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Edited Transcript of VRSN earnings conference call or presentation 24-Oct-19 8:30pm GMT

Q3 2019 Verisign Inc Earnings Call

DULLES Oct 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Verisign Inc earnings conference call or presentation Thursday, October 24, 2019 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, President & CEO

* David Atchley

VeriSign, Inc. - VP & Corporate Treasurer

* George E. Kilguss

VeriSign, Inc. - Executive VP & CFO

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Conference Call Participants

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* Matthew Steven Lemenager

Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst

* Nicholas Freeman Jones

Citigroup Inc, Research Division - Assistant VP & Senior Associate

* 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 Third 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 comments 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. - VP & Corporate Treasurer [2]

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Thank you, operator, and good afternoon, everyone. Welcome to VeriSign's Third 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 third 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 in our documents filed with the SEC, specifically the most recent report 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.

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

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Thanks, David, and good afternoon, everyone. I'm pleased to report another solid quarter for VeriSign. Our 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.

At the end of September, the domain name base in .com and .net totaled 157.4 million, consisting of 144 million names for .com and 13.4 million names for .net, with a year-over-year growth rate of 3.8%. During the third quarter, we processed 9.9 million new registrations and the domain name base increased by 1.27 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 third quarter of 2019 will be approximately 73.6%. This preliminary rate compares to 74.8% achieved in the third quarter of 2018. For 2019 full year, we now expect the domain name base growth rate to be between 3.2% and 3.7%.

As noted during our recent earnings calls, we are engaged in the process with ICANN to incorporate the terms of Amendment 35 to the Cooperative Agreement, including the pricing terms into our .com Registry Agreement. For those not familiar with this, let me remind you that under the 2016 Amendment to our .com Registry Agreement with ICANN, which extended the term of the agreement, we and ICANN also agreed to negotiate in good faith to do 2 things. First, we agreed to reflect changes to the Cooperative Agreement into the .com agreement, including pricing terms. Second, we agreed to amend the. com agreement to include terms to preserve and enhance the security and stability of the .com registry or the Internet. We believe these discussions with ICANN are nearly complete. While it will be inappropriate at this time to provide more details, I can say that we are satisfied with the results so far. As noted, this is an ICANN process and we expect that before long, ICANN will be publishing for public comment the documents we have been discussing.

During the third quarter, we continued our share repurchase program by repurchasing 1 million shares of common stock for $194 million. Our financial position remains strong with $1.23 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.

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George E. Kilguss, VeriSign, Inc. - Executive VP & CFO [4]

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Thank you, Jim, and good afternoon, everyone. Third quarter GAAP results produced revenue of $308 million, up 0.9% year-over-year.

Operating expense totaled $103 million compared to $105 million last quarter and $111 million in the third quarter a year ago. The small sequential quarter-over-quarter decrease in operating expenses is primarily a result of the timing of spend related to some sales and marketing programs. Year-over-year, the decrease in operating expenses is primarily due to 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.

Operating income totaled $206 million compared with $195 million in the third quarter of 2018. The operating margin in the quarter came to 66.7% compared to 63.8% in the same quarter a year ago.

Net income totaled $154 million compared to $138 million a year earlier, which produced diluted earnings per share of $1.30 in the third quarter this year compared to $1.13 for the same quarter last year. As of September 30, 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 $511 million were held domestically, with the remainder held abroad.

I'll now review some additional third 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, third quarter non-GAAP operating expense, which excludes $13 million of stock-based compensation, totaled $90 million compared to $91 million last quarter and $96 million in the third quarter a year ago.

Non-GAAP operating margin for the third quarter was 70.8% compared to 70.1% last quarter and 68.7% in the same quarter of 2018.

Non-GAAP net income for the third quarter was $161 million, resulting in non-GAAP diluted earnings per share of $1.36 based on a weighted average diluted share count of 118.6 million shares. This compares to $1.33 last quarter and $1.23 in the third quarter of 2018.

