Item 16. 10-K SUMMARY

None.

FINANCIAL STATEMENTS

As required under Item 8—Financial Statements and Supplementary Data, the consolidated financial statements of Verisign, Inc. are provided in this separate section. The consolidated financial statements included in this section are as follows:

Financial Statement Description	Page
Reports of Independent Registered Public Accounting Firm	44
Consolidated Balance Sheets As of December 31, 2018 and December 31, 2017	46
Consolidated Statements of Comprehensive Income For the Years Ended December 31, 2018, 2017, and 2016	47
Consolidated Statements of Stockholders’ Deficit For the Years Ended December 31, 2018, 2017, and 2016	48
Consolidated Statements of Cash Flows For the Years Ended December 31, 2018, 2017, and 2016	49
Notes to Consolidated Financial Statements	50

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

VeriSign, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of VeriSign, Inc. and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of comprehensive income, stockholders’ deficit, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 15, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, effective January 1, 2018, the Company adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, and several related amendments, issued by the Financial Accounting Standards Board (FASB). This change was adopted using the modified retrospective method.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ KPMG LLP

We have served as the Company’s auditor since 1995.

McLean, Virginia

February 15, 2019

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

VeriSign, Inc.:

Opinion on Internal Control Over Financial Reporting

We have audited VeriSign, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of comprehensive income, stockholders’ deficit, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements), and our report dated February 15, 2019 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting (Item 9A). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP

McLean, Virginia

February 15, 2019

VERISIGN, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

	December 31, 2018				December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	357,415			$	465,851
Marketable securities	912,254				1,948,900
Other current assets	47,365				31,402
Total current assets	1,317,034				2,446,153
Property and equipment, net	253,905				263,513
Goodwill	52,527				52,527
Deferred tax assets	104,992				15,392
Deposits to acquire intangible assets	145,000				145,000
Other long-term assets	41,046				18,603
Total long-term assets	597,470				495,035
Total assets	$	1,914,504			$	2,941,188
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable and accrued liabilities	$	215,208			$	219,603
Deferred revenues	732,382				713,309
Subordinated convertible debentures, including contingent interest derivative	—				627,616
Total current liabilities	947,590				1,560,528
Long-term deferred revenues	285,720				286,097
Senior notes	1,785,047				1,782,529
Deferred tax liabilities	134				444,108
Other long-term tax liabilities	281,487				128,197
Total long-term liabilities	2,352,388				2,640,931
Total liabilities	3,299,978				4,201,459
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: 352,325 at December 31, 2018 and 325,218 at December 31, 2017; Outstanding shares: 120,037 at December 31, 2018 and 97,591 at December 31, 2017	352				325
Additional paid-in capital	15,706,774				16,437,135
Accumulated deficit	(17,089,789		)		(17,694,790		)
Accumulated other comprehensive loss	(2,811		)		(2,941		)
Total stockholders’ deficit	(1,385,474		)		(1,260,271		)
Total liabilities and stockholders’ deficit	$	1,914,504			$	2,941,188

See accompanying Notes to Consolidated Financial Statements.

VERISIGN, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, except per share data)

	Year Ended December 31,
	2018				2017				2016
Revenues	$	1,214,969			$	1,165,095			$	1,142,167
Costs and expenses:
Cost of revenues	192,134				193,326				198,242
Sales and marketing	64,891				81,951				80,250
Research and development	57,884				52,342				59,100
General and administrative	132,668				129,754				118,003
Total costs and expenses	447,577				457,373				455,595
Operating income	767,392				707,722				686,572
Interest expense	(114,845		)		(136,336		)		(115,564		)
Non-operating income, net	76,969				27,626				10,165
Income before income taxes	729,516				599,012				581,173
Income tax expense	(147,027		)		(141,764		)		(140,528		)
Net income	582,489				457,248				440,645
Other comprehensive income	130				512				540
Comprehensive income	$	582,619			$	457,760			$	441,185
Earnings per share:
Basic	$	5.13			$	4.56			$	4.12
Diluted	$	4.75			$	3.68			$	3.42
Shares used to compute earnings per share
Basic	113,452				100,325				107,001
Diluted	122,661				124,180				128,833

See accompanying Notes to Consolidated Financial Statements.

VERISIGN, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(In thousands)

									Additional Paid-In Capital				Accumulated Deficit				Accumulated Other Comprehensive Loss				Total Stockholders' Deficit
		Common Stock
		Shares			Amount
Balance at December 31, 2015		110,072			$	323			$	17,558,822			$	(18,625,599	)		$	(3,993	)		$	(1,070,447	)
Net income		—			—				—				440,645				—				440,645
Other comprehensive income		—			—				—				—				540				540
Issuance of common stock under stock plans		1,128			1				13,669				—				—				13,670
Stock-based compensation		—			—				52,430				—				—				52,430
Net excess income tax benefits associated with stock-based compensation		—			—				25,058				—				—				25,058
Repurchase of common stock		(8,109	)		—				(662,491		)		—				—				(662,491		)
Balance at December 31, 2016		103,091			324				16,987,488				(18,184,954		)		(3,453		)		(1,200,595		)
Cumulative adjustment upon adoption of ASU 2016-09		—			—				2,544				32,916				—				35,460
Net income		—			—				—				457,248				—				457,248
Other comprehensive income		—			—				—				—				512				512
Issuance of common stock under stock plans		1,100			1				12,914				—				—				12,915
Stock-based compensation		—			—				55,362				—				—				55,362
Repurchase of common stock		(6,600	)		—				(621,173		)		—				—				(621,173		)
Balance at December 31, 2017		97,591			325				16,437,135				(17,694,790		)		(2,941		)		(1,260,271		)
Cumulative adjustment upon adoption of ASU 2014-09		—			—				—				22,512				—				22,512
Conversion of Subordinated Convertible Debentures		26,080			26				(159,618		)		—				—				(159,592		)
Net income		—			—				—				582,489				—				582,489
Other comprehensive income		—			—				—				—				130				130
Issuance of common stock under stock plans		1,027			1				12,835				—				—				12,836
Stock-based compensation		—			—				54,574				—				—				54,574
Repurchase of common stock		(4,661	)		—				(638,152		)		—				—				(638,152		)
Balance at December 31, 2018		120,037			$	352			$	15,706,774			$	(17,089,789	)		$	(2,811	)		$	(1,385,474	)

