VeriSign, Inc.
Q2 2017 Earnings Call Transcript

Published: 27 Jul 2017

[Operator:]

Good day, everyone and welcome to VeriSign's Second Quarter 2017 Earnings Call. Today's conference is being recorded, and unauthorized recording of this call is not permitted. At this time, I would like to turn the conference over to Mr. David Atchley, Vice President of Investor Relations and Corporate Treasurer. Please go ahead, sir.

[David Atchley, CFA:]

Thank you, operator, and good afternoon, everyone. Welcome to VeriSign's second quarter 2017 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 the Investor Relations section of our verisign.com website. There, you will also find our second quarter 2017 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 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.

[D. James Bidzos:]

Thanks, David, and good afternoon, everyone. I am pleased to report another solid quarter for VeriSign. Second quarter results are 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 $289 million, up 0.7% year-over-year, and delivered strong financial performance, including non-GAAP EPS of $1.05 and $171 million in free cash flow. During the second quarter, we continued our share repurchase program by repurchasing 1.7 million shares for $150.5 million. Our financial position is strong, with $1.8 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 was 144.3 million, consisting of 129.2 million names for .com and 15.1 million names for .net. The domain name base increased by 0.68 million net names during the second quarter after processing 9.2 million new gross registrations. 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 2017 will be 73.9%. This preliminary rate compares to 73.8% achieved in the second quarter of 2016. We are updating the full year 2017 domain name base growth guidance to be between 2% and 2.75%. Also, we expect the domain name base to increase during the third quarter between 0.8 million to 1.3 million registrations. I'll comment now on a few recent events. In June, the .net registry agreement between VeriSign and ICANN was successfully renewed. The new agreement does not contain changes to the material terms such as pricing terms, renewal rights, the six-year term, or fees paid to ICANN. Also in June, we issued $550 million of senior unsecured notes with a 4.75% coupon maturing in 10 years. This offering closed in early July and we're pleased with the results of this issuance. Lastly, today we announced an increase in the annual wholesale fee for .net domain name registration, as allowed by our agreement with ICANN. As of February 1, 2018, the annual wholesale fee for a .net domain name registration will increase from $8.20 to $9.02. We believe this positions .net competitively in the marketplace while keeping .net priced lower than other popular legacy TLDs. And now, I'd like to turn the call over to George.

[George E. Kilguss III:]

Thanks, Jim, and good afternoon, everyone. Revenue for the second quarter totaled $289 million, up 0.7% year-over-year. During the quarter, 60% of our revenue was from customers in the U.S. and 40% was from foreign customers. As it relates to our GAAP results, operating income in the second quarter totaled $175 million, compared with $176 million in the second quarter of 2016. The operating margin in the quarter came to 60.6% compared to 61.5% in the same quarter a year ago. Net income totaled $123 million compared to $113 million a year earlier, which produced diluted earnings per share of $0.99 in the second quarter this year compared to $0.87 for the second quarter last year. (5

[D. James Bidzos:]

Thank you, George. In closing, during the second quarter we continued our work to protect, grow and manage the business, while continuing our focus on providing long-term value to our shareholders. We have marked some significant milestones since our last call. In addition to renewing the .net registry agreement with ICANN for another six years, earlier this month the company surpassed 20 continuous years of 100% availability in the .com and .net DNS. This record is the result of the expertise of our people and our specialized infrastructure. We believe our focus on profitable growth and disciplined execution will extend the long trendlines of growth in our top and bottom line, and allow us to continue our consistent track record of generating and returning value to our shareholders in the most efficient manner. We will now take your questions. Operator, we're ready for the first question.

[Operator:]

Thank you We'll go first to Rob Oliver with Robert W. Baird.

[Matt S. Lemenager:]

Great, thanks. This is Matt Lemenager on for Rob. Question on the strength of the domain name activity, quarter to date, in the guidance, it's a little bit above maybe what we expected, at least a few quarters ago, at 0.8 million to 1.3 million. So as we think about what is driving that strength, is there any direction that you can point to us? Is it perhaps promotional activity, or international domain name ads? I don't know if there's any color you could add there.

[D. James Bidzos:]

I think probably the biggest contributors there are, there is some strengthening in the economy. There's more economic activity, which generally contributes to domain name growth. But I also think the strong brands that .com and .net represent, they're strong, recognized, trusted global brands, are showing their strength and contributed to that good performance as well.

[George E. Kilguss III:]

The only other point I'd put on that, Rob, is as you saw in the first quarter, we had also good demand coming out of the U.S. market, and that strength in the U.S. continued into the second quarter.

[Matt S. Lemenager:]

Great, thanks. And then just one other question on the expense structure. Is there any expenses that are kind of more second half weighted? As we think about the EBIT margin guidance we've kind of been above, or at the high end of that range for the full-year guide. Is there anything for the second half, that's maybe expenses that are second-half-specific, that would cause that EBIT margin to come in at that lower end of that guide?

[George E. Kilguss III:]

Well, we provided our guidance for our non-GAAP operating margin for the full year just now, but as far as how expenses flow, what we've outlined in our 10-Q is we do expense our sales and marketing expenses to be higher in the second half of the year, but we'll continue to manage all the expenses of the business, and we expect to be within the non-GAAP operating margin of between 64.5% to 64.25% just given earlier.

