Verisign Inc
NASDAQ:VRSN

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NASDAQ:VRSN
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Price: 198.84 USD 2.79% Market Closed
Market Cap: 19.1B USD
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Earnings Call Transcript

Earnings Call Transcript
2019-Q2

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Operator

Good day, everyone. Welcome to Verisign's Second Quarter 2019 Earnings Call. Today's conference is being recorded. Unauthorized recording of this call is not permitted.

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

D
David Atchley
VP of IR & Corporate Treasurer

Thank you, operator, and good afternoon, everyone. Welcome to VeriSign's second quarter 2019 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 presentation are being webcast from the Investor Relations website, which is available under About Verisign on verisign.com. There you will also find our second quarter 2019 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 on 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 long-standing 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 include GAAP 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 afterward, we will open the call for your questions.

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

J
Jim Bidzos
Executive Chairman, President & CEO

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. At the end of June, the domain name base in dot-com and dot-net totaled 156.1 million, consisting of 142.5 million names for dot-com and 13.6 million names for dot-net with a year-over-year growth rate of 4.3%.

During the second quarter, we processed 10.3 million new registrations, and the domain name base increased by 1.34 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 2019 will be approximately 74%. This preliminary rate compares to 75% achieved in the second quarter of 2018.

For 2019 full year, we expect the domain name base growth rate to be between 3% and 4.25 % narrowed from our previous range of 2.5% to 4.25%. As noted during our recent earnings calls, we are engaged in a process with ICANN to incorporate terms of Amendment 35 for the Cooperative Agreement, including the pricing terms into the dot-com registry agreement. For those not familiar with this, let me remind you that under the 2016 amendment to the dot-com registry agreement with ICANN, which extended the term of the dot-com registry.

We agreement -- we and ICANN also agreed to negotiate in good faith to flow through any changes that would be made to the Cooperative Agreement, including the pricing terms, and in addition to preserve and enhance the security and stability of the dot-com registry or the Internet. These discussions with ICANN are ongoing. And at this time, there are no further details to share. Of course when appropriate, we will update you.

During the second quarter, we continued our share repurchase program by repurchasing 0.9 million shares of common stock for $175 million. Our financial position remained strong, with $1.22 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.

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

G
George Kilguss
EVP & CFO

Thanks, Jim, and good afternoon, everyone. Second quarter GAAP results produced revenue of $306 million, up 1.3% year-over-year. Operating expense totaled $105 million compared to $106 million last quarter and $109 million in the second quarter a year ago. Operating income totaled $202 million compared with $193 million in the second quarter of 2018. The operating margin in the quarter came to 65.9% compared to 63.8% in the same quarter a year ago.

Net income totaled $148 million compared to $128 million a year earlier, which produced diluted earnings per share of $1.24 in the second quarter of this year compared to $1.04 for the same quarter last year. As of June 30th, 2019, 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 $582 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 to our 2019 full year guidance.

As it relates to non-GAAP metrics, second quarter non-GAAP operating expense, which excludes $13 million of stock-based compensation, totaled $91 million compared to $94 million last quarter and $96 million in the second quarter a year ago. The slight year-over-year decrease in operating expenses is primarily a result of lower expenses as a result of the sale of our Security Services business as well as the timing of spend related to periodic and planned changes to and investments in our infrastructure.

Non-GAAP operating margin for the second quarter was 70.1% compared to 69.4% last quarter and $68.2% in the same quarter of 2018. Non-GAAP net income for the second quarter was $159 million, resulting in non-GAAP diluted earnings per share of $1.33 based on a weighted average diluted share count of 119.4 million shares. This compares to $1.31 last quarter and $1.18 in the second quarter of 2018.

Operating cash flow for the second quarter was $165 million and free cash flow was $154 million compared with $202 million and $191 million respectively for the second quarter last year. The year-over-year decline was a result of the timing of cash tax payments, which were predominantly made in Q1 last year versus occurring in the second quarter this year.

Now, I'd like to provide updates to our full year 2019 guidance. Revenue is now expected to be in the range of $1.225 billion to $1.235 billion, narrowed from the $1.220 billion to $1.235 billion range provided on our last call. Our 2019 revenue range is based on our expectation for continued growth of our domain name base for the full year of 2019 to between 3% and 4.25%.

Our non-GAAP operating margin is expected to be between 68% and 69%, increased from the 67.5% to 68.5% range provided on our last call, and we'll continue to include certain immaterial operating costs associated with providing transition services for Security Service customers. Our interest expense and non-operating income net is still expected to be an expense of between $42 million and $49 million and consists primarily of net interest expense, partially offset by income recognized as part of the aforementioned transition services agreement.