See accompanying Notes to Consolidated Financial Statements

VERISIGN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Year Ended December 31,
	2018				2017				2016
Cash flows from operating activities:
Net income	$	582,489			$	457,248			$	440,645
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property and equipment	48,367				49,878				58,167
Stock-based compensation	52,504				52,907				50,044
Gain on sale of business	(54,840		)		(10,421		)		—
Loss on debt extinguishment	6,554				—				—
Payment of contingent interest	—				(15,232		)		(13,385		)
Amortization of debt discount and issuance costs	7,137				14,678				13,411
Amortization of discount on investments in debt securities	(18,259		)		(14,860		)		(5,527		)
Other, net	955				826				(662		)
Changes in operating assets and liabilities
Prepaid expenses and other assets	1,041				13,775				8,109
Accounts payable and accrued liabilities	(2,130		)		15,483				40,244
Deferred revenues	19,825				25,348				14,347
Net deferred income taxes and other long-term tax liabilities	54,124				113,131				87,614
Net cash provided by operating activities	697,767				702,761				693,007
Cash flows from investing activities:
Proceeds from maturities and sales of marketable securities	4,031,809				4,562,161				3,817,899
Purchases of marketable securities	(2,976,752		)		(4,929,834		)		(3,691,057		)
Proceeds from sale of business	52,240				11,748				—
Purchases of property and equipment	(37,007		)		(49,499		)		(26,574		)
Deposits to acquire intangible assets	—				—				(143,000		)
Other investing activities	(160		)		—				—
Net cash provided by (used in) investing activities	1,070,130				(405,424		)		(42,732		)
Cash flows from financing activities:
Repayment of principal on subordinated convertible debentures	(1,250,009		)		—				—
Proceeds from employee stock purchase plan	12,836				12,915				13,670
Repurchases of common stock	(638,152		)		(621,173		)		(662,491		)
Proceeds from senior notes, net of issuance costs	—				543,185				—
Net cash used in financing activities	(1,875,325		)		(65,073		)		(648,821		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(958		)		1,294				(501		)
Net (decrease) increase in cash, cash equivalents and restricted cash	(108,386		)		233,558				953
Cash, cash equivalents, and restricted cash at beginning of period	475,139				241,581				240,628
Cash, cash equivalents, and restricted cash at end of period	$	366,753			$	475,139			$	241,581
Supplemental cash flow disclosures:
Cash paid for interest	$	117,956			$	117,234			$	115,544
Cash paid for income taxes, net of refunds received	$	84,906			$	28,294			$	14,303

See accompanying Notes to Consolidated Financial Statements.

VERISIGN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2018, 2017 AND 2016

Note 1. Description of Business and Summary of Significant Accounting Policies

Description of Business

VeriSign, Inc. (“Verisign” or “the Company”) was incorporated in Delaware on April 12, 1995. The Company has one reportable segment, Registry Services. The Company enables the security, stability, and resiliency of key internet infrastructure and services, including providing root zone maintainer services, operating two of the 13 global internet root servers, and providing registration services and authoritative resolution for the .com and .net top-level domains, which support the majority of global e-commerce. As discussed further in Note 8 “Sale of Security Services Business”, the Company completed the sale of the rights, economic benefits, and obligations, in all customer contracts related to its Security Services business to NeuStar, Inc. (“Neustar”) on December 5, 2018.

Basis of Presentation

The accompanying consolidated financial statements of Verisign and its subsidiaries have been prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States (“U.S.”). All significant intercompany accounts and transactions have been eliminated.

The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

Reclassifications

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

Adoption of New Accounting Standards

Effective January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, and several related amendments, issued by the Financial Accounting Standards Board (“FASB”). ASU 2014-09 replaces the previous numerous and disparate revenue recognition guidance, and provides companies with a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. The adoption of ASU 2014-09 did not have any impact on our revenue recognition, but did result in a change in the accounting for costs incurred to obtain a contract. Pursuant to the new guidance, the Company recognizes the fees that it pays to ICANN for each annual increment of .com domain name registrations and renewals, as an asset which is amortized on a straight-line basis over the related domain name term. This change was adopted using the modified retrospective method. As a result, the Company recorded current and long-term assets of $19.7 million and $7.6 million, respectively, a deferred tax liability of $4.8 million and a decrease to the opening balance of accumulated deficit of $22.5 million.

Effective January 1, 2018, the Company adopted ASU 2016-18, Restricted Cash, issued by the FASB. ASU 2016-18 requires restricted cash to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts set forth on the statement of cash flows instead of presenting changes in restricted cash in cash flows from investing activities. As a result of the adoption, the changes in restricted cash are included with cash and cash equivalents on the statement of cash flows for both periods presented. The change in the amounts presented for the prior period was not significant.

Recent Accounting Pronouncements

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. In July 2018, the FASB issued ASU 2018-11, Targeted Improvements to Topic 842 Leases, which allows for an alternative transition approach, which will not require adjustments to comparative prior period amounts. This ASU became effective for the Company on January 1, 2019. The adoption of this standard will not have a material impact on the Company’s consolidated financial statements.

VERISIGN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

DECEMBER 31, 2018, 2017 AND 2016

Significant Accounting Policies

Cash and Cash Equivalents

Verisign considers all highly-liquid investments purchased with original maturities of three months or less to be cash equivalents. Cash and cash equivalents include certain money market funds, debt securities and various deposit accounts. Verisign maintains its cash and cash equivalents with financial institutions that have investment grade ratings and, as part of its cash management process, performs periodic evaluations of the relative credit standing of these financial institutions.

Marketable Securities

Marketable securities primarily consist of debt securities issued by the U.S. Treasury. All marketable securities are classified as available-for-sale and are carried at fair value. Unrealized gains and losses, net of taxes, are reported as a component of Accumulated other comprehensive loss. The specific identification method is used to determine the cost basis of the marketable securities sold. The Company classifies its marketable securities as current based on their nature and availability for use in current operations.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets of 35 to 47 years for buildings, 10 years for building improvements and three to five years for computer equipment, software, office equipment, and furniture and fixtures. Leasehold improvements are amortized using the straight-line method over the lesser of the estimated useful lives of the assets or associated lease terms.

Capitalized Software

Software included in property and equipment includes amounts paid for purchased software and development costs for internally developed software. The Company capitalized $14.7 million and $17.7 million of costs related to internally developed software during 2018 and 2017, respectively.

Goodwill and Other Long-lived Assets

Goodwill represents the excess of purchase consideration over fair value of net assets of businesses acquired. The Company has only one reporting unit, namely Registry Services, which has a negative carrying value. Therefore, the goodwill is not subject to impairment.

Long-lived assets, such as property, plant, and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset, or asset group, may not be recoverable. Such events or circumstances include, but are not limited to, a significant decrease in the fair value of the underlying business. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset, or asset group, to estimated undiscounted future cash flows expected to be generated by the asset, or asset group. An impairment charge is recognized in the amount by which the carrying amount of the asset exceeds its fair value.

As of December 31, 2018, the Company’s assets include a deposit related to the purchase of the contractual rights to the .web gTLD. The amount paid to date has been recorded as a deposit until such time that the contractual rights are transferred to the Company. This asset would be tested for recoverability if the Company were to determine that it is no longer probable that the rights will be transferred. At the time of the transfer of the contractual rights, the Company will record the amount as an indefinite-lived intangible asset subject to review for impairment on an annual basis or more frequently if events or changes in circumstances indicate that an impairment is more likely than not.

3.25% Junior Subordinated Convertible Debentures Due 2037 (“Subordinated Convertible Debentures”)

Upon issuance of the Subordinated Convertible Debentures, Verisign separated the liability (debt) and equity (conversion option) components in a manner that reflected the borrowing rate for a similar non-convertible debt. The liability component was recognized based on the fair value of a similar instrument without a conversion feature at issuance. The excess of the principal amount of the Subordinated Convertible Debentures over the liability component at issuance was the equity component or debt discount, which was recorded as Additional paid-in capital. The debt discount was amortized using the Company’s effective interest rate over the term of the Subordinated Convertible Debentures as a non-cash charge to interest expense. The Company settled all of the outstanding Subordinated Convertible Debentures during 2018. For further details, refer to Note 4 “Debt and Interest Expense”.