Operating cash flow for the third quarter was $208 million, and free cash flow was $197 million compared with the $187 million and $177 million, respectively, for the third quarter last year.

Beginning with the first quarter 2020 earnings results, we plan to eliminate our discussion and presentation of non-GAAP measures with the exception of free cash flow and adjusted EBITDA on which we will continue to report. As a result, our full year 2020 guidance, which we'll provide on our next call, will only include GAAP metrics. This change is the culmination of the declining trend and influence of our non-GAAP adjustments over the last several years and is consistent with the evolving trends and best practices in financial reporting.

Now I'd like to provide updates to our full year 2019 guidance. Revenue is now expected to be in the range of $1.228 billion to $1.233 billion, narrowed from the $1.225 billion to $1.235 billion range provided on our last call. This revenue range is based on our expectation for continued growth of our domain name base for the full year 2019 of between 3.2% and 3.7%.

Our non-GAAP operating margin is expected to be between 69.5% and 70%, increased and narrowed from the 68% to 69% range provided on our last call. Our interest expense and nonoperating income net is now expected to be an expense of between $44 million to $49 million, narrowed from the $42 million to $49 million range provided on our last call.

Capital expenditures in 2019 are now expected to be between $40 million and $50 million, decreased from the $45 million to $55 million range provided on our last call. Cash taxes are now expected to be between $85 million and $95 million, narrowed from the $85 million to $100 million range provided previously.

To recap, VeriSign continued to demonstrate sound financial performance during the third quarter of 2019.

Now I'll turn the call back to Jim for his closing remarks.

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

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Thanks, George. The third quarter is another solid quarter for VeriSign. And as further expansion of the domain name base and year-over-year revenue growth, we generated and efficiently returned value to our shareholders. We continued our work to protect, grow and manage the business while continuing our focus on providing long-term value to our shareholders.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question today from Rob Oliver with Baird.

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Matthew Steven Lemenager, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [2]

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It's Matthew Lemenager on for Rob. I do appreciate the comments around the ICANN registry agreement negotiation. So as we look forward, could you remind us, once the public comment period would open up, what does the time line look like after that? I believe you have to give a 6-month notification period before you can make any formal changes in pricing. So I assume that entire review period with ICANN would be complete by kind of April 2020, which can be time frame that it's going to need to be completed by. But can you just remind us what the time line looks like after the public comment period opens?

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

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Sure, Matt. Yes, let me explain how -- what we expect in the public comment period with the caveat that this is an ICANN process so I can't speak with certainty and I don't speak for ICANN, but I can tell you what the expectation is and what they typically do. As I mentioned, we will expect them to shortly publish these documents for a comment period. ICANN's comment periods are typically about 40 days. There's typically a short period where they review the comments. And then after that, it's normally expected that some action would be taken an approval on, on that process. Again, it's ICANN process. I can't tell you with certainty, but that's typically what they do and that's basically an expectation based on what they've done in the past.

In terms of any price increases, we don't guide to pricing. We need to finalize this ICANN process first. So I can't offer you any details on that, but hopefully that answered your question.

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Matthew Steven Lemenager, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [4]

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Yes, that's helpful. And then I think another one on kind of the newer initiatives, I suppose. Is there any update to .web and the process there?

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

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Yes. Actually, there is some new information since we spoke to you last quarter on .web. Just for the benefit, I guess, of everybody else on the call, for context, there's an option for .web. And one of the losing bidders, a company called Afilias, a competitor of ours, filed what is a form of an arbitration proceeding called an IRP in November of 2018 that's against ICANN. And as a reminder, ICANN filed a response to the complaint. We're not a party to that arbitration, but we have filed a request asking to participate in that arbitration as an interested party, which is allowed by ICANN's rules. So the update is that since last quarter, kind of a significant update, I guess, is that an arbitration panel has been appointed, convened, that actually held a hearing just very recently, a couple of weeks ago, on our request to participate. That hearing was held, and we expect a ruling on that issue of our participation before the end of the year.

