Verisign Inc

NASDAQ:VRSN

Earnings Call Transcript 2018-Q2

[Unknown Speaker]

kOperator: Good day, everyone. Welcome to VeriSign's Second Quarter 2018 Earnings Call. Today's conference is being recorded and unauthorized recording of this call is not permitted.

At this time, I'd like to turn the conference over to Mr. David Ashley, Vice President of Investor Relations and Corporate Treasurer. Please go ahead, sir.

[David Atchley, CFA, VeriSign, Inc.]

Thank you, operator, and good afternoon, everyone. Welcome to VeriSign's second quarter 2018 earnings call. With me are Jim Bidzos, Executive Chairman, President and CEO; Todd Strubbe, Executive Vice President and COO; and George Kilguss, Executive Vice President and CFO. This call and our presentation are being webcast from our Investor Relations website, which is available under About VeriSign on verisign.com. There you will also find our second quarter 2018 earnings release. At the end of this call the presentation will be available on that site and within a few hours the replay of the call will be posted.

Financial results in our earnings release are unaudited and our remarks include forward-looking statements that are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically the most recent reports on Forms 10-K and 10-Q, which identify risk factors that could cause actual results to differ materially from those contained in the forward-looking statements. VeriSign retains its longstanding policy not to comment on financial performance or guidance during the quarter unless it is done through a public disclosure.

The financial results in today's call and the matters we will be discussing today (00:01:36) and non-GAAP measures used by VeriSign. GAAP to non-GAAP reconciliation information is appended to our earnings release and slide presentation as applicable, each of which can be found on the Investor Relations section of our website. In a moment, Jim and George will provide some prepared remarks and afterwards we will open the call for your questions.

With that I would like to turn the call over to Jim.

[D. James Bidzos, VeriSign, Inc.]

Thanks, David, and good afternoon, everyone. I am pleased to report another solid quarter for VeriSign. Second quarter results were in line with our objectives of offering security and stability to our customers while generating profitable growth and providing long-term value to our shareholders.

We reported revenue of $302 million, up 4.8% year-over-year, and delivered solid financial performance including non-GAAP EPS of $1.18, up 12% year-over-year. During the second quarter we continued our share repurchase program by repurchasing 1 million shares for $125 million.

Our financial position remains strong with $1.2 billion in cash, cash equivalents and marketable securities at the end of the quarter. We continually evaluate the overall cash and investing needs of the business and consider the best uses for our cash including potential share repurchases. At the end of June, the domain name base in .com and .net totaled 149.7 million, consisting of 135.6 million names for .com and 14.1 million names for .net. During the second quarter we processed 9.6 million new registrations and the domain name base increased by 1.4 million names.

Although renewal rates are not fully measurable until 45 days after the end of the quarter, we believe that the renewal rate for the second quarter of 2018 will be 74.9%. This preliminary rate compares to 74.0% achieved in the second quarter of 2017.

We now expect full year 2018 domain name base growth of between 3.5% and 4.25% with an increase to the domain name base for the third quarter of 2018 of between 1.3 million and 1.8 million net registrations.

To update you on our discussions about the Cooperative Agreement, VeriSign and NTIA are engaged in dialogue about amending the Cooperative Agreement and what that amendment would look like. But beyond that we don't have anything else to say at this time.

And now I'd like to turn the call over to George.

[George E. Kilguss III, VeriSign, Inc.]

Thanks, Jim, and good afternoon, everyone. Revenue for the second quarter totaled $302 million, up 4.8% year-over-year and up by 1.1% sequentially. The increase was primarily a result of improved new domain name registrations and improving renewal rates over the prior year.

Operating income for the period totaled $193 million compared with $175 million in the second quarter of 2017. The operating margin in the quarter came to 63.8% compared to 60.6% in the same quarter a year ago.

Net income totaled $128 million compared to $123 million a year earlier, which produced diluted earnings per share of $1.04 in the second quarter of this year compared to $0.99 for the same quarter of last year.

As of June 30, 2018, the company maintained total assets of $1.9 billion and total liabilities of $3.3 billion. Assets included $1.2 billion of cash, cash equivalents and marketable securities, of which $569 million were held domestically with the remainder held abroad.