VERISIGN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

DECEMBER 31, 2018, 2017 AND 2016

Foreign Currency Remeasurement

Verisign conducts business in several different countries and transacts in multiple currencies. The functional currency for all of Verisign’s international subsidiaries is the U.S. Dollar. The Company’s subsidiaries’ financial statements are remeasured into U.S. Dollars using a combination of current and historical exchange rates and any remeasurement gains and losses are included in Non-operating income, net. Remeasurement gains and losses were not significant in each of the last three years.

Verisign maintains a foreign currency risk management program designed to mitigate foreign exchange risks associated with the monetary assets and liabilities that are denominated in currencies other than the U.S. dollar. The primary objective of this program is to minimize the gains and losses resulting from fluctuations in exchange rates. The Company does not enter into foreign currency transactions for trading or speculative purposes, nor does it hedge foreign currency exposures in a manner that entirely offsets the effects of changes in exchange rates. The program may entail the use of forward or option contracts, which are usually placed and adjusted monthly. These foreign currency forward contracts are derivatives and are recorded at fair market value. The Company records gains and losses on foreign currency forward contracts in Non-operating income, net. Gains and losses related to foreign currency forward contracts were not significant in each of the last three years.

As of December 31, 2018, Verisign held foreign currency forward contracts in notional amounts totaling $28.5 million to mitigate the impact of exchange rate fluctuations associated with certain assets and liabilities held in foreign currencies.

Revenue Recognition

Revenues are recognized when control of the promised services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.

Registry Services

Registry Services revenues primarily arise from fixed fees charged to registrars for the initial registration or renewal of .com, .net, and other domain names. Fees for domain name registrations and renewals are generally due at the time of registration or renewal. Domain name registration terms range from one year up to ten years.

Most customers either maintain a deposit with Verisign or provide an irrevocable letter of credit in excess of the amounts owed. New customers are subjected to a credit review process that evaluates the customer’s financial condition and, ultimately, their ability to pay.

Verisign also offers promotional marketing programs to its registrars based upon market conditions and the business environment in which the registrars operate. Amounts payable to these registrars for such promotional marketing programs are usually recorded as a reduction of revenue. If Verisign obtains an identifiable benefit separate from the services it provides to the registrars, then amounts payable up to the fair value of the benefit received are recorded as advertising expenses and the excess, if any, is recorded as a reduction of revenue.

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Each domain name registration or renewal is considered a separate optional purchase and represents a single performance obligation, which is to allow its registration and maintain that registration (by allowing updates, Domain Name System (“DNS”) resolution and Whois services) through the registration term. These services are provided continuously throughout each registration term, and as such, revenues from the initial registration or renewal of domain names are deferred and recognized ratably over the registration term. Fees for renewals and advance extensions to the existing term are deferred until the new incremental period commences. These fees are then recognized ratably over the renewal term.

Security Services

Following the revenue recognition criteria above, revenues from Security Services were deferred and recognized over the service term, generally one to two years. On December 5, 2018, we completed the sale of the rights, economic benefits, and obligations, in all customer contracts related to our Security Services business. Revenues from the Security Services business were not significant in relation to our consolidated revenues.

Costs Incurred to Obtain a Contract

We recognize the fees that we pay to ICANN for each annual increment of domain name registrations and renewals, as an asset which will be amortized on a straight-line basis over the related registration term. These assets are included in Other current assets and Other long-term assets on the condensed consolidated balance sheet.

VERISIGN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

DECEMBER 31, 2018, 2017 AND 2016

Practical Expedients and Exemptions

Prior to the sale of the customer contracts of the Security Services business in December of 2018, we recognized sales commissions for Security Services contracts as expense when incurred because the amortization period for the majority of commissions would have been one year or less. These costs were not material for any period presented and were recorded within sales and marketing expenses.

Advertising Expenses

Advertising costs are expensed as incurred and are included in Sales and marketing expenses. Advertising expenses, including costs for advertising campaigns conducted jointly with our registrars were $15.2 million, $27.4 million, and $17.2 million in 2018, 2017, and 2016, respectively.

Income Taxes

Verisign uses the asset and liability method to account for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017, most provisions of which became effective in 2018. The Tax Act made substantial changes to U.S. taxation of corporations, including, lowering the U.S. federal corporate income tax rate from 35% to 21%, and instituting a territorial tax system, along with a one-time tax on accumulated foreign earnings. The effect on deferred tax assets and liabilities of a change in law or tax rates is recognized in income in the period that includes the enactment date. The Company records a valuation allowance to reduce deferred tax assets to an amount whose realization is more likely than not. For every tax-paying component and within each tax jurisdiction, all deferred tax liabilities and assets are offset and presented as a single net noncurrent asset or liability.

Among other changes, the Tax Act included a provision designed to currently tax global intangible low-taxed income (“GILTI”). The Company evaluated available accounting policy alternatives and elected to record the U.S. income tax effect of future GILTI inclusions in the period in which they arise.

The Company’s income taxes payable is reduced by the tax benefits from restricted stock unit (“RSU”) vestings equal to the fair market value of the stock at the vesting date. If the income tax benefit at the exercise or vesting date differs from the income tax benefit recorded based on the grant date fair value of the RSUs, the excess or shortfall of the tax benefit is recognized within income tax expense.

Verisign’s global operations involve dealing with uncertainties and judgments in the application of complex tax regulations in multiple jurisdictions. The final taxes payable are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions and resolution of disputes arising from U.S. federal, state, and international tax audits. The Company only recognizes tax positions taken or expected to be taken on its tax returns that are more likely than not to be sustained upon examination, and records a tax benefit amount that is more likely than not to be realized upon ultimate settlement with the taxing authority. The Company adjusts its estimate of unrecorded tax benefits in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a liability that is materially different from its estimate.

The Company’s assumptions, judgments and estimates relative to the value of a deferred tax asset take into account predictions of the amount and character of future taxable income, such as income from operations or capital gains income. Actual operating results and the underlying amount and character of income in future years could render the Company’s current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate. Any of the assumptions, judgments and estimates mentioned above could cause the Company’s actual income tax obligations to differ from its estimates, thus materially impacting its financial condition and results of operations.

Stock-based Compensation

The Company’s stock-based compensation consists of RSUs granted to employees and the employee stock purchase plan (“ESPP”). Stock-based compensation expense is typically recognized ratably over the requisite service period. Forfeitures of stock-based awards are recognized as they occur. The Company also grants RSUs which include performance conditions, and in some cases market conditions, to certain executives. The expense for these performance-based RSUs is recognized based on the probable outcome of the performance conditions. The expense recognized for awards with market conditions is based on the grant date fair value of the awards including the impact of the market conditions, using a Monte Carlo simulation model. The Company uses the Black-Scholes option pricing model to determine the fair value of its ESPP offerings. The determination of the fair value of stock-based payment awards using the Monte Carlo simulation model or the Black-Scholes option-pricing

VERISIGN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

DECEMBER 31, 2018, 2017 AND 2016

model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables.

Earnings per Share

The Company computes basic earnings per share by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share gives effect to dilutive potential common shares, including unvested RSUs, ESPP offerings and the conversion spread related to the Subordinated Convertible Debentures, prior to conversion on May 1, 2018, using the treasury stock method.

