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Edited Transcript of VRSN earnings conference call or presentation 27-Apr-17 8:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Verisign Inc Earnings Call

DULLES May 9, 2017 (Thomson StreetEvents) -- Edited Transcript of Verisign Inc earnings conference call or presentation Thursday, April 27, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* D. James Bidzos

VeriSign, Inc. - Founder, Executive Chairman, CEO and President

* David Atchley

VeriSign, Inc. - Vice President Investor Relations and Corporate Treasurer

* George E. Kilguss

VeriSign, Inc. - CFO and EVP

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Conference Call Participants

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* Gray Powell

Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Analyst

* Sterling Auty

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good day, everyone. Welcome to VeriSign's First 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.

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David Atchley, VeriSign, Inc. - Vice President Investor Relations and Corporate Treasurer [2]

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Thank you, operator, and good afternoon, everyone. Welcome to VeriSign's First 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 first 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.

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D. James Bidzos, VeriSign, Inc. - Founder, Executive Chairman, CEO and President [3]

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Thanks, David, and good afternoon, everyone. I'm pleased to report another solid quarter for VeriSign. First 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 2.4% year-over-year and delivered strong financial performance, including non-GAAP EPS of $0.96, up 12% year-over-year, and $139 million in free cash flow. As part of managing our business during the first quarter, we continued our share repurchase program by repurchasing 1.8 million shares for $150 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 March, the domain name base in .com and .net was 143.6 million, consisting of 128.4 million names for .com and 15.2 million names for .net. The domain name base increased by 1.4 million net names during the first quarter after processing 9.5 million new gross registrations. The U.S. market contributed to the better-than-expected performance. Although renewal rates are not fully measurable until 45 days after the end of the quarter, we believe that the renewal rate for the first quarter of 2017 will be approximately 72.2%. This preliminary rate compares to 74.4% achieved in the first quarter of 2016.

In the fourth quarter of 2016, the final renewal rate was 67.6% compared with 73.3% for the same quarter of 2015. As noted in our prior conference calls, the portion of registrations associated with the China names surge that occurred in the first quarter of 2016 continued to renew at lower-than-historic first-time renewal rates in the first and second quarter of 2017 and are contributing to slightly higher deletions in the first half of 2017.

In addition, Q2 tends to have slightly lower seasonal new gross registrations than Q1. Based on these and other factors, we now expect full year 2017 domain name base growth of between 1% and 2.5%, with a change of the domain name base for the second quarter of 2017 of flat to an increase of 0.4 million net registrations. As many of you are aware, we are in the process of reviewing the .net registry agreement with ICANN as the current term expands on -- sorry, ends on June 30. On April 20, ICANN posted the new .net registry agreement for public comment, which is open until May 30th.

From our perspective, the posted agreement does not contain changes to the material terms, such as the fees paid to ICANN, the renewal rights or the 6-year term. We believe we're on track for renewal prior to the expiration of the current term agreement.

Finally, as discussed during our prior earnings call, we decided it was in the best interest of the company to sell our iDefense business. The iDefense sale was completed at the start of the second quarter and VeriSign continues as a customer to benefit from the threat intelligence information provided by iDefense.

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

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George E. Kilguss, VeriSign, Inc. - CFO and EVP [4]

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Thank you, Jim, and good afternoon, everyone. Revenue for the first quarter totaled $289 million, up 2.4% year-over-year and up 0.8% sequentially. During the quarter, 60% of our revenue was from customers in the United States and 40% was from foreign customers.

As it relates to our GAAP results, operating income in the first quarter totaled $175 million, up 5.1% from $167 million in the first quarter of 2016. The operating margin in the quarter came to 60.7% compared to 59.2% in the same quarter a year ago.

Net income totaled $116 million compared to $107 million a year earlier, which produced diluted earnings per share of $0.94 in the first quarter of this year compared to $0.82 for the first quarter last year.