I'll now review some additional second quarter financial metrics which include non-GAAP operating margin, non-GAAP earnings per share, operating cash flow, and free cash flow. I will then provide updates on our 2018 full-year guidance.

As it relates to non-GAAP metrics, second quarter operating expense, which excludes $13 million of stock-based compensation, totaled $96 million compared to $101 million last quarter and $100 million in the same quarter a year ago.

Non-GAAP operating margin for the second quarter was 68.2%, compared to 66.3% last quarter and 65.3% in the same quarter of 2017. Non-GAAP net income for the second quarter was $145 million, resulting in non-GAAP diluted earnings per share of $1.18 based on a weighted average diluted share count of 123.2 million shares. This compares to $1.07 last quarter and $1.05 in the second quarter of 2017.

Operating cash flow for the second quarter was $202 million and free cash flow was $191 million compared with $181 million and $171 million respectively for the second quarter last year.

Now we would like to provide updates to our full-year 2018 guidance. Revenue is now expected to be in the range of $1.205 billion to $1.215 billion, narrowed from the $1.2 billion to $1.215 billion provided on our last call.

Non-GAAP operating margin is now expected to be between 66% and 67%, increased from the 65.5% to 66.5% range provided on the last call. Our non-GAAP interest expense and non-GAAP non-operating income net is now expected to be an expense of between $82 million and $89 million, decreased from the $85 million and $92 million range provided on our last call.

Capital expenditures are still expected to be between $45 million and $55 million. Cash taxes are now expected to be between $80 million and $90 million, narrowed from the $75 million to $95 million range provided on our last call.

In summary, the company continued to demonstrate sound financial performance during the second quarter. Now I'll turn the call back over to Jim for his closing remarks.

[D. James Bidzos, VeriSign, Inc.]

Thank you, George. Second quarter was a solid one for VeriSign. There was further expansion of the domain name base and revenues were generated and efficiently returned value to shareholders.

We continue to work to protect, grow and manage the business while continuing our focus on providing long-term value to our shareholders. Last week the company surpassed 21 continuous years of 100% availability in the common net DNS.

This record is the result of the expertise of our people and our specialized infrastructure.

We will now take your questions. Operator, we're ready for the first question.

[Operator]

Thank you. We'll take our first question from Rob Oliver with Baird. Please go ahead.

[Rob Oliver, Robert W. Baird & Co., Inc. (Broker)]

Hey, guys. Thank you very much for taking my question. And I know, Jim, that you said you won't comment on the CA. But I thought I'd give it a shot anyway.

On the time line it's a November expiration so is it likely we would get some resolution on this before kind of our next earnings call? Or is it something that we would be unlikely to hear about until the actual expiration? And then I just had a quick follow-up. Thank you.

[D. James Bidzos, VeriSign, Inc.]

Yeah, Rob. Nice try. Sorry, we're engaged in a dialogue with NTIA and really can't speculate on the time line. It's their process.

[Rob Oliver, Robert W. Baird & Co., Inc. (Broker)]

Okay. Thanks, Jim. And then I just wanted to ask about just kind of where we are with .web and any color that you guys can provide around how that ramp might begin to look. Thank you guys very much.

[D. James Bidzos, VeriSign, Inc.]

Sure, thanks. Well, we're engaged in ICANN's process on .web to move the delegation forward but this is ICANN's process so we can't say exactly when it will conclude. We'll certainly give you updates when they're available. Operator, another one?

[Operator]

Thank you. We'll now take our next question from Sterling Auty with JPMorgan.

[Ugam Kamat, JPMorgan India Pvt Ltd.]

Hey. Hi guys, this is actually Ugam Kamat on for Sterling. So just to hit on the Cooperative Agreement, Jim, you mentioned about that you are amending the agreement with ICANN?

Just so that we are clear on that one, is it ruled out about the possibility of renewing or the contract throwing away and the third possibility of amending is the one that you are taking moving forward?

[D. James Bidzos, VeriSign, Inc.]

Well, that is the statement that we made. Those others were certainly in a range of possibility. I suppose anything is possible. But the facts as they sit today that I can say speaking for both VeriSign and NTIA is precisely the statement that I made earlier, which is that we are engaged in a dialogue about amending the Cooperative Agreement and what that amendment would look like.