Fair Value of Financial Instruments

The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

•	Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

•	Level 2: Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

•	Level 3: Unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

The Company measures and reports certain financial assets and liabilities at fair value on a recurring basis, including its investments in money market funds classified as Cash and cash equivalents and marketable securities.

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.

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

VERISIGN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

DECEMBER 31, 2018, 2017 AND 2016

Note 2. Financial Instruments

Cash, Cash Equivalents, and Marketable Securities

The following table summarizes the Company’s cash, cash equivalents, and marketable securities and the fair value categorization of the financial instruments measured at fair value on a recurring basis:

	As of December 31,
	2018				2017
	(In thousands)
Cash	$	37,190			$	135,092
Time deposits	3,810				3,682
Money market funds (Level 1)	120,832				116,068
Debt securities issued by the U.S. Treasury (Level 1)	1,117,175				2,169,197
Total	$	1,279,007			$	2,424,039
Cash and cash equivalents	$	357,415			$	465,851
Restricted cash (included in Other long-term assets)	9,338				9,288
Total Cash, cash equivalents, and restricted cash	366,753				475,139
Marketable securities	912,254				1,948,900
Total	$	1,279,007			$	2,424,039

The fair value of the debt securities held as of December 31, 2018 was $1.12 billion, including less than $0.1 million of gross and net unrealized losses. All of the debt securities held as of December 31, 2018 have contractual maturities of less than one year. The lower Cash and cash equivalents and Marketable securities balances at December 31, 2018 reflect the cash used to settle the principal amount of the Subordinated Convertible Debentures on May 1, 2018, as discussed in Note 4 “Debt and Interest Expense.”

Fair Value Measurements

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. Debt securities purchased with original maturities less than three months are included in Cash and cash equivalents.

As of December 31, 2018, the Company’s other financial instruments include cash, accounts receivable, restricted cash, and accounts payable whose carrying values approximated their fair values. The fair values of the Company’s senior notes due 2023 (the “2023 Senior Notes”), the senior notes due 2025 (the “2025 Senior Notes”), and the senior notes due 2027 (the “2027 Senior Notes”) were $741.3 million, $502.2 million, and $524.2 million, respectively, as of December 31, 2018. The fair values of these debt instruments are based on available market information from public data sources and are classified as Level 2.

As part of the settlement of the Subordinated Convertible Debentures in the second quarter of 2018, the Company estimated the fair value of the liability component of the debentures, based on the present value of the remaining contractual cash flows, using a discount rate of 8.42% (the estimated borrowing rate for similar non-convertible debt). The fair value of the liability component at the time of extinguishment was $651.3 million and was classified as Level 3.

In connection with the sale of the customer contracts of the Security Services business, the Company estimated the fair value of the total consideration expected to be received based on the estimated probability and timing of customers consenting to assignment of their contracts to Neustar. This fair value measurement was classified as Level 3.

VERISIGN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

DECEMBER 31, 2018, 2017 AND 2016

Note 3. Other Balance Sheet Items

Other Current Assets

Other current assets consist of the following:

	As of December 31,
	2018				2017
	(In thousands)
Prepaid registry fees	$	20,696			$	—
Prepaid expenses	14,109				15,787
Accounts receivable, net	6,029				5,111
Income taxes receivable	4,451				6,347
Other	2,080				4,157
Total other current assets	$	47,365			$	31,402

Property and Equipment, Net

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

	As of December 31,
	2018				2017
	(In thousands)
Land	$	31,141			$	31,141
Buildings and building improvements	247,870				246,654
Computer equipment and software	461,829				462,469
Capital work in progress	2,013				4,024
Office equipment and furniture	6,912				6,472
Leasehold improvements	1,403				1,403
Total cost	751,168				752,163
Less: accumulated depreciation	(497,263		)		(488,650		)
Total property and equipment, net	$	253,905			$	263,513

Substantially all of the Company’s property and equipment were held in the U.S. for both periods presented.

Goodwill

The following table presents the detail of goodwill:

	As of December 31,
	2018				2017
	(In thousands)
Goodwill, gross	$	1,537,843			$	1,537,843
Accumulated goodwill impairment	(1,485,316		)		(1,485,316		)
Total goodwill	$	52,527			$	52,527

There was no impairment of goodwill or other long-lived assets recognized in any of the periods presented.

Deposits to Acquire Intangible Assets

As of December 31, 2018, the Company has recorded $145.0 million for the future assignment to the Company of contractual rights to the .web gTLD, pending resolution of objections by other applicants, regulatory review, and approval from ICANN. Upon assignment of the contractual rights, the Company will record the total investment as an indefinite-lived intangible asset.

VERISIGN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

DECEMBER 31, 2018, 2017 AND 2016

Other Long-Term Assets

Other long-term assets consist of the following:

	As of December 31,
	2018				2017
	(In thousands)
Contingent consideration receivable	$	14,721			$	—
Long-term prepaid registry fees	7,779				—
Restricted cash	9,338				9,288
Other tax receivable	5,673				5,673
Other	3,535				3,642
Total other long-term assets	$	41,046			$	18,603

The contingent consideration receivable in the table above relates to the estimated contingent consideration expected to be collected from Neustar after the first anniversary of closing as part of the sale of customer contracts of the Security Services business. The prepaid registry fees in the tables above relate to the fees the Company pays to ICANN for each annual increment of .com domain name registrations and renewals which are deferred and amortized over the domain name registration term, upon adoption of ASU 2014-09 as discussed in Note 1, “Description of Business and Summary of Significant Accounting Policies”. The amount of prepaid registry fees as of December 31, 2018 reflects amortization of $32.9 million during 2018 which was recorded in Cost of Revenues.

Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consist of the following:

	As of December 31,
	2018				2017
	(In thousands)
Accounts payable	$	10,445			$	10,519
Accrued employee compensation	54,746				51,481
Customer deposits, net	57,025				63,617
Interest Payable	24,318				47,357
Accrued registry fees	11,029				10,404
Payables to buyer	9,875				—
Taxes payable and other tax liabilities	18,961				13,477
Other accrued liabilities	28,809				22,748
Total accounts payable and accrued liabilities	$	215,208			$	219,603

Payables to buyer in the table above relate to amounts due to Neustar for estimated collections from Security Services customers of any billings after the closing date and until the customer contracts are assigned to Neustar.

Note 4. Debt and Interest Expense

Senior Notes

As of December 31, 2018, the Company had senior notes outstanding of $1.79 billion, net of unamortized issuance costs. All of the outstanding senior notes were issued at par and are senior unsecured obligations of the Company. Interest is payable on each of the senior notes semi-annually. Each of the senior notes issuances is redeemable, in whole or in part, at the Company’s option at times and redemption prices specified in the indentures.