[Matt S. Lemenager:]

Great. Thanks, guys.

[Operator:]

And we'll go next to Sterling Auty with JPMorgan.

[Ugam Kamat:]

Hey. Hi guys, this is Ugam Kamat on for Sterling Auty. Just to expand on the domain name question, you said about the strengthening economy in the U.S. that is driving the growth in domains. What are you seeing within the international market currently, versus what you saw about a year ago? And how should we think about it going forward?

[D. James Bidzos:]

Well, there's a – let me see if I understand your question properly. By international markets, I can point to one thing that has changed. We did mention in several past quarters that the so-called China surge, which began in late 2015 and continued into 2016, including the second quarter, of course, affected renewals through 2017. We believe now that, that effect, the China effect, so to speak, has pretty much pushed through the system. So I think that might be a factor. Certainly, some activity I would point to in terms of international market. There is general strong growth in the international market. But as George pointed out, some growth in the U.S. market in the first quarter continued into the second market as well. So there are good signs, there's general growth outside the U.S. and then economic activity in the U.S. has contributed to some continuing growth here.

[Ugam Kamat:]

Perfect. That's really helpful. And another one on expenses. Operating margins came somewhere around 65.3% versus somewhere 66% we were estimating. Any particular expenses that were higher within the quarter that led to the dinging of margins?

[George E. Kilguss III:]

So we did see a slight increase in G&A expense in the quarter. During the quarter we purchased some additional software licenses for the core business, and we also had slightly higher legal fees in the quarter. But again, on a non-GAAP basis, we were pretty much flat. We can consistently be around about $100 million non-GAAP operating expense level.

[Ugam Kamat:]

Okay. And if I could sneak one more in, where are you currently in the .web antitrust suit, and what is a normal procedure and timeline you're expecting with that particular suit?

[D. James Bidzos:]

Well, there's really no update to provide on .web at this point. With respect to our interactions with the Department of Justice, we continue to cooperate with DOJ as it pertains to the CID we discussed last quarter. That dialogue is constructive, has been constructive. We produced documents and information. We'd answered questions as needed, and we're meeting with the department. So that's an ongoing process, and beyond that, there's really nothing to say at this point.

[Ugam Kamat:]

Perfect. Thank you so much guys.

[D. James Bidzos:]

Thank you.

[Operator:]

And we'll take our last question from Gregg Moskowitz with Cowen & Company.

[Gregg Moskowitz:]

Okay, thank you very much. Good afternoon, guys. Just I guess to start off, a follow-up on one of those last questions. I was wondering if you might be able to, George, put a finer point on the amount of excess G&A expense in Q2, just for us to get a little bit more of a normalized sense of the OpEx.

[George E. Kilguss III:]

Well, I'm not sure what you mean by excess expense, Greg. I mean, we continue to manage all the lines of expenses throughout the business pretty much on a quarterly and monthly basis. And each quarter, there's always going to be some type of expense that comes in that might not have been planned or one might call non-recurring. But I think if you continue to call those out, any expense you could almost view as non-recurring. As I said, in the quarter we did purchase some additional software licenses in the quarter, and we did have some higher legal costs in the quarter, But we will have, from time to time, the need to purchase additional software licenses in the business, and we'll have the need to spend additional money from a legal perspective for the company. And so again, I'd look back at the big picture. On a non-GAAP basis, total expense was a little over $100 million, $100.7 million. And compared to last quarter, which was a similar amount, and year-over-year, I believe it was $99 million a year ago quarter versus $100 million there. We did have a little bit higher stock-based compensation in the quarter on a GAAP basis, and that's really a function of two areas. One, since last year, we have brought on some additional senior management to the company, in particular, if you looked at our website, we brought on an SVP of Product. And then we also, as a senior management team, do have some longer-term incentive programs, and as we continue to execute on our plan and deliver on the results over and above some of the goals that were set, we do have some accelerators that get accrue there as we continue to execute. So we'll continue to try to do that. But again, from a GAAP perspective, we had a little bit more stock-based compensation. And as I said, we had a few other nits and that in the quarter. But in general, very consistent with the year-ago period as well as sequentially.

[Gregg Moskowitz:]

Okay. That's helpful. And then I guess, just one other question. As you noted in your prepared remarks, you recently issued a little over $500 million in debt. Are you looking to put that to work in relatively short order, or can you give us an update on what you plan to do with the cash? Thanks.

[D. James Bidzos:]

Sure. So as you point out, we absolutely added some additional debt to capital structure. And as you know, as a company, we try to actively manage that capital structure. One of the things that we clearly look at and monitor is our ability to raise debt in the market, our ability to execute it, and also what interest rate we can do that. And when we looked at the market, we felt that where the market was, it was an attractive time for us to go add other piece of long-term capital to our capital structure. So as far as use of proceeds, as we mentioned in the offering, we plan to use those proceeds for general corporate purposes. That would also include potential share repurchases. As you know from following us, we don't guide to share repurchases, but we try to be very prudent with the capital of the company and we'll continue to look for ways to generate positive returns for the shareholders.

[Gregg Moskowitz:]

Great. Thank you.

[Operator:]

And with that, I'd like to turn the conference back over to David Atchley for any additional or closing remarks.

[David Atchley, CFA:]

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 concludes today's presentation. We thank you for your participation.