And I guess I would just add that amendments are certainly possible by mutual agreement between NTIA and VeriSign. So again we're engaged and that's the process we're in currently.

[Ugam Kamat, JPMorgan India Pvt Ltd.]

Great.

[D. James Bidzos, VeriSign, Inc.]

Since that process is still ongoing I can't speculate on what's possible at the end of it. But that's the statement I'm providing today.

[Ugam Kamat, JPMorgan India Pvt Ltd.]

Great. I mean, that's helpful. And one on the like net additions for the total domain names, you are guiding to something like 4% at the midpoint. I mean, that's the best rates that we have seen so far. Like if you exclude out the China in 2015. What is driving that particular increase in the domain? Is that the cross additions that you are seeing or the high renewal rates from the existing customers that is driving that net additions up?

[George E. Kilguss III, VeriSign, Inc.]

Sure. This is George. As you saw in the second quarter, we had good performance in net adds from the domain name base. And in the second quarter that primarily came from improved gross adds. Gross adds were $9.6 million versus $9.2 million a year ago in the second quarter and slightly improved renewal rates which were, as Jim mentioned, the preliminary renewal rate for second quarter is 74.9%, up from 74% a year ago. And we expect those trends to continue here into the third quarter. And that really – those two factors really are the basis of our guidance.

[Ugam Kamat, JPMorgan India Pvt Ltd.]

All right. And if I could squeeze one more in on the operating margins, I mean 68.2% has been really the peak of the margins. But you are guiding to 66%, 67% for 2018. Any particular expenses that you expect in the back half of the year that should drag the margins down from the June quarter level?

[George E. Kilguss III, VeriSign, Inc.]

Well, if you look at the second quarter, you can see that our expenses, our non-GAAP expenses were down about $4 million year-over-year. And as I have mentioned before, quarter-to-quarter we do have some timing differences with some spend that we put into the business. And Q4 was lower by that $4 million. Roughly $3 million of it was in marketing and $1 million was in G&A. But we still expect to be around that $100 million expense going forward.

And when we think about where they are – we'll probably see a little bit more in marketing expense go out in subsequent quarters. But we've given – we really don't guide to quarterly expense or margin. The full year guidance is what we expect we'll fall between for the remainder of the year.

[Ugam Kamat, JPMorgan India Pvt Ltd.]

That's perfect. Really helpful. Thank you, guys.

[Operator]

Thank you. We'll now take our last question from Matthew Wells with Citi.

[Matthew Wells, Citigroup Global Markets, Inc.]

Hey. This is Matt Wells with Citi. Thanks for taking my questions. And just digging into growth in the zone file and net adds, can you just talk to where you are seeing strength geographically?

[George E. Kilguss III, VeriSign, Inc.]

Yes. I'd say similar to last quarter, Matt, we continue to see U.S. registrars do well, as well as registrars in China. But the U.S. registrars have performed well for us this year year-to-date.

[Matthew Wells, Citigroup Global Markets, Inc.]

Are you able to just speak directionally around the breakout between U.S. and China, net add?

[George E. Kilguss III, VeriSign, Inc.]

Well, for the first half of the year -- I mean, again we know that our (00:15:10) registrars are performing well. I'd say it's fairly balanced between the two areas. I'd say the U.S. is doing a pretty good job but China continues to do well as well.

[Matthew Wells, Citigroup Global Markets, Inc.]

That's great. Thanks.

[D. James Bidzos, VeriSign, Inc.]

Okay, it's Jim here. Just a clarification on one answer I gave on the Cooperative Agreement, our status there. The statement I made is an accurate statement. I guess I don't speak for NTIA. That process is theirs. But the statement is an accurate statement from VeriSign. I just wanted to be clear on that.

[Operator]

Thank you and that does conclude today's question-and-answer session. I'd like to turn the conference back over to Mr. David Atchley for any additional or final closing remarks.

[David Atchley, CFA, VeriSign, Inc.]

Thank you, operator. Please call the Investor Relations department with any follow-up questions from this call. Thank you for your participation. This concludes our call. Have a good evening.

[Operator]

Thank you. That does conclude today's conference. Thank you all for your participation.