits and investigations against us that may result in adverse outcomes.

In addition to possible intellectual property litigation and infringement claims, we are involved in a number of claims, lawsuits and investigations which we currently believe are immaterial but could prove material. Litigation is inherently unpredictable, and excessive verdicts do occur. In addition, certain parties to litigation to which we are a party may be entitled to indemnification by us. Adverse outcomes in some or all of these claims, lawsuits and investigations may result in significant monetary damages, including indemnification payments, or injunctive relief that could adversely affect our ability to conduct our business and may have a material adverse effect on our financial condition and results of operations. Additionally, these investigations, claims and lawsuits may involve significant expense and diversion of management’s attention and resources from other matters.

 

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We must establish and maintain strategic, channel and other relationships.

One of our significant business strategies has been to enter into strategic or other similar collaborative relationships in order to reach a larger customer base than we could reach through our direct sales and marketing efforts, including in international markets. We may need to enter into additional relationships to execute our business plan. We may not be able to enter into additional, or maintain our existing, strategic relationships on commercially reasonable terms. If we fail to enter into additional relationships, we would have to devote substantially more resources to the distribution, sale and marketing of our services than we would otherwise.

Our success in obtaining results from these relationships will depend both on the ultimate success of the other parties to these relationships and on the ability of these parties to market our services successfully.

Furthermore, any changes by our distributors to their existing marketing strategies could have a material adverse effect on our business. Similarly, if one or more of our distributors were to encounter financial difficulties, or if there were a significant reduction in marketing expenditures by our distributors (including registrars), as a result of industry consolidation or otherwise, it could have a material adverse effect on our business, including a decrease in domain name registrations and renewals. Failure of one or more of our strategic, channel or other relationships to result in the development and maintenance of a market for our services could harm our business. If we are unable to maintain our existing relationships or to enter into additional relationships, this could harm our business.

The success of our NIA Services depends in part on the acceptance of our services.

We are investing in our NIA Services, and the future growth of these services depends, in part, on the commercial success, acceptance, and reliability of our NIA Services. These services will suffer if our target customers do not adopt or use these services. We are not certain that our target customers will choose our NIA Services or continue to use these services even after adoption.

Many of our target markets are evolving, and if these markets fail to develop or if our products and services are not widely accepted in these markets, our business could be harmed.

Our Registry Services and NIA Services businesses are developing services in emerging markets, including services that involve naming and directory services other than registry and related infrastructure services. These emerging markets are rapidly evolving, may never gain wide acceptance and may not grow. Even if these markets grow, our services may not be widely accepted. Accordingly, the demand for our services in these markets is very uncertain. The factors that may affect market acceptance of our services in these markets include the following:

 

   

market acceptance of products and services based upon technologies other than those we use;

 

   

public perception of the security of our technologies and of IP and other networks;

 

   

the introduction and consumer acceptance of new generations of mobile devices;

 

   

the ability of the Internet infrastructure to accommodate increased levels of usage; and

 

   

government regulations affecting Internet access and availability, e-commerce and telecommunications over IP networks.

If the market for e-commerce and communications over IP and other networks does not grow or these services are not widely accepted in the market, our business could be materially harmed.

We depend on key personnel to manage our business effectively and may not be successful in attracting and retaining such personnel.

We depend on the performance of our senior management team and other key employees. Our success also depends on our ability to attract, integrate, train, retain and motivate these individuals and additional highly skilled technical and sales and marketing personnel, both in the U.S. and abroad.

 

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All of the members of our senior management team and other U.S. key employees are at-will employees and we do not maintain key person life insurance for any of our senior management team members or key employees. The loss of the services of any of our senior management team or other key employees, or failure to attract, integrate, train, retain and motivate additional key employees could harm our business.

We have anti-takeover protections that may discourage, delay or prevent a change in control that could benefit our stockholders.

Our amended and restated Certificate of Incorporation and Bylaws contain provisions that could make it more difficult for a third party to acquire us without the consent of our Board of Directors (“Board”). These provisions include:

 

   

our stockholders may take action only at a duly called meeting and not by written consent;

 

   

special meetings of our stockholders may be called only by the chief executive officer, the president or our Board, and cannot be called by our stockholders;

 

   

our Board must be given advance notice regarding stockholder-sponsored proposals for consideration at annual meetings and for stockholder nominations for the election of directors;

 

   

vacancies on our Board can be filled until the next annual meeting of stockholders by majority vote of the members of the Corporate Governance and Nominating Committee, or a majority of directors then in office if no such committee exists, or a sole remaining director; and

 

   

our Board has the ability to designate the terms of and issue new series of preferred stock without stockholder approval.

