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VERISIGN INC/CA - Quarter Report: 2016 September (Form 10-Q)

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________ 
FORM 10-Q
 ____________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
OR
o
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.)
 
 
 
12061 Bluemont Way, Reston, Virginia
 
20190
(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   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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   o
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
  o
Non-accelerated filer
  o
Smaller reporting company
  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):     YES   o     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 as of October 21, 2016
Common stock, $.001 par value
 
104,574,465


 
 
 
 
 



TABLE OF CONTENTS
 
 
 
Page
 
 
 
 

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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

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Table of Contents

VERISIGN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)
 
September 30,
2016
 
December 31,
2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
177,785

 
$
228,659

Marketable securities
1,579,926

 
1,686,771

Accounts receivable, net
15,767

 
12,638

Other current assets
21,490

 
39,856

Total current assets
1,794,968

 
1,967,924

Property and equipment, net
270,165

 
295,570

Goodwill
52,527

 
52,527

Deferred tax assets
12,819

 
17,361

Deposits to acquire intangible assets
145,000

 
2,000

Other long-term assets
22,500

 
22,355

Total long-term assets
503,011

 
389,813

Total assets
$
2,297,979

 
$
2,357,737

LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
161,966

 
$
188,171

Deferred revenues
693,598

 
680,483

Subordinated convertible debentures, including contingent interest derivative
626,862

 
634,326

Total current liabilities
1,482,426

 
1,502,980

Long-term deferred revenues
287,214

 
280,859

Senior notes
1,236,731

 
1,235,354

Deferred tax liabilities
344,179

 
294,194

Other long-term tax liabilities
116,667

 
114,797

Total long-term liabilities
1,984,791

 
1,925,204

Total liabilities
3,467,217

 
3,428,184

Commitments and contingencies

 

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

 

Common stock—par value $.001 per share; Authorized shares: 1,000,000; Issued shares:324,088 at September 30, 2016 and 322,990 at December 31, 2015; Outstanding shares:105,095 at September 30, 2016 and 110,072 at December 31, 2015
324

 
323

Additional paid-in capital
17,123,629

 
17,558,822

Accumulated deficit
(18,290,506
)
 
(18,625,599
)
Accumulated other comprehensive loss
(2,685
)
 
(3,993
)
Total stockholders’ deficit
(1,169,238
)
 
(1,070,447
)
Total liabilities and stockholders’ deficit
$
2,297,979

 
$
2,357,737


See accompanying Notes to Condensed Consolidated Financial Statements.

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Table of Contents

VERISIGN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except per share data)
(Unaudited)
 
  
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenues
$
287,554

 
$
265,780

 
$
855,896

 
$
786,741

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenues
49,807

 
47,218

 
149,142

 
143,792

Sales and marketing
18,647

 
20,966

 
58,431

 
67,677

Research and development
14,324

 
15,019

 
45,355

 
48,518

General and administrative
30,000

 
28,115

 
85,158

 
79,090

Total costs and expenses
112,778

 
111,318

 
338,086

 
339,077

Operating income
174,776

 
154,462

 
517,810

 
447,664

Interest expense
(28,919
)
 
(28,544
)
 
(86,582
)
 
(79,064
)
Non-operating income (loss), net
3,262

 
(3,975
)
 
8,092

 
(6,329
)
Income before income taxes
149,119

 
121,943

 
439,320

 
362,271

Income tax expense
(34,692
)
 
(29,486
)
 
(104,227
)
 
(88,565
)
Net income
114,427

 
92,457

 
335,093

 
273,706

Realized foreign currency translation adjustments, included in net income

 

 
85

 
(291
)
Unrealized (loss) gain on investments
(485
)
 
565

 
1,301

 
799

Realized gain on investments, included in net income
(11
)
 
(26
)
 
(78
)
 
(99
)
Other comprehensive (loss) income
(496
)
 
539

 
1,308

 
409

Comprehensive income
$
113,931

 
$
92,996

 
$
336,401

 
$
274,115

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
1.08

 
$
0.82

 
$
3.10

 
$
2.38

Diluted
$
0.90

 
$
0.70

 
$
2.58

 
$
2.06

Shares used to compute earnings per share
 
 
 
 
 
 
 
Basic
106,307

 
112,955

 
107,982

 
115,235

Diluted
127,750

 
131,721

 
129,967

 
132,925

See accompanying Notes to Condensed Consolidated Financial Statements.

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VERISIGN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Nine Months Ended September 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
335,093

 
$
273,706

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

 
 
Depreciation of property and equipment
44,114

 
46,554

Stock-based compensation
35,745

 
34,351

Excess tax benefit associated with stock-based compensation
(15,566
)
 
(19,420
)
Unrealized (gain) loss on contingent interest derivative on Subordinated Convertible Debentures
(2,411
)
 
9,058

Payment of contingent interest
(13,385
)
 
(10,759
)
Amortization of debt discount and issuance costs
9,971

 
9,122

Other, net
(2,944
)
 
(961
)
Changes in operating assets and liabilities:

 
 
Accounts receivable
(3,536
)
 
(1,319
)
Prepaid expenses and other assets
17,814

 
2,967

Accounts payable and accrued liabilities
(8,285
)
 
14,658

Deferred revenues
19,470

 
49,787

Net deferred income taxes and other long-term tax liabilities
56,397

 
55,203

Net cash provided by operating activities
472,477

 
462,947

Cash flows from investing activities:

 
 
Proceeds from maturities and sales of marketable securities
3,029,699

 
1,965,767

Purchases of marketable securities
(2,917,743
)
 
(2,443,865
)
Purchases of property and equipment
(19,889
)
 
(28,659
)
Deposits to acquire intangible assets
(143,000
)
 

Other investing activities
171

 
(3,666
)
Net cash used in investing activities
(50,762
)
 
(510,423
)
Cash flows from financing activities:

 
 
Proceeds from issuance of common stock from option exercises and employee stock purchase plans
13,670

 
14,690

Repurchases of common stock
(501,934
)
 
(492,575
)
Proceeds from borrowings, net of issuance costs

 
492,237

Excess tax benefit associated with stock-based compensation
15,566

 
19,420

Net cash (used in) provided by financing activities
(472,698
)
 
33,772

Effect of exchange rate changes on cash and cash equivalents
109

 
(33
)
Net decrease in cash and cash equivalents
(50,874
)
 
(13,737
)
Cash and cash equivalents at beginning of period
228,659

 
191,608

Cash and cash equivalents at end of period
$
177,785

 
$
177,871

Supplemental cash flow disclosures:

 
 
Cash paid for interest
$
84,930

 
$
68,678

Cash paid for income taxes, net of refunds received
$
14,474

 
$
13,289

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 2015 Annual Report on Form 10-K (the “2015 Form 10-K”) filed with the SEC on February 19, 2016.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard will become effective for the Company on January 1, 2018. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
In February 2016, the FASB issued ASU No. 2016-02, Leases. The guidance introduces a lessee model that requires most leases to be reported on the balance sheet. This ASU will become effective for the Company on January 1, 2019 and requires the modified retrospective transition method. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment award transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The ASU requires that excess tax benefits and tax deficiencies (the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes) be recognized as income tax expense or benefit in the Consolidated Statement of Comprehensive Income. This change may lead to increased volatility in the provision for income taxes. There are different transition methods for different aspects of the standard. The new standard will be effective for the Company on January 1, 2017. The Company is evaluating the effect that this ASU will have on its consolidated financial statements and related disclosures.

Note 2. Cash, Cash Equivalents, and Marketable Securities
The following table summarizes the Company’s cash, cash equivalents, and marketable securities:
 
September 30,
 
December 31,
 
2016
 
2015
 
(In thousands)
Cash
$
30,089

 
$
99,027

Money market funds
155,055

 
137,593

Time deposits
4,439

 
4,007

Debt securities issued by the U.S. Treasury
1,577,537

 
1,685,882

Equity securities of public companies
2,389

 
890

Total
$
1,769,509

 
$
1,927,399

 
 
 
 
Included in Cash and cash equivalents
$
177,785

 
$
228,659

Included in Marketable securities
$
1,579,926

 
$
1,686,771

Included in Other long-term assets (Restricted cash)
$
11,798

 
$
11,969


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The fair value of the debt securities held as of September 30, 2016 was $1.6 billion, including less than $0.5 million of gross and net unrealized gains. All of the debt securities held as of September 30, 2016 are scheduled to mature in less than one year.
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 September 30, 2016 and December 31, 2015:
 
 
 
Fair Value Measurement Using
 
Total Fair Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
(In thousands)
As of September 30, 2016:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Investments in money market funds
$
155,055

 
$
155,055

 
$

 
$

Debt securities issued by the U.S. Treasury
1,577,537

 
1,577,537

 

 

Equity securities of public companies
$
2,389

 
$
2,389

 
$

 
$

Foreign currency forward contracts (1)
124

 

 
124

 

Total
$
1,735,105

 
$
1,734,981

 
$
124

 
$

Liabilities:
 
 
 
 
 
 
 
Contingent interest derivative on the Subordinated Convertible Debentures
$
14,330

 
$

 
$

 
$
14,330

Foreign currency forward contracts (2)
84

 

 
84

 

Total
$
14,414

 
$

 
$
84

 
$
14,330

As of December 31, 2015:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Investments in money market funds
$
137,593

 
$
137,593

 
$

 
$

Debt securities issued by the U.S. Treasury
1,685,882

 
1,685,882

 

 

Equity securities of public companies
890

 
890

 

 

Foreign currency forward contracts (1)
230

 

 
230

 

Total
$
1,824,595

 
$
1,824,365

 
$
230

 
$

Liabilities:
 
 
 
 
 
 
 
Contingent interest derivative on the Subordinated Convertible Debentures
$
30,126

 
$

 
$

 
$
30,126

Foreign currency forward contracts (2)
164

 

 
164

 

Total
$
30,290

 
$

 
$
164

 
$
30,126

 
(1)
Included in Other current assets
(2)
Included in Accounts payable and accrued liabilities

The fair value of the Company’s investments in money market funds approximates their face value. Such instruments are classified as Level 1 and are included in Cash and cash equivalents. The fair value of the debt securities consisting of U.S. Treasury bills is based on their quoted market prices and are classified as Level 1. Debt securities purchased with original maturities in excess of three months are included in Marketable securities. The fair value of the equity securities of public companies is based on quoted market prices and are classified as Level 1. Investments in equity securities of public companies are included in 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 utilizes a valuation model to estimate the fair value of the contingent interest derivative on the subordinated convertible debentures due 2037 (“the Subordinated Convertible Debentures”). The inputs to the model include stock price, bond price, risk free interest rates, volatility, and credit spread observations. As several significant inputs are not observable, the overall fair value measurement of the derivative is classified as Level 3. The volatility and credit spread assumptions used in the calculation are the most significant unobservable inputs. As of September 30, 2016, the valuation of the contingent interest derivative assumed a volatility rate of approximately 30% and a credit spread of approximately 5%. The fair value of the

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contingent interest derivative would not have significantly changed using a volatility rate of either 25% or 35%, or a credit spread of either 4% or 6%.