VERISIGN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

DECEMBER 31, 2018, 2017 AND 2016

The following table summarizes information related to our Senior notes (in thousands, except interest rates):

						As of December 31,
						2018				2017
		Issuance Date	Maturity Date	Interest Rate		Principal
Senior notes due 2023		April 16, 2013	May 1, 2023	4.625	%	$	750,000			$	750,000
Senior notes due 2025		March 27, 2015	April 1, 2025	5.250	%	500,000				500,000
Senior notes due 2027		July 5, 2017	July 15, 2027	4.750	%	550,000				550,000
Unamortized issuance costs						(14,953		)		(17,471		)
Total senior notes						$	1,785,047			$	1,782,529

The indenture governing the 2023 Senior Notes contains covenants that limit the ability of the Company and/or its restricted subsidiaries, under certain circumstances, to, among other things: (i) pay dividends or make distributions on, or redeem or repurchase, its capital stock; (ii) make certain investments; (iii) create liens on assets; (iv) enter into sale/leaseback transactions and (v) merge or consolidate or sell all or substantially all of its assets. These covenants are subject to a number of important limitations and exceptions. The Indenture also provides for events of default, which, if any of them occurs, may permit or, in certain circumstances, require the principal, premium, if any, accrued and unpaid interest and any other monetary obligations on all the then outstanding Notes to be due and payable immediately. The Company has remained in compliance with these covenants and no events of default have occurred over the term of the Notes.

2015 Credit Facility

On March 31, 2015, the Company entered into a credit agreement for a $200.0 million committed senior unsecured revolving credit facility (the “2015 Credit Facility”). The 2015 Credit Facility includes financial covenants requiring that the Company’s interest coverage ratio not be less than 3.0 to 1.0 for any period of four consecutive quarters and the Company’s leverage ratio not exceed 2.5 to 1.0. As of December 31, 2018, there were no borrowings outstanding under the facility and the Company was in compliance with the financial covenants. The 2015 Credit Facility expires on April 1, 2020 at which time any outstanding borrowings are due. Verisign may from time to time request lenders to agree on a discretionary basis to increase the commitment amount by up to an aggregate of $150.0 million.

Subordinated Convertible Debentures

In August 2007, Verisign issued $1.25 billion principal amount of 3.25% subordinated convertible debentures due August 15, 2037, in a private offering. At issuance, the Company calculated the carrying value of the liability component as the present value of its cash flows using a borrowing rate for similar non-convertible debt with no contingent payment options, adjusted for the fair value of the contingent interest feature. The table below presents the carrying amounts of the liability and equity components as of December 31, 2017.

Debt discount upon issuance (net of issuance costs of $14,449)	$	686,221
Deferred taxes associated with the debt discount upon issuance	(267,225		)
Carrying amount of equity component	$	418,996
Principal amount of Subordinated Convertible Debentures	$	1,250,000
Unamortized discount of liability component	(612,303		)
Unamortized debt issuance costs associated with the liability component	(10,081		)
Carrying amount of liability component	$	627,616

On February 15, 2018, the Company called for the redemption of all the outstanding Subordinated Convertible Debentures with a redemption date of May 1, 2018. Substantially all of the holders elected to convert their debentures, and on May 1, 2018, the Company settled the $1.25 billion principal value in cash, and issued 26.1 million shares of common stock for the $3.17 billion excess of the conversion value over the principal amount. Of the total consideration transferred to settle the debentures, $651.3 million was allocated to the liability component, and the remaining $3.77 billion was allocated to the equity component. The fair value of the liability component exceeded the $644.7 million carrying value, and therefore, resulted in a loss of $6.6 million upon extinguishment of the Subordinated Convertible Debentures in the second quarter of 2018.

VERISIGN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

DECEMBER 31, 2018, 2017 AND 2016

The following table presents the components of the Company’s interest expense:

	Year Ended December 31,
2018				2017				2016
	(In thousands)
Contractual interest on Subordinated Convertible Debentures	$	20,015			$	47,432			$	40,625
Contractual interest on Senior Notes	87,063				73,638				60,938
Amortization of debt discount on the Subordinated Convertible Debentures	4,236				12,012				11,094
Amortization of debt issuance costs and other interest expense	3,531				3,254				2,907
Total interest expense	$	114,845			$	136,336			$	115,564

Note 5. Stockholders’ Deficit

Treasury Stock

Treasury stock is accounted for under the cost method. Treasury stock includes shares repurchased under stock repurchase programs and shares withheld in lieu of minimum tax withholdings due upon vesting of RSUs.

On February 8, 2018, the Company’s Board of Directors (“Board”) authorized the repurchase of its common stock in the amount of approximately $585.8 million, in addition to the $414.2 million remaining available for repurchase under the previous share repurchase program, for a total repurchase authorization of up to $1.0 billion under the share repurchase program. 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. As of December 31, 2018 there was approximately $463.2 million remaining available for repurchases under the share repurchase program.

Effective February 7, 2019, the Company’s Board authorized the repurchase of its common stock in the amount of approximately $602.9 million, in addition to the $397.1 million remaining available for repurchase under the previous share repurchase program, for a total repurchase authorization of up to $1.0 billion under the share repurchase program.

The summary of the Company’s common stock repurchases for 2018, 2017 and 2016 are as follows:

	2018								2017								2016
Shares				Average Price				Shares				Average Price				Shares				Average Price
	(In thousands, except average price amounts)
Total repurchases under the repurchase plans	4,352				$	137.86			6,265				$	94.59			7,789				$	81.73
Total repurchases for tax withholdings	309				$	123.62			335				$	85.27			320				$	80.74
Total repurchases	4,661				$	136.91			6,600				$	94.12			8,109				$	81.70
Total costs	$	638,152							$	621,173							$	662,491

Since inception, the Company has repurchased 232.3 million shares of its common stock for an aggregate cost of $9.42 billion, which is recorded as a reduction of Additional paid-in capital.

VERISIGN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

DECEMBER 31, 2018, 2017 AND 2016

Accumulated Other Comprehensive Loss

The following table summarizes the changes in the components of Accumulated other comprehensive loss for 2018 and 2017:

	Foreign Currency Translation Adjustments Loss				Unrealized Gain (Loss) On Investments				Total Accumulated Other Comprehensive Loss
	(In thousands)
Balance, December 31, 2016	$	(3,366	)		$	(87	)		$	(3,453	)
Changes	530				(18		)		512
Balance, December 31, 2017	(2,836		)		(105		)		(2,941		)
Changes	—				130				130
Balance, December 31, 2018	$	(2,836	)		$	25			$	(2,811	)

Note 6. 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:

	Year Ended December 31,
	2018			2017			2016
	(In thousands)
Weighted-average shares of common stock outstanding	113,452			100,325			107,001
Weighted-average potential shares of common stock outstanding:
Conversion spread related to Subordinated Convertible Debentures	8,589			23,247			21,074
Unvested RSUs, and ESPP	620			608			758
Shares used to compute diluted earnings per share	122,661			124,180			128,833

The dilutive impact of the conversion spread related to the Subordinated Convertible Debentures is included in the calculation for 2018, on a weighted-average basis for the period prior to conversion. 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.

Note 7. Revenue

The Company generates revenues in the U.S.; Europe, the Middle East and Africa (“EMEA”); China; and certain other countries, including, but not limited to Canada, Australia, and Japan. The following table presents our revenues disaggregated by geography, based on the billing addresses of our customers:

	Year Ended December 31,
	2018				2017				2016
	(In thousands)
U.S	$	756,907			$	707,906			$	667,301
EMEA	212,699				211,349				207,474
China	106,841				106,526				127,298
Other	138,522				139,314				140,094
Total revenues	$	1,214,969			$	1,165,095			$	1,142,167

Revenues for the Company’s Registry Services business are attributed to the country of domicile and the respective regions in which registrars are located, however, this may differ from the regions where the registrars operate or where registrants are located. Revenue for each region may be impacted by registrars reincorporating, relocating, or from acquisitions

or changes in affiliations of resellers. Revenue for each region may also be impacted by registrars domiciled in one region, registering domain names in another region.

