Industry: IT services
VeriSign provides Internet domain name registry and Internet security services.
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A company creates wealth for its long-term shareholders in 2 main ways - through dividend payments and through the accumulation of retained earnings. This graph shows the accumulation of per-share equity of long-term shareholders (green bars), which consists of the retained earnings plus all capital invested in the company, and the cumulative dividends the company has paid over time per share of its stock (blue bars).
In the words of Warren Buffett: "We're looking for... businesses earning good returns on equity while employing little or no debt."
Return on equity is a key metric of financial performance, indicating a company's ability to generate earnings using shareholder capital. Over time, ROE is one of the major determinants of the rate at which a company creates shareholder wealth. The average ROE for large U.S. companies is 12%, and many investors use it as a threshold for attractive investments.
Companies can boost ROE by increasing leverage, which reduces the safety of the investment. Therefore, it is useful to look at the return on assets (ROA), which measures a company's earning power regardless of its capital structure. A widening gap between ROE and ROA may be a warning sign that should be thoroughly investigated.
Earnings per share is a popular metric used to value a company (using P/E ratio); growth in EPS is often used to judge company growth potential. However, many investors believe that EPS is an inferior metric to ROE, because it ignores the amount of capital the company used to generate earnings.
Free cash flow shows how much cash a company generates from operations, above and beyond what is required to maintain or expand its productive assets. This cash can be returned to investors, or spent by management on growing the company or paying back its debts.
Balance sheets of many companies contain intangible assets such as goodwill, trademarks, patents, etc. Many investors consider intangibles more difficult to value than physical assets. If intangible assets had been valued incorrectly, they must be impaired, resulting in a loss charged against shareholder equity. This chart demonstrates the potential loss to shareholder equity from such impairments.
Companies often use debt financing to increase their return on equity. However, as the amount of debt financing increases relative to the amount of equity financing, the company becomes more sensitive to down turns and other negative events. As a result, many investors use the ratio of debt to equity as a measure of a company's financial risk, and avoid companies that have this ratio above 1.
This chart shows shareholder equity as a percentage of total assets, allowing investors to judge the overall leverage. Companies with a higher proportion of equity can be viewed as safer investments. This metric is particularly important for highly leveraged institutions, such as banks, where it must be at least 4% according to government regulations.
The ratio of current assets to current liabilities is known as the current ratio. This metric is a quick measure of the company's ability to pay its short-term obligations. A current ratio below 1 is a warning sign that should be investigated, especially for companies that cannot count on adequate cash flow from operations.
This chart shows the cumulative dilution of investor ownership in a company over time. Dilution reduces an investor's participation in the future earnings. Dilution increases when a company issues new shares, and decreases when a company buys its shares back. Many investors avoid companies with large chronic dilution.
analysis provides insight into factors affecting the Return On Equity of a company.
The DuPont equation decomposes ROE as follows:
ROE = (Net margin) * (Asset turnover) * (Asset to equity ratio)
Net margin indicates operating efficiency, Asset turnover measures the total asset use efficiency, and the Asset to equity ratio is a measure of financial leverage.
The dividend payout ratio tells investors what percentage of earnings a company returns to shareholders, and what percentage it retains and reinvests. This ratio represents a major capital allocation decision by the company, and can be used to judge management rationality. Rational management should pay out all earnings that cannot be productively reinvested. Therefore, a low dividend payout ratio for a profitable company with a low growth potential may be a warning sign.
Many investors use the P/B ratio as a quick way of judging company valuation. Value investors - followers of Graham and Dodd - specifically seek out companies with low P/B ratios. However, investors should be careful not to make investment decisions on this metric alone, without considering a company's earning and growth potential, since a low P/B ratio can be a sign of a bleak future for the business.
P/E ratio is a popular way of making a quick judgment of a company valuation. Value investors - followers of Graham and Dodd - often seek solid companies with low P/E ratios as investment opportunities. However, P/E ratio represents an oversimplified approach to business valuation, and can often lead to incorrect investment decisions.
In July 1998, VeriSign completed a merger with SecureIT, Inc. by exchanging approximately 1,666,000 shares of its common stock for all of the outstanding common stock of SecureIT. Each share of SecureIT was exchanged for 0.164806 of one share of VeriSign common stock. In addition, outstanding SecureIT employee stock options were converted at the same exchange ratio into options to purchase approximately 190,000 shares of VeriSign common stock. The merger constituted a tax-free reorganization and has been accounted for as a pooling-of-interests under Accounting Principles Board Opinion No. 16, "Business Combinations."
On February 1, 2000, VeriSign completed its acquisition of Thawte Consulting (Pty) Ltd. ("Thawte"), a privately held South African company that provides digital certificates to websites and software developers. VeriSign issued approximately 4.4 million shares of its common stock in exchange for all of the outstanding shares of Thawte. The acquisition has been accounted for as a purchase and, accordingly, the total purchase price of approximately $652 million has been allocated to the tangible and intangible assets acquired and the liabilities assumed based on their respective fair values on the acquisition date. Thawte's results of operations have been included in the consolidated financial statements from its date of acquisition.
On February 29, 2000, VeriSign completed its acquisition of Signio, Inc. ("Signio"), a privately held company that provides payment services that connect online merchants, business-to-business exchanges, payment processors and financial institutions on the Internet. VeriSign issued approximately 5.6 million shares of its common stock in exchange for all the outstanding shares of Signio and also assumed all of Signio's outstanding stock options. The acquisition has been accounted for as a purchase and, accordingly, the total purchase price of approximately $876 million has been allocated to the tangible and intangible assets acquired and the liabilities assumed based on their respective fair values on the acquisition date. Signio's results of operations have been included in the consolidated financial statements from its date of acquisition.