The following table summarizes the change in the fair value of the Company’s contingent interest derivative on the Subordinated Convertible Debentures during the three and nine months ended September 30, 2016 and 2015:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Beginning balance
$
22,611

 
$
25,841

 
$
30,126

 
$
26,755

Payment of contingent interest
(6,841
)
 
(5,534
)
 
(13,385
)
 
(10,759
)
Unrealized (gain) loss
(1,440
)
 
4,747

 
(2,411
)
 
9,058

Ending balance
$
14,330

 
$
25,054

 
$
14,330

 
$
25,054

In August 2016, the upside trigger on the Subordinated Convertible Debentures was met for the six month interest period ending in February 2017. The $7.7 million contingent interest payable in February 2017 is included in the balance of the contingent interest derivative on the Subordinated Convertible Debentures as of September 30, 2016.
The Company’s other financial instruments include cash, accounts receivable, restricted cash, and accounts payable. As of September 30, 2016, the carrying value of these financial instruments approximated their fair value. The fair value of the Company’s Subordinated Convertible Debentures was $2.9 billion as of September 30, 2016. The fair values of the senior notes due 2023 (the “2023 Senior Notes”) and the senior notes due 2025 (the “2025 Senior Notes”) were $764.1 million and $525.6 million, respectively, as of September 30, 2016. The fair values of these debt instruments are based on available market information from public data sources and are classified as Level 2.
Note 4. Deposits to Acquire Intangible Assets
As of September 30, 2016, the Company has paid $145.0 million for the future assignment to the Company of contractual rights to the .web gTLD, pending approval from ICANN. Upon assignment of the contractual rights, the Company will record the total investment as an indefinite-lived intangible asset.

Note 5. Other Balance Sheet Items
Other Current Assets
Other current assets consist of the following: 
 
September 30,
 
December 31,
 
2016
 
2015
 
(In thousands)
Prepaid expenses
$
16,043

 
$
14,823

Income tax receivables
3,714

 
23,098

Other
1,733

 
1,935

Total other current assets
$
21,490

 
$
39,856

The Income tax receivables as of December 31, 2015 primarily consists of the remaining U.S. federal income tax overpayment from prior years. As of September 30, 2016, substantially all of the remaining overpayment has been used to offset current year income taxes.

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Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following: 
 
September 30,
 
December 31,
 
2016
 
2015
 
(In thousands)
Accounts payable
$
16,028

 
$
23,298

Accrued employee compensation
45,216

 
51,851

Customer deposits, net
37,944

 
48,307

Interest Payable
32,779

 
27,701

Income taxes payable and other tax liabilities
16,551

 
16,943

Other accrued liabilities
13,448

 
20,071

Total accounts payable and accrued liabilities
$
161,966

 
$
188,171

Accrued employee compensation primarily consists of liabilities for employee leave, salaries, payroll taxes, employee contributions to the employee stock purchase plan, and incentive compensation. Accrued employee incentive compensation as of December 31, 2015, was paid during the nine months ended September 30, 2016. Interest payable includes coupon interest on the Subordinated Convertible Debentures, the 2023 Senior Notes and the 2025 Senior Notes.
Note 6. Stockholders’ Deficit
On February 11, 2016, the Company’s Board of Directors authorized the repurchase of approximately $611.2 million of its common stock, in addition to the $388.8 million remaining available for repurchase under the previous share repurchase program for a total repurchase authorization of up to $1.0 billion of its common stock. The share repurchase 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 nine months ended September 30, 2016 the Company repurchased 2.2 million and 5.8 million shares of its common stock, respectively, at an average stock price of $79.66 and $82.72, respectively. The aggregate cost of the repurchases in the three and nine months ended September 30, 2016 was $177.0 million and $476.8 million, respectively. As of September 30, 2016, $588.9 million remained available for further repurchases under the share repurchase program.
During the nine months ended September 30, 2016, the Company placed 0.3 million shares, at an average stock price of $80.87, and for an aggregate cost of $25.1 million, into treasury stock for purposes related to tax withholding upon vesting of Restricted Stock Units (“RSUs”).
Since inception the Company has repurchased 219.0 million shares of its common stock for an aggregate cost of $8.0 billion, which is presented as a reduction of Additional paid-in capital.
Note 7. Calculation of Earnings per Share
The following table presents the computation of weighted-average shares used in the calculation of basic and diluted earnings per share:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Weighted-average shares of common stock outstanding
106,307
 
112,955

 
107,982

 
115,235

Weighted-average potential shares of common stock outstanding:
 
 
 
 

 

Conversion spread related to Convertible Debentures
20,789
 
18,024

 
21,244

 
16,936

Unvested RSUs, stock options, and ESPP
654
 
742

 
741

 
754

Shares used to compute diluted earnings per share
127,750
 
131,721

 
129,967

 
132,925

The calculation of diluted weighted average shares outstanding, excludes potentially dilutive securities, the effect of which would have been anti-dilutive, as well as performance based RSUs granted by the Company for which the relevant performance criteria have not been achieved. The number of potential shares excluded from the calculation was not significant in any period presented.

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Note 8. Stock-based Compensation
Stock-based compensation is classified in the Condensed Consolidated Statements of Comprehensive Income in the same expense line items as cash compensation. The following table presents the classification of stock-based compensation:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
2016
 
2015
 
2016
 
2015
 
(In thousands)
Cost of revenues
$
1,779

 
$
1,722

 
$
5,367

 
$
5,202

Sales and marketing
1,129

 
1,683

 
4,219

 
4,800

Research and development
1,676

 
1,478

 
4,966

 
4,890

General and administrative
8,270

 
7,339

 
21,193

 
19,459

Total stock-based compensation expense
$
12,854

 
$
12,222

 
$
35,745

 
$
34,351

The following table presents the nature of the Company’s total stock-based compensation:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
RSUs
$
10,276

 
$
9,871

 
$
28,034

 
$
27,375

Performance-based RSUs
2,216

 
2,041

 
6,878

 
5,879

ESPP
924

 
958

 
2,594

 
3,152

Capitalization (Included in Property and equipment, net)
(562
)
 
(648
)
 
(1,761
)
 
(2,055
)
Total stock-based compensation expense
$
12,854

 
$
12,222

 
$
35,745

 
$
34,351

Note 9. Debt and Interest Expense
The following table presents the components of the Company’s interest expense:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
2016
 
2015
 
2016
 
2015
 
(In thousands)
Contractual interest on Subordinated Convertible Debentures
$
10,156

 
$
10,156

 
$
30,469

 
$
30,469

Contractual interest on Senior Notes
15,235

 
15,235

 
45,704

 
39,505

Amortization of debt discount on the Subordinated Convertible Debentures
2,802

 
2,581

 
8,235

 
7,585

Credit facility fees and other interest expense
726

 
572

 
2,174

 
1,505

Total interest expense
$
28,919

 
$
28,544

 
$
86,582

 
$
79,064



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Note 10. Non-operating Income (Loss), Net
The following table presents the components of Non-operating income (loss), net:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Unrealized gain (loss) on contingent interest derivative on Subordinated Convertible Debentures
$
1,440

 
$
(4,747
)
 
$
2,411

 
$
(9,058
)
Interest income
1,728

 
639

 
4,292

 
1,271

Other, net
94

 
133

 
1,389

 
1,458

Total non-operating income (loss), net
$
3,262

 
$
(3,975
)
 
$
8,092

 
$
(6,329
)
Unrealized gains and losses on the contingent interest derivative on the Subordinated Convertible Debentures reflect the change in value of the derivative that results primarily from changes in the Company’s stock price.
Note 11. Income Taxes
The following table presents income tax expense and the effective tax rate:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands)
Income tax expense
$
34,692

 
$
29,486

 
$
104,227

 
$
88,565

Effective tax rate
23
%
 
24
%
 
24
%
 
24
%
The effective tax rate for the three and nine months ended September 30, 2016 and 2015 was lower than the statutory federal rate of 35% primarily due to tax benefits from foreign income taxed at lower rates, partially offset by state income taxes.
Deferred tax liabilities as of September 30, 2016 reflect the use of a portion of U.S. foreign tax credits during the nine months ended September 30, 2016, and an increase in the deferred tax liability related to the Subordinated Convertible Debentures.

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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 2016 and our 2015 Form 10-K, which was filed on February 19, 2016, 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 global provider of domain name registry services and internet security, enabling internet navigation for many of the world’s most recognized domain names and providing protection for websites and enterprises around the world. Our Registry Services ensure the security, stability and resiliency of key internet infrastructure and services, including the .com and .net domains, two of the internet’s root servers, and the operation of the root zone maintainer function for the core of the internet’s DNS. Our product suite also includes Security Services, consisting of DDoS Protection Services, iDefense Services, and Managed DNS Services. Revenues from Security Services are not significant in relation to our consolidated revenues.
As of September 30, 2016, we had approximately 144.1 million .com and .net registrations in the domain name base. 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 internet access, as well as marketing activities carried out by us and third-party registrars. Growth in the number of domain name registrations under our management may be hindered by certain factors, including overall economic conditions, competition from ccTLDs, the introduction of new gTLDs, and ongoing changes in the internet practices and behaviors of consumers and businesses. Factors such as the evolving practices and preferences of internet users, and how they navigate the internet, as well as the motivation of domain name registrants and how they will manage their investment in domain names, can negatively impact our business and the demand for new domain name registrations and renewals.
Business Highlights and Trends
We recorded revenues of $287.6 million and $855.9 million during the three and nine months ended September 30, 2016. This represents an increase of 8% and 9%, respectively , as compared to the same periods in 2015.
We recorded operating income of $174.8 million and $517.8 million during the three and nine months ended September 30, 2016. This represents an increase of 13% and 16%, respectively, as compared to the same periods in 2015.
On October 20, 2016, we announced that the U.S. Department of Commerce approved the extension amendment to the .com Registry Agreement with the Internet Corporation for Assigned Names and Numbers (“ICANN”), pursuant to which Verisign will remain the sole registry operator for the .com registry through November 30, 2024.
We finished the third quarter with 144.1 million .com and .net registrations in the domain name base, which represents a 7% increase from September 30, 2015, and a net increase of 0.9 million domain name registrations from June 30, 2016.
During the three months ended September 30, 2016, we processed 8.3 million new domain name registrations for .com and .net as compared to 9.2 million for the same period in 2015.