We have also adopted a stockholder rights plan that may discourage, delay or prevent a change of control or the acquisition of a substantial block of our common stock and may make any future unsolicited acquisition attempt more difficult. Under the rights plan:

 

   

The rights will generally become exercisable if a person or group acquires 20% or more of our outstanding common stock (unless such transaction is approved by our Board) and thus becomes an “acquiring person.”

 

   

Each right, when exercisable, will entitle the holder, other than the “acquiring person,” to acquire shares of our common stock at a 50% discount to the then-prevailing market price.

 

   

As a result, the rights plan will cause substantial dilution to a person or group that becomes an “acquiring person” on terms that our Board does not believe are in our best interests and those of our stockholders and may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares.

In addition, Section 203 of the General Corporation Law of Delaware prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns or within the last three years has owned 15% or more of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless in the same transaction the interested stockholder acquired 85% ownership of our voting stock (excluding certain shares) or the business combination is approved in a prescribed manner. Section 203 therefore may impact the ability of an acquirer to complete an acquisition of us after a successful tender offer and accordingly could discourage, delay or prevent an acquirer from making an unsolicited offer without the approval of our Board.

Changes in, or interpretations of, tax rules and regulations may adversely affect our effective tax rates.

We are subject to income taxes in both the U.S. and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, as well

 

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as in the execution of our divestitures, there are many transactions and calculations where the ultimate tax determination is uncertain. We are subject to audit by various tax authorities. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different than that which is reflected in historical income tax provisions and accruals. Should additional taxes be assessed as a result of an audit or litigation, an adverse effect on our income tax provision and net income in the period or periods for which that determination is made could result.

We are a U.S.-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. A significant portion of our foreign earnings for the current fiscal year were earned by our Swiss subsidiaries. Our effective tax rate could fluctuate significantly on a quarterly basis and could be adversely affected to the extent earnings are lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates.

In February 2011, the Obama administration announced various legislative proposals that would reform the U.S. corporate tax laws. We are unable to predict whether these or other proposals will be implemented. We have not yet determined whether, or the extent to which, these proposals will ultimately impact Verisign.

Our inability to indefinitely reinvest our foreign earnings could materially adversely affect our results of operations.

Deferred income taxes have not been provided on the undistributed earnings of foreign subsidiaries because these earnings have been indefinitely reinvested and we do not plan to initiate any action that would precipitate the payment of income taxes thereon. We consider the following matters, among others, in evaluating our plans for indefinite reinvestment: the forecasts, budgets and financial requirements of the parent and subsidiaries for both the long and short term; the tax consequences of a decision to reinvest; and any U.S. and foreign government programs designed to influence remittances. If factors change and as a result we are unable to indefinitely reinvest the foreign earnings, the income tax expense and payments may differ significantly from the current period and could materially adversely affect our results of operations.

Risks relating to the competitive environment in which we operate

The business environment is highly competitive and, if we do not compete effectively, we may suffer price reductions, reduced gross margins and loss of market share.

General:  New technologies and the expansion of existing technologies may increase competitive pressure. We cannot assure you that competing technologies developed by others or the emergence of new industry standards will not adversely affect our competitive position or render our services or technologies noncompetitive or obsolete. In addition, our markets are characterized by announcements of collaborative relationships involving our competitors. The existence or announcement of any such relationships could adversely affect our ability to attract and retain customers. As a result of the foregoing and other factors, we may not be able to compete effectively with current or future competitors, and competitive pressures that we face could materially harm our business.