Major Customers

Our largest customer accounted for approximately 32%, 31%, and 30% of revenues in 2018, 2017, and 2016, respectively and another customer accounted for 10% of revenues during 2018. The Company does not believe that the loss of either of these customers would have a material adverse effect on the Company’s business because, in that event, end-users of these customers would transfer to the Company’s other existing customers.

Deferred Revenues

As payment for domain name registrations and renewals are due in advance of our performance, we record these amounts as deferred revenue. The increase in the deferred revenue balance in 2018 is primarily driven by amounts billed in 2018 for domain name registrations and renewals to be recognized as revenue in future periods, offset by refunds for domain name renewals deleted during the 45-day grace period, and $690.1 million of revenues recognized that were included in the deferred revenue balance at December 31, 2017. The balance of deferred revenue as of December 31, 2018 represents our aggregate remaining performance obligations. Amounts included in current deferred revenue are all expected to be recognized in revenue within 12 months, except for a portion of deferred revenue that relates to domain name renewals that are deleted in the 45-day grace period following the transaction. The long-term deferred revenue amounts will be recognized in revenue over several years and in some cases up to ten years.

Historically, we have experienced higher domain name growth in the first quarter of the year compared to other quarters. Our quarterly revenue does not reflect these seasonal patterns because the preponderance of our revenue for each quarterly period is provided by the ratable recognition of our deferred revenue balance. The effect of this seasonality has historically resulted in the largest amount of growth in our deferred revenue balance occurring during the first quarter of the year compared to the other quarters.

Note 8. Sale of Security Services Business

On December 5, 2018, the Company completed the sale of the rights, economic benefits, and obligations, in all customer contracts related to its Security Services business, which was primarily comprised of Distributed Denial of Service Protection and Managed DNS services, to Neustar. As part of the transaction, the Company will continue to support the Security Services customers during the transition to Neustar over the course of 2019. The transaction was accounted for as the sale of a business. The Company received a payment of $50.0 million at closing and recorded a non-current receivable for the estimated contingent consideration of $14.7 million expected to be collected after the first anniversary of closing. In addition, the Company recorded a current liability of $9.9 million for amounts due to Neustar for estimated collections from Security Services customers of any billings after the closing date and until the customer contracts are assigned to Neustar. As a result of the sale, the Company recognized a pre-tax gain of approximately $54.8 million, which is included in Non-operating income in the fourth quarter of 2018. The estimated contingent consideration to be received, the liability for estimated future billings to be remitted to Neustar, and the gain recognized in 2018, are based on the Company’s best estimates of the probability and timing of customers consenting to the assignment of their contracts to Neustar. To the extent that the actual results differ from the Company’s estimates, the gain on the sale may be adjusted in 2019.

Note 9. Employee Benefits and Stock-based Compensation

401(k) Plan

The Company maintains a defined contribution 401(k) plan (the “401(k) Plan”) for substantially all of its U.S. employees. Under the 401(k) Plan, eligible employees may contribute up to 50% of their pre-tax salary, subject to the Internal Revenue Service (“IRS”) annual contribution limits. Through the second quarter of 2018, the Company matched 50% of up to the first 6% of the employee’s annual salary contributed to the plan. Effective July 1, 2018, the Company increased its employer contribution to 50% of up to the first 8% of the employee’s annual salary contributed to the plan. The Company contributed $4.3 million in 2018, $4.0 million in 2017, and $3.8 million in 2016 under the 401(k) Plan. The Company can terminate matching contributions at its discretion at any time.

Equity Incentive Plan

The majority of Verisign’s stock-based compensation relates to RSUs. As of December 31, 2018, a total of 9.6 million shares of common stock were reserved for issuance upon the vesting of RSUs and for the future grant of equity awards.

On May 26, 2006, the stockholders of Verisign approved the 2006 Equity Incentive Plan, which was amended and restated on June 9, 2016 (the “2006 Plan”). The 2006 Plan authorizes the award of incentive stock options to employees and

non-qualified stock options, restricted stock awards, RSUs, stock bonus awards, stock appreciation rights and performance shares to eligible employees, officers, directors, consultants, independent contractors and advisers. The 2006 Plan is administered by the Compensation Committee which may delegate to a committee of one or more members of the Board or Verisign’s officers the ability to grant certain awards and take certain other actions with respect to participants who are not executive officers or non-employee directors. RSUs are awards covering a specified number of shares of Verisign common stock that may be settled by issuance of those shares (which may be restricted shares). RSUs generally vest over four years. Certain RSUs with performance and market conditions (“PSUs”), granted to the Company’s executives, vest over either three or four year terms. Additionally, the Company has granted fully vested RSUs to members of its Board in each of the last three years. The Compensation Committee may authorize grants with a different vesting schedule in the future. A total of 27.0 million common shares were authorized and reserved for issuance under the 2006 Plan.

2007 Employee Stock Purchase Plan

On August 30, 2007, the Company’s stockholders approved the 2007 Employee Stock Purchase Plan, and in 2017 approved an amendment to increase the shares reserved for issuance by 2.5 million to a total of 8.5 million common shares authorized and reserved for issuance under the ESPP. Eligible employees may purchase common stock through payroll deductions by electing to have between 2% and 25% of their compensation withheld to cover the purchase price. Each participant is granted an option to purchase common stock on the first day of each 24-month offering period and this option is automatically exercised on the last day of each six-month purchase period during the offering period. The purchase price for the common stock under the ESPP is 85% of the lesser of the fair market value of the common stock on the first day of the applicable offering period or the last day of the applicable purchase period. Offering periods begin on the first business day of February and August of each year. As of December 31, 2018, 3.3 million shares of the Company’s common stock remain reserved for future issuance under this plan.

Stock-based Compensation

Stock-based compensation is classified in the Consolidated Statements of Comprehensive Income in the same expense line items as cash compensation. The following table presents the classification of stock-based compensation:

	Year Ended December 31,
	2018				2017				2016
	(In thousands)
Cost of revenues	$	6,835			$	7,030			$	7,253
Sales and marketing	4,972				5,688				5,738
Research and development	6,728				6,113				6,739
General and administrative	33,969				34,076				30,314
Total stock-based compensation	$	52,504			$	52,907			$	50,044

The following table presents the nature of the Company’s total stock-based compensation:

	Year Ended December 31,
	2018				2017				2016
	(In thousands)
RSUs	$	38,005			$	38,087			$	37,325
PSUs	12,403				13,270				11,512
ESPP	4,166				4,005				3,593
Capitalization (Included in Property and equipment, net)	(2,070		)		(2,455		)		(2,386		)
Total stock-based compensation expenses	$	52,504			$	52,907			$	50,044

The income tax benefit that was included within Income tax expense related to these stock-based compensation expenses for 2018, 2017, and 2016 was $12.3 million, $12.5 million, and $17.7 million, respectively. The tax benefit for 2018 and 2017 reflects the reduction in the U.S. federal statutory corporate tax rate from 35% to 21% in 2017.