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The final .com and .net renewal rate for the second quarter of 2016 was 73.8% compared with 72.7% for the same quarter in 2015. Renewal rates are not fully measurable until 45 days after the end of the quarter.
During the three months ended September 30, 2016, we repurchased 2.2 million shares of our common stock under the share repurchase program for $177.0 million. As of September 30, 2016, $588.9 million remained available for further repurchases under our share repurchase program.
Through October 26, 2016, we repurchased an additional 0.7 million shares for $52.3 million under our share repurchase program.
We generated cash flows from operating activities of $472.5 million during the nine months ended September 30, 2016, compared to $462.9 million in the same period last year.
Pursuant to our agreements with ICANN, we make available on our website (at www.Verisign.com/zone) files containing all active domain names registered in the .com and .net registries. At the same website address, we make available a summary of the active zone count registered in the .com and .net registries and the number of .com and .net domain name registrations in the domain name base. The domain name base is the active zone plus the number of domain name registrations that are registered but not configured for use in the respective top level domain zone file plus the number of domain name registrations that are in a client or server hold status. These files and the related summary data are updated at least once per day. The update times may vary each day. The number of domain name registrations provided in this Form 10-Q are as of midnight of the date reported. Information available on, or accessible through, our website is not incorporated herein by reference.
Results of Operations
The following table presents information regarding our results of operations as a percentage of revenues:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenues
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Costs and expenses:
 
 

 
 
 
 
Cost of revenues
17.3

 
17.8

 
17.4

 
18.3

Sales and marketing
6.5

 
7.9

 
6.8

 
8.6

Research and development
5.0

 
5.6

 
5.3

 
6.2

General and administrative
10.4

 
10.6

 
10.0

 
10.0

Total costs and expenses
39.2

 
41.9

 
39.5

 
43.1

Operating income
60.8

 
58.1

 
60.5

 
56.9

Interest expense
(10.0
)
 
(10.7
)
 
(10.1
)
 
(10.0
)
Non-operating income (loss), net
1.1

 
(1.5
)
 
0.9

 
(0.8
)
Income before income taxes
51.9

 
45.9

 
51.3

 
46.1

Income tax expense
(12.1
)
 
(11.1
)
 
(12.1
)
 
(11.3
)
Net income
39.8
 %
 
34.8
 %
 
39.2
 %
 
34.8
 %
Revenues
Revenues related to our Registry Services are primarily derived from registrations for domain names in the .com and .net domain name registries. We also derive revenues from operating domain name registries for several other TLDs and from providing back-end registry services to a number of TLD registry operators, all of which are not significant in relation to our consolidated revenues. For domain names registered with the .com and .net registries we receive a fee from registrars per annual registration that is fixed pursuant to our agreements with ICANN. Individual customers, called registrants, contract directly with registrars or their resellers, and the registrars in turn register the domain names with Verisign. Changes in revenues are driven largely by changes in the number of new domain name registrations and the renewal rate for existing registrations as well as the impact of new and prior price increases, to the extent permitted by ICANN and the DOC. New registrations and the renewal rate for existing registrations are impacted by continued growth in online advertising, e-commerce, and the number of internet users, as well as marketing activities carried out by us and our registrars. We increased the annual fee for a .net domain name registration from $6.18 to $6.79 on February 1, 2015, and from $6.79 to $7.46 on February 1, 2016. On July 28, 2016, we announced an increase in the annual fee for the .net domain name registration from $7.46 to $8.20, effective February 1, 2017. The annual fee for a .com domain name registration is $7.85 for the duration of the current .com Registry Agreement through November 30, 2024, except that prices may be raised by up to 7% each year due to the imposition of any new Consensus Policy

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or documented extraordinary expense resulting from an attack or threat of attack on the Security and Stability (each as defined in the .com Registry Agreement) of the DNS, subject to approval of the DOC. We offer promotional marketing programs for our registrars based upon market conditions and the business environment in which the registrars operate. All fees paid to us for .com and .net registrations are in U.S. dollars. Revenues from Security Services are not significant in relation to our total consolidated revenues.
A comparison of revenues is presented below:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
% Change
 
2015
 
2016
 
% Change
 
2015
 
(Dollars in thousands)
Revenues
$
287,554

 
8
%
 
$
265,780

 
$
855,896

 
9
%
 
$
786,741

The following table compares the .com and .net domain name registrations in the domain name base managed by our Registry Services business:
 
September 30, 2016
 
% Change
 
September 30, 2015
.com and .net domain name registrations in the domain name base
144.1 million
 
7
%
 
135.2 million
Revenues increased by $21.8 million and $69.2 million during the three and nine months ended September 30, 2016, respectively, as compared to the same periods last year, primarily due to an increase in revenues from the operation of the registries for the .com and .net TLDs. The increase in revenues from the operation of the registries for the .com and .net TLDs was driven by a 7% increase in the domain name base for .com and .net and an increase in the .net domain name registration fees in February 2015 and 2016.
Growth in the domain name base has been primarily driven by continued internet growth and marketing activities carried out by us and our registrars. During the second half of 2015 and the first quarter of 2016 we experienced an increased volume of new domain name registrations primarily from our registrars in China.  The volume of these new registrations has been inconsistent and periodic compared to prior periods, and by the end of the first quarter of 2016, reverted back to a more normalized registration pace. However, ongoing economic uncertainty, competitive pressure from ccTLDs, the introduction of new gTLDs, ongoing changes in internet practices and behaviors of consumers and business, as well as the motivation of existing domain name registrants and how they will manage their investment in domain names, has limited the rate of growth of the domain name base in recent years and may continue to do so in the remainder of 2016 and beyond.
We expect the rate of revenue growth for the full year of 2016 to decrease slightly in the fourth quarter compared to the growth for the nine months ended September 30, 2016.
Geographic revenues
We generate revenues in the U.S.; Europe, the Middle East and Africa (“EMEA”); China; and certain other countries including Canada, Australia and Japan.
The following table presents a comparison of our geographic revenues:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
% Change
 
2015
 
2016
 
% Change
 
2015
 
(Dollars in thousands)
U.S.
$
167,796

 
4
 %
 
$
160,708

 
$
497,595

 
4
 %
 
$
477,424

EMEA
51,615

 
6
 %
 
48,891

 
155,280

 
8
 %
 
144,130

China
33,224

 
62
 %
 
20,478

 
97,150

 
69
 %
 
57,447

Other
34,919

 
(2
)%
 
35,703

 
105,871

 
(2
)%
 
107,740

Total revenues
$
287,554

 
 
 
$
265,780

 
$
855,896

 
 
 
$
786,741

Revenues for our Registry Services business are attributed to the country of domicile and the respective regions in which our registrars are located, however, this may differ from the regions where the registrars operate or where registrants are located. Revenue growth for each region may be impacted by registrars reincorporating, relocating, or from acquisitions or changes in affiliations of resellers. Revenue growth for each region may also be impacted by registrars domiciled in one region, registering domain names in another region. Although revenues continued to grow in the more mature markets of the U.S. and EMEA for both the three and nine months ended September 30, 2016 compared to the same periods of the prior year, China saw the highest growth rate for both periods due to the increased volume of new registrations during the second half of 2015 and the first quarter of 2016.

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Cost of revenues
Cost of revenues consist primarily of salaries and employee benefits expenses for our personnel who 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, telecommunications expense and allocations of indirect costs such as corporate overhead.
A comparison of cost of revenues is presented below:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
% Change
 
2015
 
2016
 
% Change
 
2015
 
(Dollars in thousands)
Cost of revenues
$
49,807

 
5
%
 
$
47,218

 
$
149,142

 
4
%
 
$
143,792

Cost of revenues increased by $2.6 million during the three months ended September 30, 2016, as compared to the same period last year, primarily due to a $1.9 million increase in salary and employee benefits expenses as a result of an increase in average headcount and an increase in bonus expenses.
Cost of revenues increased by $5.4 million during the nine months ended September 30, 2016, as compared to the same period last year, primarily due to a $5.3 million increase in salary and employee benefits expenses as a result of an increase in average headcount and an increase in bonus expenses.
We expect cost of revenues as a percentage of revenues to remain consistent during the fourth quarter of 2016 compared to the nine months ended September 30, 2016.
Sales and marketing
Sales and marketing expenses consist primarily of salaries, sales commissions, sales operations and other personnel-related expenses, travel and related expenses, trade shows, costs of lead generation, costs of computer and communications equipment and support services, facilities costs, consulting fees, costs of marketing programs, such as online, television, radio, print and direct mail advertising costs, and allocations of indirect costs such as corporate overhead.
A comparison of sales and marketing expenses is presented below:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
% Change
 
2015
 
2016
 
% Change
 
2015
 
(Dollars in thousands)
Sales and marketing
$
18,647

 
(11
)%
 
$
20,966

 
$
58,431

 
(14
)%
 
$
67,677

Sales and marketing expenses decreased during the three months ended September 30, 2016, as compared to the same period last year due to a number of factors, none of which were individually significant.
Sales and marketing expenses decreased by $9.2 million during the nine months ended September 30, 2016, as compared to the same period last year, primarily due to a $6.3 million decrease in advertising and consulting expenses and a combined $2.4 million decrease in salary and employee benefits expenses, stock-based compensation expenses, travel expenses and allocated overhead expenses. Advertising and consulting expenses decreased primarily due to the timing of marketing programs for our Registry Services business and a decrease in expenses related to our Security Services business. Salary and employee benefits expenses, stock-based compensation expenses, travel expenses and allocated overhead expenses decreased due to a reduction in average headcount.
We expect sales and marketing expenses as a percentage of revenues to increase during the fourth quarter of 2016 compared to the nine months ended September 30, 2016 as the volume of marketing initiatives increases.
Research and development
Research and development expenses consist primarily of costs related to research and development personnel, including salaries and other personnel-related expenses, consulting fees, facilities costs, computer and communications equipment, support services used in our service and technology development, and allocations of indirect costs such as corporate overhead.