Capital expenditures in 2019 are still expected to be between $45 million and $55 million. Cash taxes are now expected to be between $85 million and $100 million, narrowed from the $85 million to $105 million range provided previously.

In summary, the company continued to demonstrate sound financial performance during the second quarter of 2019. Now, I'll turn the call back to Jim for his closing remarks.

J
Jim Bidzos
Executive Chairman, President & CEO

Thanks, George. The second quarter was another solid quarter for Verisign. There was further expansion of the domain name base and year-over-year revenue growth. We generated and efficiently returned value to shareholders. We continued our work to protect, grow and manage the business while continuing our focus on providing long-term value to our shareholders. Last week, the company marked 22 years of 100% availability in the dot-com and dot-net domain name system. This achievement is a result of the dedication and expertise of our team and our specialized infrastructure.

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

Operator

[Operator Instructions] We'll hear first today from Sterling Auty with JPMorgan.

Sterling Auty
JPMorgan

Yeah, thanks. Hi, guys. Maybe two to kick off. Jim, can you give us an update on where things stand with the dot-web arbitration and situation?

J
Jim Bidzos
Executive Chairman, President & CEO

Hi, Sterling. Thanks. Sure. Since we last spoke to you, there has been some movement in the process. ICANN has filed a response to affiliates as complaint, which is a public response and it's posted on ICANN's website. So, there is some movement, but beyond that we don't have any update.

As a reminder, one of the losing bidders in the dot-web auction, Afilias, one of our competitors, filed this arbitration in November of 2018 against ICANN trying to continue to delay the process. We're not a party to that arbitration, but we are continuing to seek to participate in the proceedings.

Sterling Auty
JPMorgan

All right, great. And then, you noticed -- noted the initial renewal rate 74% is down. Anything in particular in terms of either the types of names that didn't renew at the same rate or a mix of first year renewals versus multi -- second time or more renewal names, anything that's being kind of call out that drove that trend?

G
George Kilguss
EVP & CFO

Sure, Sterling. This is George. So, as far as our renewal rates are, as you know, our preliminary renewal rate is estimated at 74%, which is down about 1% year-over-year. I'd say, one of the prime contributors is a slightly lower first time renewal rate, which is being driven by a higher proportion of names coming up for renewal from our Chinese registrars.

As we've talked before, historically China like other emerging domain name markets have lower renewal rates, more than say mature markets like the US and Europe. And so, accordingly, what we're seeing is that the first time renewal rate is being impacted by this weighted average effective more Chinese names coming up for renewal.

Sterling Auty
JPMorgan

And is that also impacting the 10.3 million new names processed towards the upper end of what we typically see. Was that also being impacted by China or what other influences did you see there?

G
George Kilguss
EVP & CFO

Yeah. I think the short answer is yes. As we've talked about in previous quarters, some of the big drivers are registrars operating both in China and the US, but we're seeing a lot of registrars perform well in Q2, but China continues to perform well for us.

Sterling Auty
JPMorgan

Okay. And then, just last question, given the results on the operating income and operating margin line for the first half, to get down to the full-year guidance would suggest some compression and operating margins in the back half of the year. What are going to be some of the investments and sort of things that we should look for that would cause that to happen?

G
George Kilguss
EVP & CFO

Yeah. Sure, Sterling. So, maybe the best way to answer that is just to talk about some of the variances year-over-year, and then I can give you some color as to the rest of the year. But year-over-year, our expenses are down by about $4.7 million, $91.4 million were end of the quarter. And the two big costs there of being down year-over-year, one is about $2.5 million of costs associated with VSS. We again sold that business last year. And then the remaining $2 million of that variance is really related to the timing of investments in telco and networking in our network. I mentioned that in my prepared remarks.

As we go forward here, we -- and as we say in our Q that's filed this afternoon, we expect that we will have slight increases as a percent of revenue for both sales and marketing, for cost of goods sold and for G&A as well, but we continue to invest in our network. We'll probably still spend some more money in sales and marketing next year, and we'll continue to invest in our cyber activities throughout the year, which falls in the G&A.

Sterling Auty
JPMorgan

All right, perfect. Thank you so much, guys.

J
Jim Bidzos
Executive Chairman, President & CEO

Thank you.

Operator

We'll hear next from Nick Jones with Citi.

N
Nick Jones
Citi

Hi, thanks for taking the question. I saw some headlines that ICANN uncapped dot-org pricing rate increases. Do you have any comments what ICANN -- what kind of ICANN's move may mean for the broader industry? Does it have any kind of future implications for dot-com or dot-net? Is it possible that you could get uncapped in the future or is there any kind of color or commentary you guys have around that?