RSUs Information

The following table summarizes unvested RSUs activity for the year ended December 31, 2018:

	Shares			Weighted-Average Grant-Date Fair Value
	(Shares in thousands)
Unvested at beginning of period	1,588			$	74.69
Granted	474			$	112.74
PSU achievement adjustment	115			$	38.10
Vested and settled	(862	)		$	66.37
Forfeited	(93	)		$	88.43
	1,222			$	90.88

The RSUs in the table above include PSUs. The unvested RSUs as of December 31, 2018 include approximately 0.4 million PSUs. The number of shares received upon vesting of these PSUs may range from zero to 0.8 million depending on the level of performance achieved and whether any market conditions are satisfied.

The closing price of Verisign’s stock was $148.29 on December 31, 2018. As of December 31, 2018, the aggregate market value of unvested RSUs was $181.2 million. The fair values of RSUs that vested during 2018, 2017, and 2016 were $107.2 million, $75.9 million, and $70.5 million, respectively. The weighted-average grant-date fair value of RSUs granted during the years ended December 31, 2017 and 2016, was $83.91 and $81.59, respectively. As of December 31, 2018, total unrecognized compensation cost related to unvested RSUs was $73.4 million which is expected to be recognized over a weighted-average period of 2.5 years.

Note 10. Non-operating Income, Net

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

	Year Ended December 31,
	2018				2017				2016
	(In thousands)
Gain on sale of business	$	54,840			$	10,421			$	—
Interest income	26,490				17,944				6,191
Loss on extinguishment of Subordinated Convertible Debentures	(6,554		)		—				—
Other, net	2,193				(739		)		3,974
Total non-operating income, net	$	76,969			$	27,626			$	10,165

On December 5, 2018, the Company completed the sale of the rights, economic benefits, and obligations, in all customer contracts related to its Security Services business, which resulted in a gain of approximately $54.8 million in the fourth quarter of 2018. During the second quarter of 2017, the Company completed the sale of its iDefense business, which resulted in a gain of approximately $10.4 million in 2017. Interest income is earned principally from the Company’s surplus cash balances and marketable securities.

Note 11. Income Taxes

Income before income taxes is categorized geographically as follows:

	Year Ended December 31,
	2018				2017				2016
	(In thousands)
United States	$	420,597			$	313,351			$	299,304
Foreign	308,919				285,661				281,869
Total income before income taxes	$	729,516			$	599,012			$	581,173

The provision for income taxes consisted of the following:

	Year Ended December 31,
	2018				2017				2016
	(In thousands)
Current expense:
Federal	$	99,127			$	16,870			$	34,842
State	1,088				294				240
Foreign, including withholding tax	76,199				15,539				19,268
	176,414				32,703				54,350
Deferred expense (benefit):
Federal	(16,448		)		90,113				64,301
State	42,624				19,654				21,492
Foreign	(55,563		)		(706		)		385
	(29,387		)		109,061				86,178
Total income tax expense	$	147,027			$	141,764			$	140,528

Federal current expense and federal deferred benefit for 2018 includes $96.4 million of the one-time U.S. tax on accumulated foreign earnings (“Transition tax”), net of $106.7 million of carried forward and newly-generated foreign tax credits, payable as a result of the Tax Act. This amount will be paid in installments over 8 years starting in 2018, as allowed by the Tax Act. As discussed below, the Transition tax was recorded as a provisional deferred tax liability in 2017.

State tax expense for 2018 is increased by $10.0 million remeasurement of deferred tax assets because of changes in certain state apportionment rates, and $5.6 million change in estimate related to the 2017 state income tax returns.

Foreign current expense and foreign deferred benefit for 2018 includes $60.7 million of withholding taxes paid upon the repatriation of cash held by foreign subsidiaries. As discussed below, the withholding tax was recorded as a provisional deferred tax liability in 2017.

The difference between income tax expense and the amount resulting from applying the federal statutory rate of 21% in 2018 and 35% in 2017 and 2016, to Income before income taxes is attributable to the following:

	Year Ended December 31,
	2018				2017				2016
	(In thousands)
Income tax expense at federal statutory rate	$	153,199			$	209,654			$	203,410
State taxes, net of federal benefit	35,852				13,029				14,517
Differences between statutory rate and foreign effective tax rate	(46,928		)		(83,808		)		(79,087		)
Excess tax benefits from stock-based compensation	(9,006		)		(7,728		)		—
Capital loss carryforwards expiration	769,706				—				—
Change in valuation allowance	(773,737		)		(5,813		)		(511		)
U.S. federal tax rate change	—				(186,800		)		—
Transition tax, net of foreign tax credits	(5,602		)		162,353				—
U.S. tax on foreign earnings, net of foreign tax credits	24,208				4,123				2,881
Foreign withholding tax on unremitted foreign earnings, net of foreign tax credits	(812		)		33,619				—
Other	147				3,135				(682		)
Total income tax expense	$	147,027			$	141,764			$	140,528

The Tax Act was enacted on December 22, 2017, and most of its provisions became effective in 2018. The Tax Act made substantial changes to U.S. taxation of corporations, including, lowering the U.S. federal corporate income tax rate from 35% to 21%, and instituting a territorial tax system, along with a one-time tax on accumulated foreign earnings. Upon enactment, the Company remeasured its deferred tax balances to reflect the new 21% U.S. federal tax rate, which resulted in a tax benefit of $186.8 million in 2017. In 2017, the Company also recorded a provisional deferred tax liability of $162.4 million, for the Transition tax, net of $38.3 million of resulting previously unrecognized foreign tax credits. The Company recorded a $5.6 million adjustment in 2018 as it finalized the provisional Transition tax amount. In 2018, the Company completed the repatriation of $1.15 billion of cash held by foreign subsidiaries, net of $60.7 million of foreign withholding taxes which was recorded in deferred tax liabilities in 2017.

The Company recorded additional impacts and changes in estimates related to the Tax Act during 2018 as additional guidance or information became available. As of December 31, 2018, the Company has completed its accounting for the tax effects of the enactment of the Tax Act.

The Company qualifies for a tax holiday in Switzerland which does not expire, unless the required non-Swiss income and expense thresholds are no longer met, or there is a law change which eliminates the holiday. The tax holiday provides reduced rates of taxation on certain types of income and also require certain thresholds of foreign source income. The tax holiday reduced the Company’s income tax expense by $16.9 million in 2018, $12.3 million in 2017, and $21.3 million in 2016. This resulted in an increase in the Company’s earnings per share by $0.14, $0.10, and $0.16 in 2018, 2017, and 2016, respectively.