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A comparison of research and development expenses is presented below:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
% Change
 
2015
 
2016
 
% Change
 
2015
 
(Dollars in thousands)
Research and development
$
14,324

 
(5
)%
 
$
15,019

 
$
45,355

 
(7
)%
 
$
48,518

Research and development expenses remained consistent during the three months ended September 30, 2016, as compared to the same period last year.
Research and development expenses decreased by $3.2 million during the nine months ended September 30, 2016, as compared to the same period last year, primarily due to a decrease in salary and employee benefits expenses and allocated overhead expenses resulting from a reduction in headcount.
We expect research and development expenses as a percentage of revenues to remain consistent during the fourth quarter of 2016 compared to the nine months ended September 30, 2016.
General and administrative
General and administrative expenses consist primarily of salaries and other personnel-related expenses for our executive, administrative, legal, finance, information technology and human resources personnel, costs of 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.
A comparison of general and administrative expenses is presented below:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
% Change
 
2015
 
2016
 
% Change
 
2015
 
(Dollars in thousands)
General and administrative
$
30,000

 
7
%
 
$
28,115

 
$
85,158

 
8
%
 
$
79,090

General and administrative expenses increased by $1.9 million during the three months ended September 30, 2016, as compared to the same period last year, primarily due to a $2.3 million increase in salary and employee benefits expenses resulting from increases in bonus expenses and average headcount.
General and administrative expenses increased by $6.1 million during the nine months ended September 30, 2016, as compared to the same period last year, primarily due to a $7.5 million increase in salary and employee benefits expenses, including stock-based compensation, a $2.2 million increase in legal expenses, and a $1.5 million increase in allocated overhead expenses, partially offset by a $2.0 million decrease in depreciation expenses and a $1.9 million decrease in miscellaneous expenses. Salary and employee benefits expenses increased primarily due to increases in bonus expenses and average headcount. Stock-based compensation increased due to increases in the total value of RSUs granted in 2015 and 2016. Legal expenses increased due to an increase in services performed by external legal counsel. Allocated overhead expenses increased resulting from an increase in headcount. Depreciation expenses decreased due to a decrease in capital expenditures in recent years. Miscellaneous expenses decreased primarily due to a decrease in certain non-income related taxes.
We expect general and administrative expenses as a percentage of revenues to increase during the fourth quarter of 2016 compared to the nine months ended September 30, 2016.

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Interest expense
The following table presents the components of Interest expense:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
2016
 
2015
 
2016
 
2015
 
(In thousands)
Contractual interest on Subordinated Convertible Debentures
$
10,156

 
$
10,156

 
$
30,469

 
$
30,469

Contractual interest on Senior Notes
15,235

 
15,235

 
45,704

 
39,505

Amortization of debt discount on the Subordinated Convertible Debentures
2,802

 
2,581

 
8,235

 
7,585

Credit facility fees and other interest expense
726

 
572

 
2,174

 
1,505

Total interest expense
$
28,919

 
$
28,544

 
$
86,582

 
$
79,064

Contractual interest on Senior Notes increased during the nine months ended September 30, 2016 due to a $6.2 million increase in interest expense related to the 2025 Senior Notes which were issued in March 2015. We expect interest expense to remain consistent during the fourth quarter of 2016 as compared to each of the first three quarters of 2016.
Non-operating income (loss), net
The following table presents the components of Non-operating income (loss), net:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Unrealized gain (loss) on contingent interest derivative on Subordinated Convertible Debentures
$
1,440

 
$
(4,747
)
 
$
2,411

 
$
(9,058
)
Interest income
1,728

 
639

 
4,292

 
1,271

Other, net
94

 
133

 
1,389

 
1,458

Total non-operating income (loss), net
$
3,262

 
$
(3,975
)
 
$
8,092

 
$
(6,329
)
Unrealized gains and losses on the contingent interest derivative on the Subordinated Convertible Debentures reflect the change in value of the derivative that results primarily from changes in our stock price. Interest income increased during both the three and nine months ended September 30, 2016 primarily due to an increase in interest rates and a higher average invested balance.
Income tax expense
The following table presents income tax expense and the effective tax rate:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands)
Income tax expense
$
34,692

 
$
29,486

 
$
104,227

 
$
88,565

Effective tax rate
23
%
 
24
%
 
24
%
 
24
%
The effective tax rate for the three and nine months ended September 30, 2016 and 2015 was lower than the statutory federal rate of 35% primarily due to tax benefits from foreign income taxed at lower rates, partially offset by state income taxes.

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Liquidity and Capital Resources
 
September 30,
 
December 31,
 
2016
 
2015
 
(In thousands)
Cash and cash equivalents
$
177,785

 
$
228,659

Marketable securities
1,579,926

 
1,686,771

Total
$
1,757,711

 
$
1,915,430

As of September 30, 2016, our principal source of liquidity was $177.8 million of cash and cash equivalents and $1.6 billion of marketable securities. The marketable securities primarily consist of debt securities issued by the U.S. Treasury 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 of amounts invested in money market funds and U.S. Treasury bills purchased with original maturities of less than 90 days. As of September 30, 2016, all of our debt securities have contractual maturities of less than one year. 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 Part I, Item I of this Quarterly Report on Form 10-Q.
As of September 30, 2016, the amount of cash and cash equivalents and marketable securities held by foreign subsidiaries was $1.3 billion. Our intent remains to indefinitely reinvest these funds outside of the U.S. and accordingly, we have not provided deferred U.S. taxes for these funds. 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 provided, we would be required to accrue and pay additional U.S. taxes in order to repatriate these funds.
As of September 30, 2016, we had $500.0 million principal amount outstanding of the 5.25% senior unsecured notes due 2025 and $750.0 million principal amount outstanding of the 4.625% senior unsecured notes due 2023.
As of September 30, 2016, there were no borrowings outstanding under the $200.0 million unsecured revolving credit facility that will expire in 2020.
As of September 30, 2016, we had $1.25 billion principal amount outstanding of 3.25% subordinated convertible debentures due 2037. The price of our common stock exceeded the conversion price threshold trigger during the third quarter of 2016. Accordingly, the Subordinated Convertible Debentures are convertible at the option of each holder through December 31, 2016. We do not expect a material amount of the Subordinated Convertible Debentures to be converted in the near term as the trading price of the debentures exceeds the value that is likely to be received upon conversion. However, we cannot provide any assurance that the trading price of the debentures will continue to exceed the value that would be derived upon conversion or that the holders will not elect to convert the Subordinated Convertible Debentures. If a holder elects to convert its Subordinated Convertible Debentures, we are permitted under the Indenture to pursue an exchange in lieu of conversion or to settle the conversion value (as defined in the Indenture) in cash, stock, or a combination thereof. If we choose not to pursue or cannot complete an exchange in lieu of conversion, we currently have the intent and the ability (based on current facts and circumstances) to settle the principal amount of the Subordinated Convertible Debentures in cash. However, if the principal amount of the Subordinated Convertible Debentures that holders actually elect to convert exceeds our cash on hand and cash from operations, we will need to draw cash from existing financing or pursue additional sources of financing to settle the Subordinated Convertible Debentures in cash. We cannot provide any assurances that we will be able to obtain new sources of financing on terms acceptable to us or at all, nor can we assure that we will be able to obtain such financing in time to settle the Subordinated Convertible Debentures that holders elect to convert.
We paid contingent interest of $6.5 million in February 2016 and $6.8 million in August 2016 in addition to the normal coupon interest on our Subordinated Convertible Debentures. In August 2016, the upside trigger on the Subordinated Convertible Debentures was met for the six month interest period ending in February 2017. On February 15, 2017, we will pay contingent interest of $7.7 million in addition to the normal coupon interest to holders of record of the Subordinated Convertible Debentures as of February 1, 2017. The upside trigger is met if the Subordinated Convertible Debentures’ average trading price is at least 150% of par during the 10 trading days before each semi-annual interest period. The upside trigger is tested semi-annually for the following six months. The semi-annual upside contingent interest payment, for a given period, can be approximated by applying the annual rate of 0.5% to the aggregate market value of all outstanding Subordinated Convertible Debentures and dividing by two for that semi-annual period payment amount.
We derive significant tax savings from the Subordinated Convertible Debentures.  During the nine months ended September 30, 2016 and 2015, the interest deduction, for income tax purposes, related to our Subordinated Convertible Debentures, excluding contingent interest, was $131.6 million and $123.6 million, respectively, compared to coupon interest expense of $30.5 million for each period. For income tax purposes, we deduct interest expense on the Subordinated Convertible Debentures calculated at 8.5% of the adjusted issue price, subject to adjustment for actual versus projected contingent interest. The adjusted issue price, and consequently the interest deduction for income tax purposes, grows over the term due to the

19

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difference between the interest deduction taken using a comparable yield of 8.5% on the adjusted issue price, and the coupon rate of 3.25% on the principal amount, compounded annually. The interest deduction taken is subject to recapture upon settlement to the extent that the amount paid (in cash or stock) to settle the Subordinated Convertible Debentures is less than the adjusted issue price. Interest recognized in accordance with GAAP, which is calculated at 8.39% of the liability component of the Subordinated Convertible Debentures, will also grow over the term, but at a slower rate. This difference will result in a continuing increase in the deferred tax liability on our Condensed Consolidated Balance Sheet.
During the third quarter of 2016, we paid $143.0 million for the future assignment to us of contractual rights to the .web gTLD, pending approval from ICANN.
We believe existing cash, cash equivalents and marketable securities, and funds generated from operations, together with our borrowing capacity under the unsecured revolving credit facility should be sufficient to meet our working capital, capital expenditure requirements, and to service our debt for at least the next 12 months. We regularly assess our cash management approach and activities in view of our current and potential future needs.
In summary, our cash flows for the nine months ended September 30, 2016 and 2015 are as follows:
 