Competition in Registry Services:  We face competition in the domain name registry space from other gTLD and ccTLD registries that are competing for the business of entities and individuals that are seeking to establish a Web presence, including registries offering services related to the .info, .org, .mobi, .biz, .pro, .aero, .museum and .coop gTLDs and registries offering services related to ccTLDs. ICANN currently has registry agreements with 15 registries for the operation of 17 gTLDs. In addition, there are over 240 Latin script ccTLD registries and 36 IDN ccTLD registries. Furthermore, under our agreements with ICANN, we are subject to certain restrictions in the operation of .com , .net and .name on pricing, bundling and use of registrars that do not apply to ccTLDs and therefore may create a competitive disadvantage.

We also face competition from service providers that offer outsourced domain name registration, resolution and other DNS services to organizations that require a reliable and scalable infrastructure. Among the

 

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competitors are Neustar Inc., Afilias Limited and Nominet UK, Inc. In addition, to the extent end-users navigate using search engines as opposed to direct navigation, we may face competition from search engine operators such as Google Inc., Microsoft Corporation, and Yahoo! Inc. Furthermore, to the extent end-users increase the use of web and phone applications to locate and access content, we may face competition from providers of such web and phone applications.

Additional competition to our business may arise from the introduction of new TLDs by ICANN. These include IDN TLDs and the upcoming introduction of new gTLDs by ICANN. On October 30, 2009, ICANN approved a fast track process for the awarding of new IDN ccTLDs and such new IDN ccTLDs have started to be introduced into the root. Other new domain extensions (including ones for which we could apply) could become available by the end of 2012. We do not yet know the impact, if any, that these new domain extensions may have on our business. Applicants for such new TLDs may have greater financial, technical, marketing and other resources than we do. Furthermore, ICANN has proposed allowing the operators of new gTLDs to also own, be owned 100% by or otherwise affiliated with a registrar, whereas we are currently prohibited by our agreements with ICANN and the DOC from owning more than 15% of a registrar. As a result, operators of new gTLDs may be able to obtain competitive advantages through such vertical integration. One operator of an existing gTLD registry has formally requested ICANN to allow it to also become a registrar; if ICANN allows an operator of an existing gTLD registry to vertically integrate, we may be at a competitive disadvantage. While we may apply for one or more of these new domain extensions, there is no certainty that we will ultimately be successful, and even if we are successful in obtaining one or more of these new domain extensions, there is no guarantee that such extensions will be any more successful than the domain name extensions obtained by our competitors.

Competition in Network Intelligence and Availability Services:  Several of our current and potential competitors have longer operating histories and/or significantly greater financial, technical, marketing and other resources than we do and therefore may be able to respond more quickly than we can to new or changing opportunities, technologies, standards and customer requirements. Many of these competitors also have broader and more established distribution channels that may be used to deliver competing products or services directly to customers through bundling or other means. If such competitors were to bundle competing products or services for their customers, we may experience difficulty establishing or increasing demand for our products and services or distributing our products successfully.

We face competition in the network intelligence and availability services industry from companies such as iSight Partners, Security Services X-Force Threat Analysis Service, Secunia ApS, SecureWorks, Inc., McAfee, Inc., Prolexic Technologies, Inc., AT&T Inc., Verizon Communications, Inc., Dyn, Inc.’s Dynect Platform, NeuStar Ultra Services, OpenDNS, BlueCat Networks, Inc., Infoblox Inc., Nominum, Inc. and Afilias Limited.

Our inability to react to changes in our industry and successfully introduce new products and services could harm our business.

The Internet and communications network services industries are characterized by rapid technological change and frequent new product and service announcements which require us continually to improve the performance, features and reliability of our services, particularly in response to competitive offerings. In order to remain competitive and retain our market share, we must continually improve our access technology and software, support the latest transmission technologies, and adapt our products and services to changing market conditions and customer preferences, or launch entirely new products and services in anticipation of market trends. We cannot assure you that we will be able to adapt to these challenges or respond successfully or in a cost effective way to adequately meet them. Our failure to do so would adversely affect our ability to compete and retain customers or market share.

 

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Risks related to the sale of our Authentication Services business and the completion of our divestiture plan

Our suite of products and services is less diverse following the sale of our Authentication Services business.

Following the sale of the Authentication Services business, our Registry Services business, which derives most of its revenues from registration fees for domain names, generates substantially all of our revenue. If there is a disruption in the Registry Services business, including any disruption from changes in the domain name industry, changes in or challenges to our agreements with ICANN, including any changes resulting from legal challenges to these agreements, whether from CFIT or otherwise, changes in customer preferences, a downturn in the economy or changes in technology related to the use of domain names, there may be a material adverse effect on our business and results of operations. In addition, a failure of the .net Registry Agreement to renew on the same or similar terms when it expires in June 2011 or the .com Registry Agreement in 2012 could have a material adverse effect on our business.