As of March 31, 2017, the company maintained total assets of $2.3 billion and total liabilities of $3.5 billion. Assets included $1.8 billion of cash, cash equivalents and marketable securities, of which $316 million were held domestically, with the remainder held abroad.

I'll now review some additional first quarter financial metrics, which include non-GAAP operating margin, non-GAAP earnings per share, diluted share count, operating cash flow and free cash flow. I will then discuss our 2017 full year guidance.

As it relates to non-GAAP metrics, first quarter operating expense, which excludes $13 million of stock-based compensation, totaled $101 million as compared to $103 million in both the fourth quarter of 2016 and in the same quarter a year ago. The sequential decrease was primarily a result of lower marketing spend in the first quarter compared to the fourth quarter.

Non-GAAP operating margin for the first quarter was 65.1% compared to 63.3% in the same quarter of 2016. Non-GAAP net income for the first quarter was $119 million, resulting in non-GAAP diluted earnings per share of $0.96 based on a weighted average diluted share count of 124.5 million shares. This compares to $0.85 in the first quarter of 2016 and $0.92 last quarter based on 131.6 million and 125.5 million weighted average diluted shares, respectively.

For the past 2 years, we have used a tax rate of 26% to calculate our non-GAAP net income and non-GAAP earnings per share. Looking ahead, we believe a more reasonable estimate of the tax rate to calculate our non-GAAP net income and non-GAAP earnings per share is $0.25 -- 25%. As a result, we will begin to use a 25% non-GAAP tax rate when reporting second quarter 2017 non-GAAP results.

Operating cash flow for the first quarter was $148 million and free cash flow was $139 million compared with $150 million and $143 million, respectively, for the first quarter last year.

Dilution related to the convertible debentures was 21.3 million shares based on the average share price during the first quarter compared with 21.1 million for the same quarter in 2016 and 20.6 million shares last quarter. The share count was reduced by the full effect of fourth quarter 2016 repurchase activity and the weighted effect of the 1.8 million shares repurchased during the first quarter.

With respect to full year 2017 guidance, revenue for 2017 is now expected to be in the range of $1,145,000,000 to $1,160,000,000, increased and narrowed from the $1,138,000,000 to $1,158,000,000 range provided on our prior earnings call. Full-year 2017 non-GAAP operating margin is now expected to be between 64.5% and 65.25%, increased and narrowed from the 64% to 65% range as provided on our last call.

Our non-GAAP interest expense and non-GAAP non-operating income net is still expected to be an expense of between $93 million and $100 million. Capital expenditures for the year are still expected to be between $35 million and $45 million. And cash taxes for the year are now expected to be between $20 million to $30 million, changed from the $15 million to $25 million range provided on our last call.

As previously mentioned, the majority of expected cash taxes in 2017 are foreign, primarily because of domestic tax attributes, including cash tax benefits from our convertible debentures. As we said last quarter, these convertible debentures are an important part of our capital structure and our intention based on current conditions is to not redeem these debentures as they become redeemable in August of this year, which will allow these cash tax benefits to continue to accrue. The financial guidance provided reflects the completion of our iDefense asset sale on April 1, 2017.

In summary, the company continued to demonstrate sound financial performance during the first quarter of 2017.

Now, I will turn the call back to Jim for his closing remarks.

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D. James Bidzos, VeriSign, Inc. - Founder, Executive Chairman, CEO and President [5]

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Thank you, George. In closing, during the first quarter, we expanded our work to protect, grow and manage the business while continuing our focus to provide long-term value to our shareholders. We think that our focus on profitable growth and disciplined execution will extend the long trend lines of growth in our top and bottom lines 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 are ready for the first question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today will come from Sterling Auty with JPMorgan.

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Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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Just a couple of questions. I want to start with, I think I saw the gross additions in the quarter were 9.5 million. If I compare that to pre-uplift from China, that's still pretty good, that's still up from, I want to say like the high 8.8 million, somewhere in that range. Just wondering what you're seeing as the factors that are helping the gross additions in the quarter?