Nine Months Ended September 30,
 
2016
 
2015
 
(In thousands)
Net cash provided by operating activities
$
472,477

 
$
462,947

Net cash used in investing activities
(50,762
)
 
(510,423
)
Net cash (used in) provided by financing activities
(472,698
)
 
33,772

Effect of exchange rate changes on cash and cash equivalents
109

 
(33
)
Net decrease in cash and cash equivalents
$
(50,874
)
 
$
(13,737
)
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, as well as payments related to taxes, interest and facilities.
Net cash provided by operating activities increased during the nine months ended September 30, 2016, primarily due to an increase in cash collected from customers, partially offset by an increase in cash paid for interest. Cash received from customers increased primarily due to an increase in the number of new and renewal domain name registrations during the nine months ended September 30, 2016, and the increases in the .net domain name registration fees in February 2016. Cash paid for interest increased due to the interest paid on the 2025 Senior Notes and higher contingent interest related to the Subordinated Convertible Debentures.
Cash flows from investing activities
The changes in cash flows from investing activities primarily relate to purchases, maturities and sales of marketable securities, and purchases of property and equipment and rights to intangible assets.
Net cash used in investing activities decreased during the nine months ended September 30, 2016 primarily due to an increase in sales and maturities of marketable securities, net of purchases, partially offset by the payments made for the future assignment of the rights to the .web gTLD and decreases in purchases of property and equipment and other investing activities.
Cash flows from financing activities
The changes in cash flows from financing activities primarily relate to share repurchases, proceeds from and repayments of borrowings, our employee stock purchase plan, and excess tax benefits from stock-based compensation.
The change in cash (used in) provided by financing activities during the nine months ended September 30, 2016 was primarily due to a decrease in proceeds from borrowings as we issued the 2025 Senior Notes in March 2015, an increase in share repurchases, and a decrease in excess tax benefits from stock-based compensation.

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ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in our market risk exposures since December 31, 2015.

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 September 30, 2016, 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 September 30, 2016 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 their inherent limitations, our disclosure controls and procedures and 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 effectiveness of our disclosure controls and procedures and 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
Verisign is involved in various investigations, claims and lawsuits arising in the normal conduct of its business, none of which, in its opinion, will have a material adverse effect on its financial condition, results of operations, or cash flows. 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.

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 arising from our agreements governing our Registry Services business could limit our ability to maintain or grow our business.
We are parties to (i) a Cooperative Agreement (as amended) with the DOC with respect to the .com gTLD and certain other aspects of the DNS and (ii)  Registry Agreements with ICANN for .com, .net, .name and other gTLDs including our IDN gTLDs. As substantially all of our revenues are derived from our Registry Services business, limitations in these agreements could have a material impact on our business.
Pricing. Under the terms of the Cooperative Agreement with the DOC and the .com Registry Agreement with ICANN, we are generally restricted from increasing the price of registrations or renewals of .com domain names except that we are entitled to increase the price up to 7%, with the prior approval of the DOC, due to the imposition of any new Consensus Policies or documented extraordinary expense resulting from an attack or threat of attack on the security and stability of the DNS. However, it is uncertain that such circumstances will arise, or if they do, that the DOC will approve our request to increase the price for .com domain name registrations. We also have the right under the Cooperative Agreement to seek the removal of these pricing restrictions if we demonstrate that market conditions no longer warrant such restrictions. However, it is uncertain that such circumstances will arise, or if they do, that the DOC will agree to the removal of these pricing restrictions. In connection with a renewal of the .com Registry Agreement, we can seek an increase of the price for .com domain name registrations. Regardless of whether we seek such an increase, there can be no assurance of the price that DOC will approve in connection with a renewal of the .com Registry Agreement. Under the terms of the .net and .name Registry Agreements with ICANN, we are permitted to increase the price of registrations and renewals in these TLDs up to 10% per year. Additionally, ICANN’s registry agreements for the new gTLDs do not contain such pricing restrictions.
Vertical integration. Under the .com, .net and .name Registry Agreements with ICANN, as well as the Cooperative Agreement with the DOC, we are not permitted to acquire, directly or indirectly, control of, or a greater than 15% ownership interest in, any ICANN-accredited registrar. Historically, all gTLD registry operators were subject to this vertical integration prohibition; however, ICANN has established a process whereby registry operators may seek ICANN’s approval to remove this restriction, and ICANN has approved such removal in some instances. If we were to seek removal of the vertical integration restrictions contained in our agreements, it is uncertain whether ICANN and/or DOC approval would be obtained. Additionally, ICANN’s registry agreement for new gTLDs generally permits such vertical integration, with certain limitations including ICANN’s right, but not the obligation, to refer such vertical integration activities to competition authorities. Furthermore, unless prohibited by ICANN as noted above, such vertical integration restrictions do not generally apply to ccTLD registry operators. If registry operators of new or existing gTLDs, or ccTLDs, are able to obtain competitive advantages through such vertical integration, it could materially harm our business.
Termination or non-renewal. Under the Cooperative Agreement (as amended) the DOC must approve any renewal or extension of the .com Registry Agreement. The DOC, under certain circumstances, could refuse to grant its approval to the renewal of the .com Registry Agreement on similar terms, or at all. Any failure of the DOC to approve the renewal of the .com Registry Agreement prior to the expiration of its current term on November 30, 2024 would have a material adverse effect on our business. Under certain circumstances, ICANN could terminate or refuse to renew one or more of our Registry Agreements including those for .com, .net, and our other gTLDs.
Modification or amendment. Our Registry Agreements for new gTLDs, including the Registry Agreements for our IDN gTLDs, include ICANN’s right to amend the agreement without our consent, which could impose unfavorable contract obligations on us that could impact our plans and competitive positions with respect to new gTLDs. At the time of renewal of

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our .com or .net Registry Agreements, ICANN might also attempt to impose this same unilateral right to amend these registry agreements under certain conditions. ICANN has also included new mandatory obligations on new gTLD registry operators, including us, that may increase the risks and potential liabilities associated with operating new gTLDs. ICANN might seek to impose these new mandatory obligations in our other Registry Agreements under certain conditions. The DOC approved an amendment to the .com Registry Agreement and the Company and ICANN entered into the amendment, which extends the term of the .com Registry Agreement through November 30, 2024 (the “.com Extension”). As part of the .com Extension, the Company agreed to negotiate in good faith with ICANN to amend the terms of the .com Registry Agreement to preserve and enhance the security and stability of the internet or the .com TLD and as a result of any changes to, or the termination or expiration of, the Cooperative Agreement. The Company also agreed to work in good faith to reach a mutual agreement with the DOC to resolve any issues identified in a public interest review in connection with the DOC’s evaluation of whether to exercise its right to extend the term of the Cooperative Agreement. We can provide no assurance that any new terms for the .com Registry Agreement that we agree to as a result of the above obligations will not have a material adverse impact on our business, operating results, financial condition and cash flows.
Legal challenges. Our Registry Agreements have faced, and could continue to face, challenges, including possible legal challenges resulting from our activities or the activities of ICANN, registrars, registrants and others, and any adverse outcome from such challenges could have a material adverse effect on our business.
Consensus Policies. Our Registry Agreements with ICANN require us to implement Consensus Policies. ICANN could adopt Consensus Policies that are unfavorable to us as the registry operator of .com, .net and our other gTLDs, that are inconsistent with our current or future plans, that impose substantial costs on our business, or that affect our competitive position. Such Consensus Policies could have a material adverse effect on our business.
Governmental regulation and the application of new and existing laws in the U.S. and overseas 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 in the U.S. or overseas 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. For example, the government of the People’s Republic of China (“PRC”) has indicated that it will issue new regulations, and has begun to enforce existing regulations, that could impose additional costs on our provision of Registry Services in the PRC and could impact the growth or renewal rates of domain name registrations in the PRC. In addition to registry operators, the regulations will require registrars to obtain a government-issued license for each TLD whose domain name registrations they intend to sell directly to registrants. Their failure to obtain the required licenses could also impact the growth of our business in the PRC.
Foreign, federal or state laws could have an adverse impact on our business, financial condition, results of operations and cash flows, and our ability to conduct business in certain foreign countries. For example, laws designed to restrict who can register and who can distribute domain names, the online distribution of certain materials deemed harmful to children, online 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 contracts pursuant to which we provide services to the U.S. government and they impose compliance costs, including compliance with the Federal Acquisition Regulation, which 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. In addition, as we launch our IDN gTLDs, we may raise our profile in certain foreign countries thereby increasing the regulatory and other scrutiny of our operations. 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.
Undetected or unknown defects in our service, security breaches, and DDoS attacks could expose us to liability and harm our business and reputation.
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, including DNS data, diversion of development resources, injury to our reputation, tort or contract claims, increased insurance costs or increased service costs, any of which could harm our business. Performance of our services could have unforeseen or unknown adverse effects on the networks over which they are delivered as well as, more broadly, on internet users and consumers, and third-party applications and services that utilize our services, which could result in legal claims against us, harming our business. Our