We face risks related to the terms of the sale of the Authentication Services business.

Under the agreement reached with Symantec for the sale of our Authentication Services business (the “Symantec Agreement”), we agreed to several terms that may pose risks to us, including the potential for confusion by the public with respect to Symantec’s right to use certain of our trademarks, brands and domain names, as well as the risk that current or potential investors in or customers of the Company may incorrectly attribute problems with Symantec products or services that are currently licensed under the VERISIGN brand to Verisign. Any such confusion may have a negative impact on our reputation, our brand and the market for our products and services. In addition, we may determine that certain assets transferred to Symantec could have been useful in our Naming Services businesses or in other future endeavors, requiring us to forego future opportunities or design or purchase alternatives which could be costly and less effective than the transferred assets. Further, we may not be able to achieve the full strategic and financial benefits we expect from the sale of our Authentication Services business.

Under the terms of the Symantec Agreement, we have licensed rights to certain of our domain name registrations to Symantec. We are at risk that our customers will go to a URL for a licensed domain name and be unable to locate our Registry or NIA Services. In addition, we will continue to maintain the registration rights for the domain names licensed to Symantec for which Symantec has sole control over the displayed content, and we may be subject to claims of infringement if Symantec posts content that is alleged to infringe the rights of a third party.

We are at risk of increased levels of employee attrition following the sale of our Authentication Services business.

Although we believe that we have retained sufficient senior management and other employees to perform various functions at the Company, we are at risk of experiencing increased levels of employee attrition from employees scheduled to be transitioned out of the Company now that the sale of the Authentication Services business has closed, and we may encounter difficulty recruiting and hiring competent personnel to replace any key personnel who terminate their employment with us. If we are unable to replace employees quickly, we may be forced to hire temporary labor for assistance in the short term at higher rates than the salaried employees. In addition, it may take new personnel a significant period of time to understand and become familiar with Company processes. The failure to replace our departing personnel, if any, in a timely manner could result in our inability to perform various important functions, including completing our SEC filings, and could impair our ability to execute our business strategy, which could have a material adverse effect on our business.

We are transitioning key corporate functions from our California office to our Virginia office.

We may encounter difficulties and face risks as we transition key corporate functions from our Mountain View, California office to our Dulles, Virginia office, including our ability to timely complete our financial reporting, the impact on key corporate support functions, and our ability to attract and retain qualified employees. In addition, the large number of personnel displacements could impair employee morale and create a distraction for employees, which could harm our business.

 

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We continue to be responsible for certain liabilities and transition services following the divestiture of certain businesses.

Under the agreements reached with the buyers of certain divested businesses, including the Authentication Services business, we remain liable for certain liabilities related to the divested businesses. In addition, we have entered into, and may in the future amend or extend, transition services agreements with buyers in connection with the divestiture of certain businesses, including the Authentication Services business. These transition services may be required for a longer period of time than anticipated by management. In addition, we have agreed to perform certain transition services for a fixed price or for fixed hourly rates, but our actual costs to provide such services may exceed the fees buyers are contractually obligated to pay us under the relevant transition services agreements. The scope and magnitude of the transition services we have agreed to provide in connection with the sale of the Authentication Services business are greater than those provided under our divestiture plan, and we may face challenges performing such transition services, including that the focus of employees and resources supporting the transition services may impact their ability to support our existing businesses.

There is a possibility that we will incur unanticipated costs and expenses associated with management of liabilities relating to the businesses we have divested, including requests for indemnification by the buyers of the divested businesses. These liabilities could potentially relate to (i) breaches of contractual representations and warranties we gave to the buyers of the divested businesses, or (ii) certain liabilities relating to the divested businesses that we retained under the agreements reached with the buyers of the divested businesses. Such liabilities could include certain litigation matters, including actions brought by third parties. Where responsibility for such liabilities is to be contractually allocated to the buyer or shared with the buyer or another party, it is possible that the buyer or the other party may be in default for payments for which they are responsible, obligating us to pay amounts in excess of our agreed-upon share of those obligations.