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Matthew Steven Lemenager, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [6]

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Okay. Got it. And then lastly, just on the sales and marketing expense. It was down 28% year-over-year. I think it's a couple of quarters in a row that's declined. I mean do you -- is there any expectation -- would that go -- just trying to think about how to, I don't know, call that out into 2020. It seems like -- would that level off at some point if we kind of do .web and put marketing dollars behind that? Or anything, I guess, maybe that you could give color around the sales and marketing expense?

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George E. Kilguss, VeriSign, Inc. - Executive VP & CFO [7]

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Yes. Sure, Matt. This is George. So as I mentioned in my prepared remarks, the big change in expense year-over-year really is a result of the sale of our VSS business. As it relates to sales and marketing, there was -- most of that expense came out of sales and marketing year-over-year, so that's primarily the year-over-year decline. As far as where sales and marketing is going in the future, we'll provide -- we don't provide guidance on the individual segments, but we will give you an idea of our expectation for next year on our call in February.

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Operator [8]

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Our next question will come from Sterling Auty with JPMorgan.

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Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [9]

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Let's start with the renewal rate in the quarter down year-over-year. Can you give us some context or color? Is there any particular region or factor that led to that decline?

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George E. Kilguss, VeriSign, Inc. - Executive VP & CFO [10]

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Sure, Sterling. This is George. Regarding renewal rates, our Q3 preliminary renewal rate is expected to be down about 1.2% or 73.6% year-over-year when you consider the 2 major components of our renewal rates. Our previous renewed rate has held consistent in the mid-80% range both year-over-year and sequentially. However, we've seen a slight decrease in our first-time renewal rate in the quarter. And while there's a variety of factors that can influence that, it -- for us, it's really been a geographic mix in the quarter, as we previously mentioned. China registrars, first-time renewal rate as well as what we call the emerging markets at historically lower first-time renewal rates than, let's say, more mature markets like the U.S. and Europe. And as China has continued to grow for us in 2018 and again in 2019, it's really this change in geographic mix which is causing a little bit of downward pressure on the first-time renewal rate.

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Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [11]

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So that makes sense. So maybe a follow-up is, the 9.9 million new names processed in the quarter, can you give us maybe a little bit more granularity as to what the geographic makeup of that looks like and how that has trended over the last year?

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George E. Kilguss, VeriSign, Inc. - Executive VP & CFO [12]

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Well, if you point to the 9.9 million gross adds, and that's a good stat for us. I mean gross adds were up 3.5% year-over-year in the third quarter, which actually was a record gross add third quarter for us. So continued good demand for the product in the third quarter here.

As far as the regions of gross adds, they tend to change quarter-to-quarter depending on where registrars are fulfilling demand. But again, China has done well for us in the third quarter. Third quarter, we saw EMEA do pretty well for us, and Asia Pacific was doing pretty well for us as well in the third quarter.

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Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [13]

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Got it. Moving over to the negotiation with ICANN. I think there's a number of investors that just felt like, well, why isn't this just a slam dunk, quick, put in Item 35 and you're done. I think from some of the commentary you've made in the earnings calls, it does seem to be more of a negotiation, and negotiation usually means both sides want something. There has been some question that I get from investors as to whether the ICANN fee would go up or what other elements we might actually see. Is there any just high-level color that you can give even prior to seeing the public comment documents?

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D. James Bidzos, VeriSign, Inc. - Founder, Executive Chairman, President & CEO [14]

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So your question is specifically about when in terms of the publication for public comment? I'm not sure. You kind of lost me right at end there. I'm just not sure exactly what the question is.

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Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [15]

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Yes. To be very specific, the question is, since it's a negotiation, should we expect that not only would we see changes to pricing coming into the registry agreement from Item 35, but will there be other changes to the registry agreement since it is a negotiation?