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failure to identify, remediate and mitigate security breaches or our 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.
In addition to undetected defects or errors, we are also subject to cyber-attacks and attempted security breaches. We retain certain customer and employee information in our data centers and various domain name 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 Company, as an operator of critical internet infrastructure, is frequently targeted and experiences a high rate of attacks. These include the most sophisticated forms of attacks, such as advanced persistent threat attacks and zero-hour threats, which means that the threat is not compiled or has been previously unobserved within our observation and threat indicators space until the moment it is launched, and may well target specific unidentified or unresolved vulnerabilities that exist only within the target’s operating environment, making these attacks virtually impossible to anticipate and difficult to defend against. In addition to external threats, we may be subject to insider threats from current, former or contract employees and these threats can be realized from intentional or unintentional actions of such employees. The Shared Registration System, the root zone servers, the Root Zone Management System, the TLD name servers and the TLD zone files that we operate are critical to our Registry Services operations. Despite the significant time and money expended on our security measures, we have been subject to a security breach, as disclosed in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, and our infrastructure may in the future be vulnerable to physical break-ins, outages resulting from destructive malcode, computer viruses, attacks by hackers or nefarious actors or similar disruptive problems, including hacktivism. 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 data centers or domain name registration systems may cause an outage of or 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 operation of our businesses, all or any of which could adversely affect our reputation and harm our business. 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 the internet as well as of the security or reliability of our services.
We use externally developed technology, systems and services including both hardware and software, for a variety of purposes, including, without limitation, encryption and authentication technology, employee email, back-office support, and other functions. While we have developed operational policies and procedures to reduce the impact of a security breach at a vendor where Company data is stored or processed, such measures cannot provide absolute security. Breaches of our vendors’ technology, systems and services could expose us or our customers to a risk of loss or misuse of Company data, including but not limited to personal information.
Additionally, our networks have been, and likely will continue to be, subject to DDoS attacks. Recent attacks against others have demonstrated that DDoS attacks continue to grow in size and sophistication and have an ability to widely disrupt internet services. While we have adopted mitigation techniques, procedures and strategies to defend against such attacks, there can be no assurance that we will be able to defend against every attack, especially as the attacks increase in size and sophistication. Any attack, even if only partially successful, could disrupt our networks, increase response time, negatively impact our ability to meet our contracted service level obligations, and generally hamper our ability to provide reliable service to our Registry Services customers and the broader internet community. Further, we sell DDoS protection services to our Security Services customers. Although we increase our knowledge of and develop new techniques in the identification and mitigation of attacks through the protection of our Security Services customers, the DDoS protection services share some of the infrastructure used in our Registry Services business. Therefore the provision of such services might expose our critical Registry Services infrastructure to temporary degradations or outages caused by DDoS attacks against those customers, in addition to any directed specifically against us and our networks.
Changes to the multi-stakeholder model of internet governance could materially and adversely impact our business.
The internet is governed under a multi-stakeholder model comprising civil society, the private sector including for-profit and not-for-profit organizations such as ICANN, governments including the U.S. government, academia, non-governmental organizations and international organizations. On March 14, 2014, NTIA announced its intent to transition its oversight of the IANA function, which it managed pursuant to a contract with ICANN (“IANA Functions Contract”) to the global multi-stakeholder community. NTIA asked ICANN to convene global stakeholders to develop a proposal to transition the current role played by NTIA in the coordination of the DNS. In August 2016, the NTIA accepted the community’s proposal, which included important reforms for ICANN, including an empowered community that contains new powers to ensure ICANN accountability. As a result, the IANA Functions Contract expired on September 30, 2016, thereby implementing key aspects of the transition. These changes to the multi-stakeholder model of internet governance could materially and adversely impact our business. For example, the newly empowered community may assert positions that could negatively impact our strategy or our business. The NTIA also coordinated a related and parallel transition of root zone management functions. These root zone management

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functions involve our role as Root Zone Maintainer under the Cooperative Agreement. At NTIA’s request, we submitted a proposal with ICANN to NTIA as to how best to remove NTIA’s administrative role associated with root zone maintenance in a manner that maintains the security, stability and resiliency of the DNS. We have performed the Root Zone Maintainer function as a community service spanning three decades without compensation at the request of the DOC under the Cooperative Agreement. Under the proposal, which NTIA accepted, the NTIA discharged us from our obligations under the Cooperative Agreement to perform Root Zone Maintainer functions and we entered into a new agreement with ICANN, the Root Zone Maintainer Service Agreement (“RZMA”) under which we now perform the Root Zone Maintainer functions on behalf of ICANN. Furthermore, although our Root Zone Maintainer function is separate from our Registry Agreements, there can be no assurance that the transition of the IANA functions or the transition of the related root zone management functions, will not negatively impact our business.
Role of ICANN. ICANN plays a central coordination role in the multi-stakeholder system. ICANN is mandated through its bylaws to uphold a private sector-led multi-stakeholder approach to internet governance for the public benefit. If ICANN fails to uphold or significantly redefines the multi-stakeholder model, it could harm our business and our relationship with ICANN. Additionally, an empowered community could adversely impact ICANN, which could negatively impact its ability to coordinate the multi-stakeholder system of governance, or negatively affect our interests. Also, legal, regulatory or other challenges could be brought challenging the legal authority underlying the roles and actions of ICANN.
Role of foreign governments. Some governments and members of the multi-stakeholder community have questioned ICANN’s role with respect to internet governance and, as a result, could seek a multilateral oversight body as a replacement. Additionally, the role of ICANN’s Governmental Advisory Committee, which is comprised of representatives of national governments, could change, giving governments more control of internet governance. For example, the Affirmation of Commitments between the DOC and ICANN has 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 us. 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.
Role of the U.S. Government. By completing the transition discussed above the U.S. Government through the NTIA has ended its coordination and management of important aspects of the DNS including the IANA functions and the root zone. There can be no assurance that the removal of the U.S. Government oversight of these key functions will not negatively impact our business.
As a result of these and other risks, internet governance may change in ways that could materially harm our Registry Services business. For example, as we perform the Root Zone Maintainer function under the RZMA, we may be subject to claims challenging the agreement and we may not have immunity from, or sufficient indemnification for, such claims.
In addition to harming our Registry Services business, changes to internet governance may make it more difficult for us to introduce new services in our Registry Services business and we could also be subject to additional restrictions on how our business is conducted, or to fees or taxes applicable to this business, which may not be equally applicable to our competitors.
We operate two root zone servers and are contracted to perform the Root Zone Maintainer function. Under ICANN’s New gTLD program, we face increased risk from these operations.
We operate two of the 13 root zone servers. Root zone servers are name servers that contain authoritative data for the very top of the DNS hierarchy. These servers have the software and DNS configuration data necessary to locate name servers that contain authoritative data for the TLDs. These root zone servers are critical to the functioning of the internet. Under the RZMA, we play a key operational role in support of the IANA function as the Root Zone Maintainer. In this role, we provision and publish the authoritative data for the root zone itself multiple times daily and distribute it to all root server operators.
Under its New gTLD Program, ICANN has recommended delegations into the root zone of a large number of new gTLDs. In view of our role as the Root Zone Maintainer, and as a root server operator, we face increased risks should ICANN’s delegation of these new gTLDs, which represent unprecedented changes to the root zone in volume and frequency, cause security and stability problems within the DNS and/or for parties who rely on the DNS. Such risks include potential instability of the DNS including potential fragmentation of the DNS should ICANN’s delegations create sufficient instability, and potential claims based on our role in the root zone provisioning and delegation process. These risks, alone or in the aggregate, have the potential to cause serious harm to our Registry Services business. Further, our business could also be harmed through security, stability and resiliency degradation if the delegation of new gTLDs into the root zone causes problems to certain components of the DNS ecosystem or other aspects of the global DNS, or other relying parties are negatively impacted as a result of domain name collisions or other new gTLD security issues, such as exposure or other leakage of private or sensitive information.
Additionally, DNSSEC enabled in the root zone and at other levels of the DNS requires new preventative maintenance functions and complex operational practices that did not exist prior to the introduction of DNSSEC. Any failure by us or the

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IANA functions operator to comply with stated practices, such as those outlined in relevant DNSSEC Practice Statements, introduces risk to DNSSEC relying parties and other internet users and consumers of the DNS, which could have a material adverse impact on our business.
The evolution of internet practices and behaviors and the adoption of substitute technologies may impact the demand for domain names.
Domain names and the domain name system have been used by consumers and businesses to access or disseminate information, conduct ecommerce, and develop an online identity for many years. The growth of technologies such as social media, mobile devices, apps and the dominance of search engines has evolved and changed the internet practices and behaviors of consumers and businesses alike. These changes can impact the demand for domain names by those who purchase domain names for personal, commercial and investment reasons. Factors such as the evolving practices and preferences of internet users and how they navigate the internet as well the motivation of domain name registrants and how they will monetize their investment in domain names can negatively impact our business. Some domain name registrars and registrants seek to purchase and resell domain names following an increase in their value. Adverse changes in the resale value of domain names could result in a decrease in the demand and/or renewal rates for domain names obtained for resale.
Some domain name registrants use a domain name to access or disseminate information, conduct ecommerce, and develop an online identity. Currently, internet users often navigate to a website either by directly typing its domain name into a web browser, the use of an app on their smart phone or mobile device, the use of a voice recognition technology such as Siri, Cortana, or Echo, or through the use of a search engine. If (i) web browser or internet search technologies were to change significantly; (ii) internet users’ preferences or practices shift away from recognizing and relying on web addresses for navigation through the use of new and existing technologies; (iii) internet users were to significantly decrease the use of web browsers in favor of applications to locate and access content; or (iv) internet users were to increasingly use third level domains or alternate identifiers, such as social networking and microblogging sites, in each case the demand for domain names registered by us could decrease. This may trigger current or prospective customers and parties in our target markets to reevaluate their need for registration or renewal of 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, Yahoo!, Baidu and Bing, have, and may continue to, adversely affect the market for those domain names favored by such registrars and registrants which has resulted in, and may continue to result in, a decrease in demand and/or the renewal rate for those domain names. For example, according to published reports, Google has in the past changed (and may change in the future) its search algorithm, which may decrease site traffic to certain websites and provide less pay-per-click compensation for certain types of websites. This has made such websites less profitable which has resulted in, and may continue to result in, fewer domain registrations and renewals. In addition, as a result of the general economic environment, spending on online 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.
If any of the above factors negatively impact the renewal of domain names or the demand for new domain names, we may experience material adverse impacts on our business, operating results, financial condition and cash flows.
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.
We target many new, developing and emerging markets to grow our business. These markets are rapidly evolving, and may not grow. Even if these markets grow, our services may not be widely used or accepted. Accordingly, the demand for our services in these markets is very uncertain. The factors that may affect market acceptance or adoption of our services in these markets include the following:
regional internet infrastructure development, expansion, penetration and adoption;
market acceptance and adoption of products and services based upon technologies other than those we use, which are substitutes for our products and services;
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, and in particular the use of alternative internet navigation mechanisms other than web browsers;
increasing cyber threats and the associated customer need and demand for our Security Services offerings;
government regulations affecting internet access and availability, domain name registrations or the provision of registry services, or e-commerce and telecommunications over the internet;

