What drove VeriSign's revenue growth in 2005?

Most of the growth came from the Communications Services Group, where revenues rose about $373.4 million, primarily from a $377.1 million increase in content services revenue. This reflected a full year of Jamba! results compared with seven months in 2004, plus growth in the content business. The Internet Services Group also grew, with revenues up $117.8 million to $633.8 million, led by Information Services and Security Services.

What are the main risks to the content services business?

The filing notes that content revenues fell sequentially in the third and fourth quarters of 2005 due to increased competition, pricing pressures and fewer subscribers, and that content revenues are expected to decline in Q1 2006. The business depends on short-term, largely non-exclusive agreements with wireless carriers and content providers, and customer subscriptions are typically cancelable. Several putative class actions and state and federal investigations relate to Jamster ringtone marketing and billing.

How is VeriSign returning capital to shareholders?

In 2005 VeriSign repurchased 16,495,224 shares for about $380.3 million under its $500 million program authorized in August 2005, leaving about $119.7 million available at December 31, 2005. It also executed a $250 million accelerated share repurchase in November 2005 for 10.8 million shares at an initial price of $23.14 per share. The company has never paid cash dividends and says it intends to retain earnings for growth. In February 2006 it entered a further $75 million ASR agreement.

VRSN 10-K FY2005 Annual Report — Revenue, Net Income, EPS

Q: Why did net income rise so sharply in 2005 when continuing operations income declined?

Net income of $406.5 million included $267.9 million from discontinued operations, mainly a $251.8 million net-of-tax gain on the sale of the payment gateway business to PayPal for $370 million in cash. Income from continuing operations fell to $138.6 million from $173.6 million, which had benefited from a $74.9 million gain on the sale of VeriSign Japan stock in 2004.

01—Abstract

Summary

Summary of the 10-K filed March 13, 2006. Cited figures are marked; the original filing is the authoritative source.

VeriSign, Inc. (NASDAQ: VRSN) reported 2005 revenues of $1,609.5 million^a from continuing operations, up 44% from $1,118.3 million in 2004, driven mainly by the Communications Services Group, whose revenues rose 62% to $975.7 million on a $377.1 million increase in content services.

The Internet Services Group grew 23% to $633.8 million^b, with active .com and .net domain names increasing 30% to 50.0 million. Net income was $406.5 million, or $1.54 diluted per share, including a $251.8 million net-of-tax gain on the November 2005 sale of the payment gateway business to PayPal for $370 million in cash. Income from continuing operations was $138.6 million, down from $173.6 million in 2004, which included a $74.9 million gain on the VeriSign Japan stock sale.

The filing highlights rising costs in the content business. Sales and marketing expense rose 99% to $480.5 million^c, including $204.1 million of increased advertising and promotion for content services. Management said content revenues declined sequentially in the third and fourth quarters of 2005 because of competition, pricing pressure and fewer subscribers, and expects content revenues to decline again in the first quarter of 2006.

The company also faces multiple class action and regulatory matters tied to Jamster ringtone marketing, plus ongoing litigation with ICANN. Capital and shareholder returns were significant. Operating cash flow was $510.8 million^d, and cash, cash equivalents and short-term investments totaled $854.8 million at year-end.

VeriSign repurchased 16,495,224 shares under its $500 million program for $380.3 million in 2005, with $119.7 million remaining. It completed several acquisitions, including LightSurf for $279 million in stock and iDefense for $37.8 million in cash, and announced further 2006 acquisitions including Kontiki and 3united. The company expects SFAS 123R to have a significant adverse impact on future earnings.

02—Key points

Key Highlights

Revenues rose 44% to $1,609.5 million in 2005, with Communications Services Group revenues up 62% to $975.7 million on content services growth.
Net income was $406.5 million ($1.54 diluted EPS), boosted by a $251.8 million net-of-tax gain on the $370 million sale of the payment gateway business.
Income from continuing operations fell to $138.6 million from $173.6 million, which had included a $74.9 million gain on the VeriSign Japan stock sale in 2004.
Sales and marketing expense rose 99% to $480.5 million, mainly from $204.1 million of higher content and application services advertising.
Content services revenues declined sequentially in Q3 and Q4 2005 due to competition, pricing pressure and fewer subscribers, and are expected to decline again in Q1 2006.
Active .com and .net domain names grew 30% to 50.0 million; operating cash flow was $510.8 million and cash plus short-term investments totaled $854.8 million.
Repurchased 16,495,224 shares for $380.3 million under the $500 million program, with $119.7 million remaining at year-end; SFAS 123R is expected to significantly reduce earnings beginning in 2006.

03—Questions

Frequently Asked Questions

What drove VeriSign's revenue growth in 2005?
Most of the growth came from the Communications Services Group, where revenues rose about $373.4 million, primarily from a $377.1 million increase in content services revenue. This reflected a full year of Jamba! results compared with seven months in 2004, plus growth in the content business. The Internet Services Group also grew, with revenues up $117.8 million to $633.8 million, led by Information Services and Security Services.
Why did net income rise so sharply in 2005 when continuing operations income declined?
Net income of $406.5 million included $267.9 million from discontinued operations, mainly a $251.8 million net-of-tax gain on the sale of the payment gateway business to PayPal for $370 million in cash. Income from continuing operations fell to $138.6 million from $173.6 million, which had benefited from a $74.9 million gain on the sale of VeriSign Japan stock in 2004.
What are the main risks to the content services business?
The filing notes that content revenues fell sequentially in the third and fourth quarters of 2005 due to increased competition, pricing pressures and fewer subscribers, and that content revenues are expected to decline in Q1 2006. The business depends on short-term, largely non-exclusive agreements with wireless carriers and content providers, and customer subscriptions are typically cancelable. Several putative class actions and state and federal investigations relate to Jamster ringtone marketing and billing.
How is VeriSign returning capital to shareholders?
In 2005 VeriSign repurchased 16,495,224 shares for about $380.3 million under its $500 million program authorized in August 2005, leaving about $119.7 million available at December 31, 2005. It also executed a $250 million accelerated share repurchase in November 2005 for 10.8 million shares at an initial price of $23.14 per share. The company has never paid cash dividends and says it intends to retain earnings for growth. In February 2006 it entered a further $75 million ASR agreement.
What acquisitions and divestitures did VeriSign complete or announce?
In 2005 VeriSign acquired LightSurf for about $279 million in stock, iDefense for about $37.8 million in cash, Moreover for $29.7 million, Retail Solutions International for $25.2 million, and siteRock K.K. for $53.3 million through VeriSign Japan. It sold the payment gateway business to PayPal for $370 million in cash in November 2005. Subsequent events include the January 2006 CallVision acquisition for about $38.2 million, the agreement to acquire Kontiki for about $62.1 million, and the February 2006 acquisition of 3united for about $69.0 million.

04—Continue

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