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George E. Kilguss, VeriSign, Inc. - CFO and EVP [3]

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This is George. In short, we saw increased demand from U.S.-based registrars in the quarter, which was aided in part by what we would call domain name-centric advertising by several channel partners in and around the Super Bowl, which happened in the February time frame.

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Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [4]

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Okay. Great. And looking at it, any change in duration of those names? I think you used to talk about maybe kind of 15-, 16-month average durations when you average everything together. Is that still the same across the .com and .net base?

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George E. Kilguss, VeriSign, Inc. - CFO and EVP [5]

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Yes, that hasn't changed too much over the years. That's still very consistent.

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Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [6]

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And you mentioned lower marketing spend in the quarter versus the fourth quarter. How should we think about the marketing spend, seasonality-wise, through the rest of the year? So we can think about the shape of the margins towards the guidance goal.

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George E. Kilguss, VeriSign, Inc. - CFO and EVP [7]

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You are correct, Sterling, that marketing spend was down sequentially. The reason behind that is partly because Q4 was so high. We had a large amount of marketing spend going into the market in Q4. And then with regard to our marketing spend this year, the timing of our marketing activities are more heavily weighted toward events later in the year than last year. So as we've outlined in our 10-Q, our expectation for marketing expense is to increase as a percent of sales in the subsequent quarters.

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Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [8]

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Okay. And very last question, if I could sneak it in. I didn't get a chance to look through, but what were the -- how much did you actually get? What were the proceeds for iDefense?

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George E. Kilguss, VeriSign, Inc. - CFO and EVP [9]

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We're not disclosing the sale proceeds from iDefense.

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D. James Bidzos, VeriSign, Inc. - Founder, Executive Chairman, CEO and President [10]

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They were not material. I think there might be some more information available in the next quarter since the sale actually closed in Q2, but the divestiture of iDefense was -- the sale of iDefense was not a material event.

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Operator [11]

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(Operator Instructions) And our last question will come from Gray Powell with Wells Fargo.

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Gray Powell, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Analyst [12]

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Just a couple if I may. So I might be looking at this wrong, but when I look at the zone files, it looks like domain additions have turned negative so far in April. Your guidance is flat at plus 400,000. So I guess, is there anything going on in the first few weeks of the new quarter? Is there any like residual churn from China or just something that I am potentially missing?

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D. James Bidzos, VeriSign, Inc. - Founder, Executive Chairman, CEO and President [13]

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I think you're seeing the final sort of move out of the China search names. There were some that carried over into April, and we're seeing the final deletions of the so-called China search names from late 2015 and 2016.

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Gray Powell, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Analyst [14]

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Okay. That's helpful. And then can you give us an update on the international transliterations of .com and .net that you have up and running today? And then just what are your expectations for additional launches over the course of the next year?

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George E. Kilguss, VeriSign, Inc. - CFO and EVP [15]

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We have 3 of the transliterations in market, 2 in Korea and 1 in Japan. At this point, we don't have any additional details on any additional launches. In China, we are still going through the licensing process to operate our Chinese IDNs, but no additional details to share at this time and we'll provide more information on these and future rollouts as appropriate.

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Gray Powell, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Analyst [16]

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Great. Then last one if I may. Any update on the .web antitrust investigation?

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D. James Bidzos, VeriSign, Inc. - Founder, Executive Chairman, CEO and President [17]

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No substantive update. We are continuing to cooperate with the Department of Justice relative to the CID that we discussed last quarter. Those interactions and dialogues have been constructive. We're producing documents and information and answering the questions as needed. So it's an ongoing process. Nothing substantive to update now. But, of course, as soon as there is, we'll share it with you.

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Operator [18]

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And ladies and gentlemen, that concludes today's question-and-answer session. Mr. David Atchley, at this time, I'll turn the conference back over to you for any additional or closing remarks.

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David Atchley, VeriSign, Inc. - Vice President Investor Relations and Corporate Treasurer [19]

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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.

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Operator [20]

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Thank you. And again, ladies and gentlemen, that does conclude our conference for today. We thank you for your participation.