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preference by markets for the use of their own country’s ccTLDs as a substitute or alternative to our TLDs; and
increased acceptance and use of new gTLDs as substitutes for established gTLDs.
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 may face operational and other risks from the introduction of new gTLDs by ICANN and our provision of back-end registry services.
Approximately 1,000 new gTLDs have already been delegated in this initial round of new gTLDs. ICANN plans on offering a second round of new gTLDs after the completion of the initial round, the timing of which is uncertain. As set forth in the Verisign Labs Technical Report #1130007 version 2.2: New gTLD Security and Stability Considerations released on March 28, 2013, and reiterated in our further publications since then, we continue to believe there are issues regarding the deployment of the new gTLDs that should have been addressed before any new gTLDs were delegated, and despite our and others’ efforts, some of these issues have not been addressed by ICANN sufficiently, if at all. For example, domain name collisions have been reported to ICANN, which have resulted in various network interruptions for enterprises as well as confusion and usability issues that have led to phishing attacks. It is anticipated that as additional new gTLDs are delegated more domain name collisions and associated security issues will occur.
We have entered into agreements to provide back-end registry services to other registry operators and applicants for new gTLDs. We may face risks regarding ICANN requirements for mitigating name collisions in the new gTLDs which we operate or for which we provide back-end registry services. For example, the possibility exists that “controlled interruption” periods may disrupt network services or that privacy or secure communications may be impacted as a result of insufficient preparedness by ICANN and the community for the launch of new gTLDs.
Our agreements with ICANN to provide registry services in connection with our new gTLDs, including our IDN gTLDs, and our agreements to provide back-end registry services directly to other applicants and indirectly through reseller relationships expose us to operational and other risks. For example, the increase in the number of gTLDs for which we provide registry services on a standalone basis or as a back-end service provider could further increase costs or increase the frequency or scope of targeted attacks from nefarious actors.
The business environment is highly competitive and, if we do not compete effectively, we may suffer lower demand for our products, price reductions, reduced gross margins and loss of market share.
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 or alternatives to our products and services. In order to remain competitive and retain our market position, we must continually improve our access to technology and software, support the latest transmission technologies, and adapt our products and services to changing market conditions and our customers’ and internet users’ preferences and practices, or launch entirely new products and services such as new gTLDs in anticipation of, or in response to, market trends. We cannot assure 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.
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 obtain a domain name registration and/or establish a web presence. We have applied for new gTLDs including certain IDN gTLDs; however, there is no guarantee that such new gTLDs will be as or more successful than the new gTLDs obtained by our competitors. For example, some of the new gTLDs, including our new gTLDs, may face additional universal acceptance and usability challenges in that current desktop and mobile device software does not ubiquitously recognize these new gTLDs and may be slow to adopt standards or support these gTLDs, even if demand for such products is strong. This is particularly true for IDN gTLDs, but applies to conventional gTLDs as well. As a result of these challenges, it is possible that resolution of domain names within some of these new gTLDs may be blocked within certain state or organizational environments, challenging universal resolvability of these strings and their general acceptance and usability on the internet.
See the “Competition” section in Part I, Item 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, which was filed on February 19, 2016, for further information.

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We must establish and maintain strong relationships with registrars and their resellers to maintain their focus on marketing our products and services otherwise our Registry Service business could be harmed.
All of our domain name registrations occur through registrars. Registrars and their resellers utilize substantial marketing efforts to increase the demand and/or renewal rates for domain names. Consolidation in the registrar or reseller industry or changes in ownership, management, or strategy among individual registrars or resellers could result in significant changes to their business, operating model and cost structure. Such changes could include reduced marketing efforts or other operational changes that could adversely impact the demand and/or the renewal rates for domain names. With the introduction of new gTLDs, many of our registrars have chosen to, and may continue to choose to, focus their short or long-term marketing efforts on these new offerings and/or reduce the prominence or visibility of our products and services on their e-commerce platforms. Our registrars and resellers not only sell domain name registrations of other competing registries but also sell and support their own services for websites such as email, website hosting, as well as other services. To the extent that registrars and their resellers focus more on selling and supporting other services and less on the registration and renewal of our TLDs, our revenues could be adversely impacted. Our ability to successfully market our services to, and build and maintain strong relationships with, new and existing registrars or resellers is a factor upon which successful operation of our business is dependent. If we are unable to keep a significant portion of their marketing efforts focused on selling our TLDs as opposed to other competing TLDs or their own services, our business could be harmed.
If we encounter system interruptions or failures, 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, including hacktivism, by miscreants or other nefarious actors;
computer viruses or software defects;
physical or electronic break-ins, sabotage, intentional acts of vandalism, terrorist attacks and other events beyond our control;
risks inherent in or arising from the terms and conditions of our agreements with service providers to operate our networks and data centers;
state suppression of internet operations; and
any failure to implement effective and timely remedial actions in response to any damage or interruption.
Most of the computing infrastructure for our Shared Registration System is 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 our primary alternate 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, we do not carry insurance or financial reserves for such interruptions, or for 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 to and from customers to our Shared Registration System residing in our secure data centers. 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 beyond our scope of control. In addition, if these service providers do not protect, maintain, improve, and reinvest in their networks or present inconsistent data regarding the DNS through their networks, our business could be harmed.
A failure in the operation or update of the root zone servers, the root zone file, the root zone management system, the TLD name servers, or the TLD zone files that we operate, or other network functions, could result in a DNS resolution or other service outage or degradation; the deletion of one or more TLDs from the internet; the deletion of one or more second-level domain names from the internet for a period of time; or a misdirection of a domain name to a different server. A failure in the operation or update of the supporting cryptographic and other operational infrastructure that we maintain could result in similar consequences. A failure in the operation of our Shared Registration System could result in the inability of one or more registrars to register or maintain domain names for a period of time. In the event that a registrar has not implemented back-up services in conformance with industry best practices, the failure could result in permanent loss of transactions at the registrar during that period. Any of these problems or outages could create potential liability, including liability arising from a failure to meet our

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service level agreements in our Registry Agreements, and 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 the internet as well as of the security or reliability of our services.
Our operating results may be adversely affected as a result of unfavorable market, economic, social and political conditions.
An unstable global economic, social and political environment, including hostilities and conflicts in various regions both inside and outside the U.S., natural disasters, currency fluctuations, and country specific operating regulations may have a negative impact on demand for our services, our business and our foreign operations. The economic, social and political environment has impacted 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 and our associated ability to execute on any share repurchase plans;
our ability to service our debt, to obtain financing or assume new debt obligations; and
our ability to obtain payment for outstanding debts owed to us by our customers or other parties with whom we do business.
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 have a disproportionate negative impact on our business.
Our international operations subject our business to additional economic and political risks that could have an adverse impact on our revenues and business.
A significant portion of our revenues is derived from customers outside the U.S. Doing business in 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 may fail to maintain our ability to conduct business, including potentially material business operations in some international locations, or we may not succeed in expanding our services into new international markets or expand our presence in existing markets. Failure to do so could materially 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 our employees, contractors and agents will not take actions in violation of such policies, procedures, laws and/or regulations. Violations of laws, regulations or internal policies and procedures by our employees, contractors or agents could result in financial reporting problems, investigations, 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, as well as foreign governments actively promoting ccTLDs, which we do not operate;
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;
currency fluctuations;
potential problems associated with adapting our services to technical conditions existing in different countries;
difficulty of verifying customer information, including complying with the customer verification requirements of certain countries;
more stringent privacy policies in some foreign countries;
additional vulnerability from terrorist groups targeting U.S. interests abroad;

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potentially conflicting or adverse tax consequences;
reliance on third parties in foreign markets in which we only recently started doing business; and
potential concerns of international customers and prospects regarding doing business with U.S. technology companies due to alleged U.S. government data collection policies.
We rely on our intellectual property rights to protect our proprietary assets, and any failure by us to protect or enforce, or any misappropriation of, our intellectual property could harm our business.
Our success depends in part on our internally developed technologies and related intellectual property. Despite our precautions, it may be possible for an external party to copy or otherwise obtain and use 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 applications with respect to some 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, third parties may seek to oppose or otherwise challenge our patents, and such patents’ scope may differ significantly from what was requested in the patent applications and may not provide us with sufficient protection of our intellectual property. In the future, we may have to resort to litigation to enforce and protect 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 is inherently unpredictable and, regardless of its outcome, could result in substantial costs and diversion of management attention and technical resources. Some of the software and protocols used in our business are based on standards set by standards setting organizations such as the Internet Engineering Task Force. To the extent any of our patents are considered “standards essential patents,” we may be required to license such patents to our competitors on reasonable and non-discriminatory terms.
We also license externally developed technology that is used in some of our products and services to perform key functions. These externally developed technology licenses may not continue to be available to us on commercially reasonable terms or at all. The loss of or our inability to obtain or maintain any of these technology licenses could hinder or increase the cost of our launching new products and services, entering into new markets and/or otherwise harm our business. Some of the software and protocols used in our Registry Services business are in the public domain or may otherwise become publicly available, which means that such software and protocols are equally available to our competitors.
We rely on the strength of our Verisign brand to help 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 fully register, build equity in, or enforce the Verisign logo in all markets where Verisign products and services are sold. In addition, in the U.S. and most other countries’ word marks for TLDs have currently not been successfully registered as trademarks. Accordingly, we may not be able to fully realize or maintain the value of these intellectual property assets.
We could become subject to claims of infringement of intellectual property of others, which could be costly to defend and could harm our business.
We cannot be certain that we do not and will not infringe the intellectual property rights of others. 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 use of our logo could present additional potential risks for external 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 were 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.
An external party could claim that the technology we license from other parties 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.
In addition, legal standards relating to the validity, enforceability, and scope of protection of intellectual property rights in internet-related businesses, including patents related to software and business methods, are uncertain and 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