Following the divestiture of certain businesses, our ability to compete in certain market sectors is restricted.

Under the agreements reached with buyers for certain businesses we divested, including the Authentication Services business, we are restricted from competing, either directly or indirectly, with those businesses or from entering certain market sectors for a defined period of time pursuant to negotiated non-compete arrangements.

Risks related to our securities

We have a considerable number of common shares subject to future issuance.

As of March 31, 2011, we had one billion authorized common shares, of which 168.4 million shares were outstanding. In addition, of our authorized common shares, 21.9 million common shares were reserved for issuance pursuant to outstanding employee stock option and employee stock purchase plans (“Equity Plans”), and 36.4 million shares were reserved for issuance upon conversion of the 3.25% junior subordinated convertible debentures due 2037 (the “Convertible Debentures”). As a result, we keep substantial amounts of our common stock available for issuance upon exercise or settlement of equity awards outstanding under our Equity Plans and/or the conversion of Convertible Debentures into our common stock. Issuance of all or a large portion of such shares would be dilutive to existing security holders, could adversely affect the prevailing market price of our common stock and could impair our ability to raise additional capital through the sale of equity securities.

We may not have the ability to repurchase the Convertible Debentures in cash upon the occurrence of a fundamental change, or to pay cash upon the conversion of Convertible Debentures, as required by the indenture governing the Convertible Debentures.

As a result of the sale of the Convertible Debentures, we have a substantial amount of long-term debt outstanding. Holders of our outstanding Convertible Debentures will have the right to require us to repurchase the Convertible Debentures upon the occurrence of a fundamental change as defined in the Indenture dated as of August 20, 2007 (the “Indenture”) between the Company and U.S. Bank National Association, as Trustee.

 

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Although we currently intend to settle the principal amount of the Convertible Debentures in cash as required under the Indenture, we may not have sufficient funds to repurchase the Convertible Debentures in cash or have the ability to arrange necessary financing on acceptable terms or at all. In addition, upon conversion of the Convertible Debentures, we will be required to make cash payments to the holders of the Convertible Debentures equal to the lesser of the principal amount of the Convertible Debentures being converted and the conversion value (as defined in the Indenture) of those debentures. Such payments could be significant, and we may not have sufficient funds to make them at such time. Our maintenance of substantial levels of debt could also adversely affect our ability to take advantage of corporate opportunities.

A fundamental change may also constitute an event of default or prepayment under, or result in the acceleration of the maturity of, our then-existing indebtedness. Our ability to repurchase the Convertible Debentures in cash or make any other required payments may be limited by law or the terms of other agreements relating to our indebtedness outstanding at the time. Our failure to repurchase the Convertible Debentures or pay cash in respect of conversions when required would result in an event of default with respect to the Convertible Debentures.

While we currently have the intent and ability to settle the principal in cash, if we conclude that we no longer have the ability, in the future, we will be required to change our accounting policy for earnings per share from the treasury stock method to the if-converted method.

There may be potential new accounting pronouncements or regulatory rulings which may have an impact on our future financial position and results of operations.

New accounting pronouncements could, when adopted, require us to implement different accounting methods which could have a material adverse impact on future or past results of operations, which could in turn materially adversely affect the trading price of our common stock.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On July 27, 2010, the Board of Directors authorized the repurchase of up to approximately $1.1 billion of Verisign’s common stock, in addition to the $393.6 million of its common stock remaining available for repurchase under the previous 2008 Share Buyback Program, for a total repurchase of up to $1.5 billion of its common stock (collectively, the “2010 Share Buyback Program”). The 2010 Share Buyback Program has no expiration date. Purchases made under the 2010 Share Buyback Program could be effected through open market transactions, block purchases, accelerated share repurchase agreements or other negotiated transactions.

The following table presents the stock repurchase activity during the three months ended March 31, 2011:

 

     Total Number
of Shares
Purchased (1)
     Average
Price Paid
per Share
     Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
(1)
     Approximate
Dollar Value of
Shares That May
Yet Be Purchased
Under the Plans or
Programs (2)
 

January 1—31, 2011

     —         $ —           —         $ 1,365.9 million   

February 1—28, 2011

     642,155         34.87         642,155         1,343.5 million   

March 1—31, 2011

     4,973,972         35.62         4,973,972         1,166.3 million   
                       
     5,616,127            5,616,127      
                       

 

(1) Represents shares repurchased under the 2010 Share Buyback Program.
(2) Represents the remaining amount available for further share repurchases under the 2010 Share Buyback Program.