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D. James Bidzos, VeriSign, Inc. - Founder, Executive Chairman, President & CEO [16]

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Well, there's -- so I think -- no, I said that we can't provide any details, but I can reiterate and tell you that there's an obligation to move the changes from the Cooperative Agreement, which is the pricing, and we're satisfied with that process. And that is the Amendment 35 pricing.

There's also an obligation resulting from the 2016 extension to provide the security and stability. So I can tell you that in that process, we're satisfied as well with that process, with the discussions that we've had, including security and stability. And that -- in that process, any obligations or expenses that arise from it, that's also an area where we're satisfied with the progress and also the Amendment 35 pricing, obviously. So hopefully that answers your question.

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Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [17]

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Yes, that makes sense. And then last question, George, just back -- as we think about the new guidance for the 3.2% to 3.7% growth in the domain overall, should we think that this would be a continuation of the trend in the renewal rate that gets us to that level for the full year? Or is there any other factors that kind of weighed on it?

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George E. Kilguss, VeriSign, Inc. - Executive VP & CFO [18]

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I mean, Sterling, as we all know, there is seasonality we have in fourth quarter, i.e., there are quite a few holidays in the fourth quarter in the U.S. and abroad. And so it's obviously a combination of adds and renewal rates, but our guidance fully reflects our expectations for the full year performance.

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Operator [19]

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We will take our last question from Nick Jones with Citi.

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Nicholas Freeman Jones, Citigroup Inc, Research Division - Assistant VP & Senior Associate [20]

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I guess thinking a little bit longer term, is there any discernible differences in kind of the number of people who are parking domains today than maybe were during the last recession? And is there kind of any difference in the business today or the profile of the registrants that you could add some color around that are different today?

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D. James Bidzos, VeriSign, Inc. - Founder, Executive Chairman, President & CEO [21]

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I think that's a very tough question to get into any specifics on. But generally, I can tell you that this business has shifted steadily over the years. You probably remember a few years ago when Google was making changes to its search algorithm and affected the way that people monetized domains, that affected registrar buying habits. Geography can play a role as well. People buy domains for different purposes in different geographies. So it's -- there are many purposes, obviously, from branding yourself and building businesses. People buy domains for defensive registration purposes. There are lots of different reasons to buy them. They vary over time. Other external factors that influence them, geography. So it's kind of hard to generalize. I can't think of any standout change or shift that I can point to that indicates any specific change or aspect of our business. As George said, this was a record Q3 with 9.9 million gross adds and so demand is good for the product. Whatever the mix may be, that's a subject for publication of some data in the future. We might look at that. It's a good question, but it's really hard to sort of give you a detailed, sort of granular answer to that. There's just so much activity and so many different reasons that people buy domains and so many different types of monetization as well.

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George E. Kilguss, VeriSign, Inc. - Executive VP & CFO [22]

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Yes. And as a reminder, Nick, we're a thick registry so we really -- excuse me, a thin registry, so we don't...

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D. James Bidzos, VeriSign, Inc. - Founder, Executive Chairman, President & CEO [23]

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You don't say the registrant. Registrants don't provide that. So we don't have quite as much information, but we certainly study these trends and it's -- there's a diverse set of reasons that people buy domains.

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Nicholas Freeman Jones, Citigroup Inc, Research Division - Assistant VP & Senior Associate [24]

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Okay. Got it. Appreciate it. One more. With kind of an upcoming political cycle and the growing scrutiny on kind of big tech, is there any kind of increased regulatory risk to VeriSign as you guys try to implement Amendment 35 as we get into 2020? Or how should we think about that?

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D. James Bidzos, VeriSign, Inc. - Founder, Executive Chairman, President & CEO [25]

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We've read what you read about that. That's all we know. I read everything lately. We've read what you've read.

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Operator [26]

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That will conclude today's question-and-answer session. At this time, I will turn the conference over to Mr. David Atchley for final comments.

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David Atchley, VeriSign, Inc. - VP & Corporate Treasurer [27]

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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 [28]

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That does conclude today's conference call. Thank you for your participation. You may now disconnect.