The tax effects of temporary differences that give rise to significant portions of the Company’s deferred tax assets and liabilities are as follows:

	As of December 31,
	2018				2017
	(In thousands)
Deferred tax assets:
Net operating loss carryforwards	$	40,729			$	70,587
Tax credit carryforwards	3,970				52,659
Deferred revenue, accruals and reserves	74,437				77,869
Capital loss carryforwards	—				778,430
Other	6,724				6,776
Total deferred tax assets	125,860				986,321
Valuation allowance	(10,153		)		(783,725		)
Net deferred tax assets	115,707				202,596
Deferred tax liabilities:
Property and equipment	(2,764		)		(1,577		)
Transition tax	—				(162,912		)
Foreign withholding tax on unremitted earnings	(2,733		)		(33,619		)
Subordinated Convertible Debentures	—				(430,088		)
Other	(5,352		)		(3,116		)
Total deferred tax liabilities	(10,849		)		(631,312		)
Total net deferred tax assets (liabilities)	$	104,858			$	(428,716	)

With the exception of deferred tax assets related to certain state and foreign net operating loss carryforwards, management believes it is more likely than not that the tax effects of the deferred tax liabilities together with future taxable income, will be sufficient to fully recover the remaining deferred tax assets. As of December 31, 2018, the Company’s Other long-term tax liabilities includes the $81.0 million noncurrent liability for Transition tax, net of applicable foreign tax credits, while the $4.8 million current portion of the liability is included in Accounts payable and accrued liabilities. Both the current and noncurrent portion of these liabilities in addition to the $10.6 million paid in 2018, had been included in deferred tax liabilities as of December 31, 2017. The excess interest deductions on the Subordinated Convertible Debentures that were converted were not subject to recapture, and accordingly, the $439.2 million deferred tax liability related to the debentures, as of the conversion date, was reversed into Additional paid-in capital upon extinguishment of the debt.

As of December 31, 2018, the Company had federal, state and foreign net operating loss carryforwards of approximately $4.5 million, $738.3 million and $18.1 million, respectively, before applying tax rates for the respective jurisdictions. As of December 31, 2018, the Company had state research tax credits of $2.3 million and alternative minimum tax credits of $6.9 million available for future years. Certain net operating loss carryforwards and credits are subject to an annual limitation under Internal Revenue Code Section 382, but are expected to be fully realized. The federal and state net operating loss and federal tax credit carryforwards expire in various years from 2019 through 2034. The foreign net operating loss can be carried forward indefinitely. As of December 31, 2018, the Company’s federal and state capital loss carryforwards expired and the associated valuation allowance reserve was also released. As of December 31, 2018, the Company has foreign tax credit carryforwards of $18.6 million. The majority of these foreign tax credits will expire in 2024.

The Company maintains liabilities for uncertain tax positions. These liabilities involve considerable judgment and estimation and are continuously monitored by management based on the best information available including changes in tax regulations and other information. A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:

	As of December 31,
	2018				2017
	(In thousands)
Beginning balance	$	223,216			$	220,682
Increases in tax positions for prior years	333				3,699
Decreases in tax positions for prior years	(196		)		(144		)
Increases in tax positions for current year	436				395
Decreases in tax positions due to settlement with taxing authorities	—				(1,416		)
Lapse in statute of limitations	(334		)		—
Ending balance	$	223,455			$	223,216

As of December 31, 2018, approximately $219.5 million of unrecognized tax benefits, including penalties and interest, could affect the Company’s tax provision and effective tax rate. It is reasonably possible that during the next twelve months, the Company’s unrecognized tax benefits may change by a significant amount as a result of IRS audits. However, the timing of completion and ultimate outcome of the audits remains uncertain. Therefore, the Company cannot currently estimate the impact on the balance of unrecognized tax benefits.

In accordance with its accounting policy, the Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. These accruals were not material in any period presented.

The Company’s major taxing jurisdictions are the U.S., the state of Virginia, and Switzerland. The Company’s U.S. federal income tax returns are currently under examination by the IRS for 2010 through 2014. The Company’s other material tax returns are not currently under examination by their respective taxing jurisdictions. Because the Company has used net operating loss carryforwards and other tax attributes to offset its taxable income in current and future years’ income tax returns for the U.S. and Virginia, such attributes can be adjusted by these taxing authorities until the statute closes on the year in which such attributes were utilized. The open years in Switzerland are the 2012 tax year and forward.

Note 12. Commitments and Contingencies

Purchase Obligations and Contractual Agreements

The following table represents the minimum payments required by Verisign under certain purchase obligations, leases, the .tv Agreement with the Government of Tuvalu, and the interest payments and principal on the Senior Notes:

	Purchase Obligations				.tv Agreement				Senior Notes				Total
	(In thousands)
2019	$	31,935			$	5,000			$	87,063			$	123,998
2020	4,737				5,000				87,063				96,800
2021	989				5,000				87,063				93,052
2022	303				—				87,063				87,366
2023	—				—				819,719				819,719
Thereafter	—				—				1,193,875				1,193,875
Total	$	37,964			$	15,000			$	2,361,846			$	2,414,810

The amounts in the table above exclude $219.5 million of income tax related uncertain tax positions, as the Company is unable to reasonably estimate the ultimate amount or time of settlement of those liabilities.

Verisign enters into certain purchase obligations with various vendors. The Company’s significant purchase obligations include firm commitments with telecommunication carriers and other service providers. The Company does not have any significant purchase obligations beyond 2022.

The Company has an agreement with Internet Corporation for Assigned Names and Numbers (“ICANN”) to be the sole registry operator for domain names in the .com registry through November 30, 2024. Under this agreement, the Company pays ICANN on a quarterly basis, $0.25 for each annual increment of a domain name registered or renewed during such quarter. As

of December 31, 2018, there were 139.0 million domain names in the .com registry. However, the number of domain names registered and renewed each quarter may vary significantly. The Company incurred registry fees for the .com registry of $33.0 million in 2018, $32.3 million in 2017, and $31.5 million in 2016. Registry fees for other top-level domains that we operate have been excluded from the table above because the amounts are variable or passed through to registrars.

The Company has an agreement with the Government of Tuvalu to be the sole registry operator for .tv domain names through December 31, 2021. Registry fees were $5.0 million in each of the last three years.

Verisign leases a small portion of its facilities under operating leases that extend into 2022. Rental expenses under operating leases were not material in any period presented. Future rental expenses under existing operating leases are not material.

Off-Balance Sheet Arrangements

As of December 31, 2018 and 2017, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, the Company is not exposed to any financing, liquidity, market or credit risk that could arise if the Company had engaged in such relationships.

It is not the Company’s business practice to enter into off-balance sheet arrangements. However, in the normal course of business, the Company does enter into contracts in which it makes representations and warranties that guarantee the performance of the Company’s products and services. Historically, there have been no significant losses related to such guarantees.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Reston, Commonwealth of Virginia, on the 15th day of February 2019.

VERISIGN, INC.

	By:	/S/ D. JAMES BIDZOS
		D. James Bidzos
		President and Chief Executive Officer
		(Principal Executive Officer)

KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature appears below constitutes and appoints D. James Bidzos, George E. Kilguss, III, and Thomas C. Indelicarto, and each of them, his or her true lawful attorneys-in-fact and agents, with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granted unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his, her or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on the 15th day of February 2019.

Signature		Title
/S/ D. JAMES BIDZOS		President, Chief Executive Officer, Executive Chairman and Director (Principal Executive Officer)
D. JAMES BIDZOS
/S/ GEORGE E. KILGUSS, III		Chief Financial Officer (Principal Financial and Accounting Officer)
GEORGE E. KILGUSS, III
/S/ KATHLEEN A. COTE		Director
KATHLEEN A. COTE
/S/ THOMAS F. FRIST III		Director
THOMAS F. FRIST III
/S/ JAMIE S. GORELICK		Director
JAMIE S. GORELICK
/S/ ROGER H. MOORE		Director
ROGER H. MOORE
/S/ LOUIS A. SIMPSON		Director
LOUIS A. SIMPSON
/S/ TIMOTHY TOMLINSON		Director
TIMOTHY TOMLINSON