Q3 2019 Earnings Call

Please standby.

Good day, everyone welcome to Verisign third quarter 2019 earnings call Today's conference is being recorded.

Right recording this call is not permitted.

I'd like to turn to comments over to Mr., David actually Vice President of Investor Relations and corporate Treasurer. Please go ahead Sir.

Thank you operator, and good afternoon, everyone welcome to Verisign third quarter 2019 earnings call with me are Jim did those executive Chairman, President and CEO touched Ruby Executive Vice President and COO, and George Kilguss Executive Vice President and CFO . This calling presentation are being webcast to.

<unk> relations website, which is available under about Verisign on Verisign Dot com. There you'll 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, our 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 FCC specifically the most recent reports on forms 10-K in 10-Q, which identify risk factors that could cause actual results to differ materially from those contained in the forward looking statements Verisign retains.

It's longstanding policy not to comment on financial performance or guidance during the quarter unless it is done through 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 in slide presentation as applicable.

Each of which can be found on the Investor Relations section of our website.

A moment Djimon 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.

Thanks, David and good afternoon, everyone.

I'm pleased to report another solid quarter for Verisign.

Results are aligned with our objectives of offerings 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, and Dot com and that totaled 157.4 million consisting of 144 million names for dot Com and 13.4 million names for dot net with a year over year growth rate of 3.8%.

During the third quarter, we process 9.9 million new registrations in 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 believed 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% in 3.7%.

As noted during our recent earnings calls we are engaged in a process what I can to incorporate the terms of amendment 35 to the cooperative agreement, including the pricing terms into our dot Com registry agreement, but does not familiar with this let me remind you that under the 2016 amendment to our calm registry agreement what I can [noise].

Which extended the term of the agreement.

We and I can also agreed to negotiate in good faith to do two things first we agreed to reflect changes to the cooperative agreement into the calm agreement, including pricing terms second we agreed to amend the calm agreement to include terms to preserve and enhance the security and stability of the calm registry or the internet.

We believe these discussions what I can or nearly complete while it would be inappropriate just trying to provide more details I can say that we are satisfied with the results so far.

Noted this is and I can't process, and we expect that before long like here 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 in 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.

Now I'd like to turn the call over to George.

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.

Small sequential quarter over quarter decrease in operating expenses is primarily result of the timing of spend related to some sales and marketing programs.

Year over year decrease in operating expenses is primarily due to lower expenses as a result, with the sale of our security services business as well as the timing of spend related to periodic and plan to changes to investments in our infrastructure.

Operating income totaled 206 million compared with 195 million into third quarter of 2018.

The operating margin in the quarter came to 66.7 per cent 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 cents in the third quarter this year compared to $1.13 cents for the same quarter last year.

As of September Thirtyth 2019, the company maintain total assets of 1.9 billion in total liabilities of 3.3 billion.

Assets included 1.2 billion of cash cash equivalents in 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 and full year guidance.

As it relates to non-GAAP metrics.

Third quarter, non-GAAP operating expense, which excludes $13 million 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 61 million, resulting in non-GAAP diluted earnings per share of $1.36 cents based on a weighted average diluted share count of 118.6 million shares.

This compares to one dollar and 33 cents last quarter and one dollar and 23 cents 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 EBIT da on which we will continue to report.

As a result, our full year 2020 guidance, which we will provide 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 and 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.

Now I wrote it 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 in node from the 68% to 69% range provided on our last call.

Our interest expense and non operating income net is now expected to be an expense 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 to 55 million range provided on our last call.

Cash taxes.

Are now expected to be between 85, and 95 million narrowed from the 85 to 100 million range provided previously.

To recap Verisign continue to demonstrate sound financial performance during the third quarter of 2019.

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

Thanks George.

Third 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 return 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 well now take your questions. Operator, we're ready for the first question.

Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turns off tomorrow symmetry try equipment.

So in order to receive the best signal. Please refrain from using your headset to ask the question.

Again press Star one to ask a question.

And we'll take our first question and day from Rob Oliver with Baird.

Good afternoon, it's Matt Lemenager on for Rob.

Jim appreciate the comments around the I can.

Registry agreement negotiation.

So when we look forward could you remind us once the public comment period would open up what does the timeline look like after that I believe you have to give a six month notification period before making any formal changes in pricing. So I assume that entire review period was I can.

Would be complete by kind of the April 2020, we couldn't be the to agree that it would need to be completed by users are aligned with what the timeline look like after the public comment period open.

Sure Yeah, let me explain how what we expect in the public comment period with the caveat that this is and I can't process. So I can't.

Speak with certainty and I don't speak for I cant, but I kind of tell you what the expectation is and what they typically do.

Mentioned, we will expect them to shortly publish these documents for comment a comment period I can't 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 on approval on on that process again, it's I cant 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 I cant process first so get off are you any details on that.

But.

Hopefully that answered your question.

Yeah. That's helpful. And then I think another one on kind of the newer initiatives I suppose is there any update to dot web and the process there.

[noise], yes actually there there is some new information since we spoke to you last quarter on thought web or.

Just for the benefit I guess of everybody else on the call for for context.

There was an auction for dot web and one of the losing better as a company called affiliates a competitor of ours of hours filed what is a form of an arbitration proceeding called an IR p. in November of 2018, that's against I can.

And Oh.