J
Jim Bidzos
Executive Chairman, President & CEO

Sure. Well, these new agreements that ICANN negotiated are more like the new generic TLD program agreements in that they no longer have price caps, but they do have to practice uniform pricing and provide the customary advance notices of any changes to pricing. So implementing the pricing features of Amendment 35 to the Cooperative Agreement for us simply restores the pricing flexibility to formerly existed for com domains from 2006 to 2012, the ability to unilaterally increase prices by up to 7% 4 times during the six-year term of the Registry Agreement.

So, the ICANN registry agreements for Oregon bids [Phonetic] by the way, were renewed late June and they completely lifted their price cap. So, we can't speculate of similar approach will be used for the next renewal of dot-net. And as you know, the pricing for dot-com is regulated by the Cooperative Agreement. So that's really a different animal in that process.

N
Nick Jones
Citi

Got it. Is there may be a tilt for ICANN to take a more hands off approach and have to be less involves sort of trend, maybe you're seeing or is it kind of -- it seems kind of more like a one-off?

J
Jim Bidzos
Executive Chairman, President & CEO

Well, I can't speak for ICANN but I can tell you that they did, as I mentioned. These agreements are now more like the generic TLD agreements and they do have roughly 1,000 of those, and those are somewhat standardized and they don't have price caps.

N
Nick Jones
Citi

Got it. Thank you for taking my questions.

Operator

Our final question will be from Rob Oliver with Baird.

M
Matt Lemenager
Baird

Great, thanks. It's Matt Lemenager on for Rob tonight. I had a question on the -- Jim, I wanted to ask about now your ability to vertically integrate. I think on the last call you said that something you guys would put -- think about internally but no update at that time. Just wanted to see if anything changed. Is there any discussion on what that might look like or what you could look like if you chose to vertically integrate there?

J
Jim Bidzos
Executive Chairman, President & CEO

Yeah. No, nothing to update since the last time we talked about that. Really nothing specific at this point that changes. We'll certainly let you know.

M
Matt Lemenager
Baird

But again, that's only for the non-comp TLDs?

J
Jim Bidzos
Executive Chairman, President & CEO

Dot-com is not part of that, of course. I think you're aware of that.

M
Matt Lemenager
Baird

Yeah.

J
Jim Bidzos
Executive Chairman, President & CEO

Yeah. But nothing to update at this point. Sorry.

M
Matt Lemenager
Baird

Okay. And then, just one thing on the -- do you think there is any -- it sounds like it's mostly registrars in China and the US, but I'm just looking at the $10.3 million gross new names and that accelerated -- second quarter in a row, it accelerated. Do you expect, I mean, ahead of the late October timeframe next year when prices are going to be increasing. Do you think there is any rush of people to come and buy names ahead of those price increases or the price increases maybe not substantial enough that people it may not matter and it may not drive business ahead of that?

J
Jim Bidzos
Executive Chairman, President & CEO

I really couldn't speculate on the price increase. I mean, we see demand in markets drive from continued penetration of the Internet, continued growth of e-commerce sales and people getting online. And we see those trends continuing. We think domain names in general benefit from that and we're trying to compete in the market against other TLDs in the market, internationally CCTLDs and new GTLDs for that matter. So, we just see continued demand in markets where e-commerce is flourishing and we think domains are a part of that.

M
Matt Lemenager
Baird

Okay, got it. And then, just my last one, the process on the dot-com pricing with ICANN. Is that something that's maybe taking longer than you thought to get that amendment or is this about the timeframe that you thought nothing outside of the time frame that you expect it to get that kind of stamp of approval from the ICANN RA amendment?

J
Jim Bidzos
Executive Chairman, President & CEO

So we're actively engaged in this process, as I said, and we won't be able to comment and don't comment on any details of discussions. And like I said in my prepared remarks, we're going through a process to incorporate the terms approved in Amendment 35, including the pricing terms into the com agreement with ICANN.

But also, as part of the 2016 amendment, Verisign and ICANN, a 2016 amendment that we made back then to extend the com agreement, Verisign and ICANN agreed to negotiate in good faith the flow through those changes, including pricing, but in addition to preserve and enhance the security and stability of the com registry of the Internet. So no updates beyond that.

M
Matt Lemenager
Baird

Okay, all right. Thanks, Jim. Thanks, George.

J
Jim Bidzos
Executive Chairman, President & CEO

Thank you.

Operator

And at this time, I'd like to turn things back to David Atchley for closing remarks.

D
David Atchley
VP of IR & Corporate Treasurer

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

Again that does conclude today's conference. Thank you all for joining us.