 

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ITEM 6. EXHIBITS

(a) Index to Exhibits

 

Exhibit

Number

  

Exhibit Description

31.01    Certification of Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a).
31.02    Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a).
32.01    Certification of Principal Executive Officer pursuant to Exchange Act Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the U.S. Code (18 U.S.C. 1350). *
32.02    Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the U.S. Code (18 U.S.C. 1350). *
101.INS    XBRL Instance Document **
101.SCH    XBRL Taxonomy Extension Schema**
101.CAL    XBRL Taxonomy Extension Calculation Linkbase**
101.LAB    XBRL Taxonomy Extension Label Linkbase**
101.PRE    XBRL Taxonomy Extension Presentation Linkbase**

 

* As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Quarterly Report on Form 10-Q and are not deemed filed with the SEC and are not incorporated by reference in any filing of VeriSign, Inc. under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in such filings.

 

** Furnished herewith.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    V ERI S IGN , I NC .

Date: April 29, 2011

    By:  

/ S /    M ARK D. M C L AUGHLIN        

      Mark D. McLaughlin
      Chief Executive Officer

Date: April 29, 2011

    By:  

/ S /    B RIAN G. R OBINS        

      Brian G. Robins
      Chief Financial Officer

 

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Table of Contents

EXHIBITS

As required under Item 6—Exhibits, the exhibits filed as part of this report are provided in this separate section. The exhibits included in this section are as follows:

 

Exhibit

Number

  

Exhibit Description

31.01    Certification of Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a).
31.02    Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a).
32.01    Certification of Principal Executive Officer pursuant to Exchange Act Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the U.S. Code (18 U.S.C. 1350). *
32.02    Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the U.S. Code (18 U.S.C. 1350). *
101.INS    XBRL Instance Document **
101.SCH    XBRL Taxonomy Extension Schema**
101.CAL    XBRL Taxonomy Extension Calculation Linkbase**
101.LAB    XBRL Taxonomy Extension Label Linkbase**
101.PRE    XBRL Taxonomy Extension Presentation Linkbase**

 

* As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Quarterly Report on Form 10-Q and are not deemed filed with the SEC and are not incorporated by reference in any filing of VeriSign, Inc. under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in such filings.

 

** Furnished herewith.

 

47

EXHIBIT 31.01

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO

EXCHANGE ACT RULE 13a-14(a)/15d-14(a)

AS ADOPTED PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Mark D. McLaughlin, certify that:

1. I have reviewed this quarterly report on Form 10-Q of VeriSign, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: April 29, 2011     By:  

/ S /    M ARK D. M C L AUGHLIN        

      Mark D. McLaughlin
      Chief Executive Officer

EXHIBIT 31.02

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO

EXCHANGE ACT RULE 13a-14(a)/15d-14(a)

AS ADOPTED PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Brian G. Robins, certify that:

1. I have reviewed this quarterly report on Form 10-Q of VeriSign, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: April 29, 2011     By:  

/ S /    B RIAN G. R OBINS        

      Brian G. Robins
      Chief Financial Officer

EXHIBIT 32.01

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

I, Mark D. McLaughlin, Chief Executive Officer of VeriSign, Inc. (the “Company”), do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

1. the Quarterly Report on Form 10-Q of the Company for the fiscal quarter ended March 31, 2011, as filed with the Securities and Exchange Commission (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: April 29, 2011       / S /    M ARK D. M CLAUGHLIN        
            Mark D. McLaughlin
            Chief Executive Officer

EXHIBIT 32.02

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

I, Brian G. Robins, Chief Financial Officer of VeriSign, Inc. (the “Company”), do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

1. the Quarterly Report on Form 10-Q of the Company for the fiscal quarter ended March 31, 2011, as filed with the Securities and Exchange Commission (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: April 29, 2011              

/ S /    B RIAN G. R OBINS        

            Brian G. Robins
            Chief Financial Officer