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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 could become involved in claims, lawsuits or investigations that may result in adverse outcomes.
In addition to possible intellectual property litigation and infringement claims, we are, and may in the future, become involved in other claims, lawsuits and investigations, including with respect to the root zone maintainer agreement now under negotiation with ICANN. Such proceedings may initially be viewed as immaterial but could prove to be material. Litigation is inherently unpredictable, and excessive verdicts do occur. Adverse outcomes in lawsuits and investigations could 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, results of operations and cash flows. Given the inherent uncertainties in litigation,  even when we are able to reasonably estimate the amount of possible loss or range of loss and therefore record an aggregate litigation accrual for probable and reasonably estimable loss contingencies, the accrual may change in the future due to new developments or changes in approach.  In addition, such investigations, claims and lawsuits could involve significant expense and diversion of management’s attention and resources from other matters.
We continue to explore new strategic initiatives, the pursuit of any of which may pose significant risks and could have a material adverse effect on our business, financial condition and results of operations.
We are exploring a variety of possible strategic initiatives which may include, among other things, the investment in, and the pursuit of, new revenue streams, services or products, changes to our offerings, initiatives to leverage our patent portfolio, our Security Services business, back-end registry services and IDN gTLDs. In addition, we have evaluated and are pursuing and will continue to evaluate and pursue acquisitions of TLDs that are currently in operation and those that have not yet been awarded as long as they support our growth strategy.
Any such strategic initiative may involve a number of risks, including: the diversion of our management’s attention from our existing business to develop the initiative, related operations and any requisite personnel; possible regulatory scrutiny or third-party claims; possible material adverse effects on our results of operations during and after the development process; our possible inability to achieve the intended objectives of the initiative; as well as damage to our reputation if we are unsuccessful in pursuing a strategic initiative. Such initiatives may result in a reduction of cash or increased costs. We may not be able to successfully or profitably develop, integrate, operate, maintain and manage any such initiative and the related operations or employees in a timely manner or at all. Furthermore, under our agreements with ICANN, we are subject to certain restrictions in the operation of .com, .net, .name and other TLDs, including required ICANN approval of new registry services for such TLDs. If any new initiative requires ICANN review or ICANN determines that such a review is required, we cannot predict whether this process will prevent us from implementing the initiative in a timely manner or at all. Any strategic initiative to leverage our patent portfolio will likely increase litigation risks from potential licensees and we may have to resort to litigation to enforce our intellectual property rights.
We depend on key employees to manage our business effectively, and we may face difficulty attracting and retaining qualified leaders.
We operate in a unique competitive and highly regulated environment and we depend on the knowledge, experience, and performance of our senior management team and other key employees in this regard and otherwise. We periodically experience changes in our management team. If we are unable to attract, integrate, retain and motivate these key individuals and additional highly skilled technical, sales and marketing, and other experienced employees, and implement succession plans for these personnel, our business may suffer. For example, our service products are highly technical and require individuals skilled and knowledgeable in unique platforms and software implementation.
Changes in, or interpretations of, tax rules and regulations or our tax positions 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, there are many transactions and calculations where the ultimate tax determination is uncertain. We are subject to audit by various tax authorities. In accordance with U.S. GAAP, we recognize income tax benefits, net of required valuation allowances and accrual for uncertain tax positions. For example, we claimed a worthless stock deduction on our 2013 federal income tax return and recorded a net income tax benefit of $380.1 million. 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 results of operations, financial condition and cash flows in the period or periods for which that determination is made could result.
A significant portion of our foreign earnings for the current fiscal year was earned in low tax jurisdictions. Our effective tax rate could fluctuate significantly on a quarterly basis and could be adversely affected to the extent earnings are lower than

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anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates.
Various legislative proposals that would reform U.S. corporate tax laws have been proposed by the Obama administration as well as members of Congress, including proposals that would significantly impact how U.S. multinational corporations are taxed on foreign earnings. We are unable to predict whether these or other proposals will be implemented. Although we cannot predict whether or in what form any proposed legislation may pass, if enacted, such legislation could have a material adverse impact on our tax expense or cash flow.
Our foreign earnings, which are indefinitely reinvested offshore, constitute a majority of our cash, cash equivalents and marketable securities, and there is a high cost associated with a change in our indefinite reinvestment assertion or a repatriation of those funds to the U.S.
A majority of our cash, cash equivalents and marketable securities are held by our foreign subsidiaries. Our foreign earnings are indefinitely reinvested offshore and are not available to be used in the U.S. for working capital needs, debt obligations, acquisitions, share repurchases, dividends or other general corporate purposes. In the event that funds from our foreign operations are needed in the U.S. for any purpose, we would be required to accrue and pay additional U.S. taxes in order to repatriate those funds, which could be significant.  Further, if we are unable to indefinitely reinvest our foreign earnings our effective tax rate would increase. These could adversely impact our business valuation and stock price.
Our marketable securities portfolio could experience a decline in market value, which could materially and adversely affect our financial results.
As of September 30, 2016, we had $1.8 billion in cash, cash equivalents, marketable securities and restricted cash, of which $1.6 billion was invested in marketable securities. The marketable securities consist primarily of debt securities issued by the U.S. Treasury 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 U.S. debt ceiling crisis and the Eurozone crisis, which affected various sectors of the financial markets and led to global credit and liquidity issues. During the 2008 financial crisis, the volatility and disruption in the global credit market reached unprecedented levels. If the global credit market deteriorates again or other events negatively impact the market for U.S. Treasury securities, 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 results of operations and cash flows.
We are subject to the risks of owning real property.
We own the land and building in Reston, Virginia, which constitutes our headquarters facility. Ownership of this property, as well as our data centers in Dulles, Virginia and New Castle, Delaware, may subject us to risks, including:
adverse changes in the value of the properties, due to interest rate changes, changes in the commercial property markets, or other factors;
ongoing maintenance expenses and costs of improvements;
the possible need for structural improvements in order to comply with environmental, health and safety, zoning, seismic, disability law, or other requirements;
the possibility of environmental contamination or notices of violation from federal or state environmental agencies; and
possible disputes with neighboring owners, tenants, service providers or others.
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 an outside 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 chairman of the board of directors, the president, our Board, or the secretary (acting as a representative of the stockholders) whenever a stockholder or group of stockholders owning at least thirty-five percent (35%) in the aggregate of the capital stock issued, outstanding and entitled to vote, and who held that amount in a net long position continuously for at least one year, so request in writing;

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vacancies on our Board can be filled until the next annual meeting of stockholders by a majority of directors then in office; and
our Board has the ability to designate the terms of and issue new series of preferred stock without stockholder approval.
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.
We have a considerable number of common shares subject to future issuance.
As of September 30, 2016, we had one billion authorized common shares, of which 105.1 million shares were outstanding. In addition, of our authorized common shares, 12.6 million common shares were reserved for issuance pursuant to outstanding equity and employee stock purchase plans (“Equity Plans”), and 36.4 million shares were reserved for issuance upon conversion of our 3.25% Junior Subordinated Convertible Debentures due 2037 (“Subordinated 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 Subordinated 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.
Our financial condition and results of operations could be adversely affected if we do not effectively manage our indebtedness.
We have a significant amount of outstanding debt, and we may incur additional indebtedness in the future. Our substantial indebtedness, including any future indebtedness, requires us to dedicate a significant portion of our cash flow from operations or to arrange alternative liquidity sources to make principal and interest payments, when due, or to repurchase or settle our debt, if triggered, by certain corporate events, certain events of default, or conversion. It could also limit our flexibility in planning for or reacting to changes in our business and our industry, or make required capital expenditures and investments in our business; make it difficult or more expensive to refinance our debt or obtain new debt; trigger an event of default; and increase our vulnerability to adverse changes in general economic and industry conditions. Some of our debt contains covenants which may limit our operating flexibility, including restrictions on share repurchases, dividends, prepayment or repurchase of debt, acquisitions, disposing of assets, if we do not continue to meet certain financial ratios. Any rating assigned to our debt securities could be lowered or withdrawn by a rating agency, which could make it more difficult or more expensive for us to obtain additional debt financing in the future. The settlement amount, contingent interest, and potential recapture of income tax deductions related to our Subordinated Convertible Debentures can be substantial, and can increase significantly based on changes in our stock price. The occurrence of any of the foregoing factors could have a material adverse effect on our business, cash flows, results of operations and financial condition.




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ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table presents the share repurchase activity during the three months ended September 30, 2016:
 
Total Number
of Shares
Purchased
 
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 (1)
 
(Shares in thousands)
July 1 – 31, 2016
558

 
$
84.24

 
558

 
$
718.9
 million
August 1 – 31, 2016
801

 
$
79.82

 
801

 
$
655.0
 million
September 1 – 30, 2016
863

 
$
76.57

 
863

 
$
588.9
 million
 
2,222

 
 
 
2,222

 
 
(1) Effective February 11, 2016, our Board of Directors authorized the repurchase of approximately $611.2 million of our common stock, in addition to the $388.8 million of our common stock remaining available for repurchase under the previous share repurchase program, for a total repurchase authorization of up to $1.0 billion of our common stock. The share repurchase 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.



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ITEM 6.    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
Incorporated by Reference
 
 
 
 
 
Form
Date
Number
 
Filed Herewith
 
 
 
 
 
 
 
 
10.01
 
Amendment to the Registry Agreement between VeriSign, Inc. and the Internet Corporation for Assigned Names and Numbers, entered into on October 20, 2016
8-K
10/20/16
10.1
 
 
 
 
 
 
 
 
 
 
10.02
 
Amendment Number Thirty-Three (33) to the Cooperative Agreement between VeriSign, Inc. and Department of Commerce, entered into on October 20, 2016
8-K
10/20/16
10.2
 
 
 
 
 
 
 
 
 
 
10.03
 
Amendment Number Thirty-Four (34) to the Cooperative Agreement between VeriSign, Inc. and Department of Commerce, entered into on October 20, 2016
8-K
10/20/16
10.3
 
 
 
 
 
 
 
 
 
 
31.01
 
Certification of Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a).
 
 
 
 
X
 
 
 
 
 
 
 
31.02
 
Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a).
 
 
 
 
X
 
 
 
 
 
 
 
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). *
 
 
 
 
X
 
 
 
 
 
 
 
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). *
 
 
 
 
X
 
 
 
 
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
 
X
 
 
 
 
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema
 
 
 
 
X
 
 
 
 
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
 
X
 
 
 
 
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase
 
 
 
 
X
 
 
 
 
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
 
 
 
 
X
 
 
 
 
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase
 
 
 
 
X

*
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.

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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.
 
Date: October 27, 2016
By:
/S/    D. JAMES BIDZOS        
 
 
D. James Bidzos
 
 
Chief Executive Officer
 
Date: October 27, 2016
By:
/S/   GEORGE E. KILGUSS, III   
 
 
George E. Kilguss, III
 
 
Chief Financial Officer

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