As a reminder, I cant filed response of 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 parties.

Which has allowed by I kids rules. So the update is that since last quarter.

End of a significant update I guess says that.

That up in.

An arbitration panel has been appointed convened it actually held a hearing just very recently a couple of weeks ago.

On our request to participate or that that hearing was held and we expect a.

<unk> ruling on that issue of our participation up before the end of the year.

Okay.

Got it and then lastly, just on the sales and marketing expense was down 28% every 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 move along the 2020 seems like would that level off at some point as we kind of do dot web and put marketing dollars behind that or anything.

Moving to give them pulling around.

The sales and marketing expense.

Yeah sure Matt This is George so as mentioned.

In my prepared remarks, the big change and expense year over year really as a result.

The sale of our VSS business.

You know as it relates to sales and marketing.

There was most of that expense came out of sales and marketing a year over year. So that's.

Primarily the year over year decline as far as where sales and marketing is going in the future will provide a we don't provide guidance on the individual segments, but we will give you an idea of our our expectation for next year on our.

Call in February .

Okay got it thanks guys.

Our next question will come from Sterling Auty with JP Morgan.

Yes, Thanks, Hi, guys, let's start with.

The renewal rate in the quarter down year over year can you give us some context or color is or any particular region or factor that led to that decline.

Oh sure Sterling this is George.

Regarding renewal rates.

Q3 preliminary roll right.

He is expected to be down about 1.2% or 73.6% year.

Year over year, when you consider the two major components.

Of our renewal rights our previous renewed rate has held consistent in the mid 80% range both year over year at sequentially. However, we've seen a slight decrease in our first time renewal rate.

In the quarter and was a variety of factors that can influence that it for us it's really been a geographic mix in the quarter as we've previously mentioned China.

China Registrars first time renewal rate as well as what we call other emerging markets have historically lower first time renewal rates.

Than let's say more mature markets like the U.S. and Europe and as John 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.

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

Well 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% a 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 ads they tend to change.

Quarter to quarter.

Depending on where registrars.

Fulfilling demand.

But again, China, China has done well for us in a third quarter third quarter, we saw me and do pretty well for us in Asia Pacific was doing pretty well for us as well in this quarter.

Got it moving over to be negotiation with with I can you know 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, Ben and you're done you know I think from some of the comments you've made in the earnings calls it does seem to be more of a negotiation and.

Negotiation, usually means both sides wants something there has been some question that I get for investors as to whether the icon.

Can be would go up or what other elements, we might actually see is there any you know just high level color that you can give even prior to seeing the public comment documents.

So your question this specifically about.

When it in terms of the a publication for public comment.

I'm not sure you're kind of lost me right at the end there.

No. So the I'm just not sure exactly what the questionnaires.

Yep to be very to be very specific the question is.

That's a negotiation should we expect that not only would we see changes to pricing coming into the registry agreement from Red just from the item 35, but will there be other changes to the registry agreement since it is the negotiation.

[noise] well there's.

Now I think I know I said that we can't provide any details, but I can reiterate and tell you that there 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 and 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 any obligations or expenses that arise from it.

That's also an area, where we're satisfied with the with the progress and also the amendment 35 pricing, obviously, so hopefully that answers your question.

Yeah that makes sense. Thank you Jim and then last question George just back you know, it's 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.

For the full year or is there any other factors that kinda weighed on it.

Oh, I mean Sterling as has normal there is some seasonality we have in the fourth quarter I either are quite a few holidays in the fourth quarter in the U.S. and abroad and so.

It's obviously a combination of.

Of ads and ER and renewal rates, but our guidance fully reflects our expectations for a for the full year performance.

Thank you guys.

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

Hi, Thank you for taking my question I guess.

Taking a little bit longer term is there any discernible differences and kind of a number of people who are parking domain. Today, then maybe work during the last recession and is there kind of any.

Different to the business today or the profile of the registering said that you can add some color around that are different today.

I think that's a very tough question too.

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 and Google is making changes to its search algorithm that affected the way the people monetize domains that affected registrar buying habits geography can play a role as well.

People buydomains for different purposes in different geographies.

So its yeah. There are there are many purposes, obviously from a branding yourself and building businesses people buydomains for defensive registration purposes.

There are lots of different reasons, the pie them they vary over time or other external factors that influence them geography, such kind of hard to generalize.

All right 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, maybe that's a that's a subject for publication of someday in the future we might look at that that'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 in so many different.

Reasons that people buydomains and so many different types of monetization as well as a reminder, Nick worth six sick registry. So we really let's assume it's been register so.

We don't.

We don't see the registrars she's a registered registrars that provide that so we don't have quite as much information.

But we certainly you know study these trends and a it's a there there is a diverse set of reasons that people by delays.

[noise] Kotick I'd appreciate it one more but with the kind of in upcoming political cycle and the garage scrutiny on kind of big Tech is there any kind of [noise].

Crease regulatory risk the Verisign you know says.

You got trying to implement 11 35, as we get into 2020 or how should we think about that.

We've read what you read about that Thats, all we know [laughter].

[laughter] I've read anything lately, we've read what you've read.

Okay appreciate taking my questions.

Sure.

That will conclude todays question and answer session. At this time ill turn the conference over to Mr., David actually for final comments.

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.

That does conclude todays conference call. Thank you for your participation you may now disconnect.