On June 8, 2000, VeriSign completed its acquisition of Network Solutions, Inc., or Network Solutions, a publicly traded company that provides Internet domain name registration and global registry services. The total consideration of approximately $19.3 billion was based on: the fair value of VeriSign's common stock issued; stock options assumed; and merger-transaction-related costs. At the closing, VeriSign issued approximately 72.3 million shares of its common stock valued at approximately $17.8 billion, based on an exchange ratio of 1.075 shares of VeriSign's common stock for each outstanding share of Network Solutions common stock. VeriSign assumed outstanding options to purchase Network Solutions common stock, which were converted into options to acquire approximately 8.1 million shares of the VeriSign's common stock, with a fair value of approximately $1.4 billion, based on the same exchange ratio, subject to terms and conditions, including exercisability and vesting schedules, of the original options. In addition, VeriSign incurred merger-transaction-related costs of approximately $50.0 million, which were included in the purchase consideration. These merger- transaction-related costs primarily consisted of investment banking fees, printing costs and other professional fees. This transaction was accounted for as a purchase. Accordingly, the purchase consideration of $19.3 billion has been preliminarily allocated to the estimated fair value of the assets acquired and liabilities assumed based on their estimated fair values as of the date of the acquisition. Goodwill and other intangible assets are being amortized on a straight-line basis over useful lives of two to four years. Network Solutions results of operations have been included in the consolidated financial statements from its date of acquisition.
At June 30, 2000, the NASDAQ market index was at 3,966 points and has decreased 1,805 points, or 46%, to 2,161 points at June 30, 2001. This decline has affected the analysis used to assess the recoverability of goodwill. As a result, management has recorded an impairment charge in the quarter ended June 30, 2001, in the amount of $9.9 billion.
During 2001, we acquired several companies that expanded and enhanced our product and service offerings and expanded our marketing reach. In particular, on December 12, 2001, we completed our acquisition of Illuminet Holdings, Inc., or Illuminet, a leading provider of specialized services to telecommunications carriers. We issued a total of approximately 30.6 million shares of our common stock for all of the outstanding capital stock of Illuminet. We also assumed all of Illuminet's outstanding employee stock options.
In addition, on February 8, 2002 we completed our acquisition of H.O. Systems, Inc., a leading provider of billing and customer services to wireless carriers, for approximately $350 million in cash. We plan to combine H.O. Systems' billing platform with the signaling, intelligent network and clearinghouse services of Illuminet to enable us to offer wireless carriers a comprehensive package of essential services.
VeriSign performed its annual impairment test as of June 30, 2002. The impairment charge to goodwill and other intangible assets from the annual impairment test resulted in a write-off of the net book value was $4,598,669K.
On May 16, 2006, the Board of Directors of VeriSign authorized a new stock repurchase program ("2006 stock repurchase program") to repurchase up to $1.0 billion of VeriSign's common stock on the open market, or in negotiated or block trades. As of September 30, 2007, the Company has approximately $984.7 million available under the 2006 stock repurchase program. On August 7, 2007, the Board of Directors of VeriSign authorized the use of the net proceeds from the issuance of the convertible debentures as described in Note 10, "Junior Subordinated Convertible Debentures," to repurchase shares of its common stock in addition to the previously approved 2006 stock repurchase program. During the three months ended September 30, 2007, the Company used proceeds from the issuance of the convertible debentures to repurchase 12.2 million shares of its common stock for an aggregate of approximately $350.0 million. Additionally, the Company entered into a $600.0 million Accelerated Share Repurchase ("ASR") agreement and a $200.0 million Guaranteed Share Repurchase ("GSR") agreement with two independent financial institutions. These agreements have been accounted for under EITF No. 99-7, "Accounting for an Accelerated Share Repurchase Program" and EITF 00-19. Under the terms of the ASR agreement, the actual purchase price per share of the common stock repurchased under the agreement is determined and adjusted based on a discount to the volume-weighted average price of the common stock during a period following the execution of the ASR Agreement. The exact number of shares repurchased pursuant to the accelerated share repurchase program is determined based on such adjusted price. The counterparty to the agreement may buy or sell the common stock in the secondary market to hedge its position. On August 20, 2007, 12.9 million shares of the Company's common stock were delivered to the Company, and the Company expects to receive delivery of up to 6.6 million additional shares of its common stock no later than December 2007. Under the terms of the GSR agreement, on September 26, 2007, 6.3 million shares of the Company's common stock were settled and delivered to the Company
Convertible debentures, including contingent interest derivative, as of December 31, 2008, decreased by $692.9 million due to the reclassification of the $700.7 million equity component of the convertible debt to Stockholders equity offset by $7.8 million accretion of interest.
On January 30, 2015, the Company's Board of Directors approved an additional authorization for share repurchases of approximately $452.9 million of its common stock in addition to the $547.1 million remaining available for repurchases of its common stock under the previous share buyback program for a total repurchase authorization of up to $1.0 billion of its common stock. The share buyback program has no expiration date. Purchases made under the program could be effected through open market transactions, block purchases, accelerated share repurchase agreements or other negotiated transactions. During the three and six months ended June 30, 2015 the Company repurchased 2.5 million and 5.2 million shares of its common stock, respectively, at an average stock price of $63.65 and $60.84, respectively. The aggregate cost of the repurchases in the three and six months ended June 30, 2015 was $156.0 million and $315.7 million, respectively. As of June 30, 2015, $760.6 million remained available for further repurchases under the share buyback program.