Q4 2019 Earnings Call

Please standby.

Good day, everyone welcome to Verisign sports cornering.

For year 2019 earnings call today's conference is being recorded.

This call is not permitted unless pre authorized.

I just don't make it turned a corner so whats mr., David actually Vice President Investor Relations and corporate Treasurer. Please go ahead Sir.

Thank you operator, and good afternoon, everyone welcome to their such fourth quarter and full year.

20 ranking earnings call with me are Jim did just executive Chairman, President and CEO Touch Derby 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 their sign on their.

<unk> Dot com there you also find or fourth quarter and full year 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 called 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 just got some detail in or documents filed with the FCC specifically the most recent reports on form 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.

Sure performance or guidance during the quarter.

It is done through public disclosure.

Financial results in today's call and the matters, we will be discussing today include GAAP and non-GAAP majors use bagger sorry.

GAAP to non-GAAP reconciliation information is depended to our earnings release and slide presentation as applicable each of which.

Which can be found an 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.

Thanks, David Good afternoon, everyone.

I'm pleased to report another solid quarter for Verisign caps off not only a solid year, but.

Also a strong decade in which we focused our core business expanded the domain name base and return value to our shareholders.

29 team, we mark more than 22 years about interrupted availability for the various idea that sport dotcom and dotnet.

2019 was also strong year for the Dot Com Dot net domain name base as we.

Processed a record 40.3 million registrations are concluded the year with 158.8 million names.

Finally, 2019 was characterized by solid financial performance with revenues of 1.232 billion in free cash flow of 714.

On January 3rd Verisign, and I can't announced.

Proposed agreements to amend the Dot Com registry agreement and a new proposed framework for working together on an issue that's related to the security stability at resiliency of the domain name system in the form of a binding letter of intent between the two organizations.

Together these agreements fulfill commitments, but I cannot verisign late in 2016.

Well the Dotcom registry agreement was previously amended.

The new proposed amendment updates the dotcom registry agreements reflects certain changes under amendment 45 to the cooperative agreement with the U.S. Department of commerce, including the pricing changes.

According to the terms of the proposed letter of intent Verisign will have a onetime commitment to provide.

$4 million per year over five years, beginning on January 1st 2021, four I cant to support activities to preserve and enhance the security stability and resiliency of the BNS and the Internet.

He believes that the activities funded by this commitment will benefit the entire internet community.

I can't it's public.

Good for these two documents close this February 14th the steps will follow the common periods closing according to our kids website or that I can't staff will prepare report at the public comments by March 620, 20, and that I can't will submit the report to its board of directors.

Now I'll discuss fourth quarter operational highlights at the end up.

December the domain name base in Dotcom, and Dotnet totaled 158.8 million consisting of 145.4 million names for Dot com at 13.4 million names for dot net with a year over year growth rate of 3.9%.

During the fourth quarter, we processed 10.3 million new registrations as it does.

My name base increase by 1.46 million names.

Although renewal rates are not fully measurable until 45 days. After the end of this quarter. We believed that the renewal rate for the fourth quarter of 29 team will be approximately 73.7%. This preliminary rate compares to 74.3% achieved in the fourth.

Quarter of 2018, and 72.2% in the fourth quarter 2017.

Looking forward to 2020, we expected domain name base growth rate of between two and 4%.

During the fourth quarter, we repurchased 1 million shares of common stock for 195 million during the full year 2019.

We repurchased 3.9 million shares for 738 million.

Effective today the board of directors increased the amount of Verisign common stock authorized for share repurchase by approximately 743 million to a total of 1 billion authorized and available under the share repurchase program, which has no expiration.

Our financial position.

They should remain strong with 1.218 billion in cash cash equivalents or marketable securities would be ended the quarter.

We continue to evaluate the overall cash in investing each of the business and considered the best uses for cash including potential share repurchases.

Finally regarding dot web as we mentioned last quarter.

Hearing on Verisign and that'd be seems request to participate the arbitration process was held last year.

Expected a ruling on our request in 2019, but we have been told by the panel, but it now hopes to issue. It's really this one.

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

Thanks, Jim and good afternoon, everyone.

For the year under.

31st 2019.

So many generated revenues of 1 billion 242 billion.

What we're saying since 2018.

GAAP operating income.

Millions, 5% from 767 billion a year ago.

A reminder.

Revenue growth during 2019 is partially offset by lower revenue from our divested security services business as most customers contracts transition to the buyer during the year.

For the full year 2019 revenue for us customers was 63% of total.

37%.

In some foreign customers.

Fourth quarter revenue came to younger than 11 million up 1% year over year.

GAAP operating expense totaled 112 million compared to 103 million last quarter.

13 million in the fourth quarter a year ago.

The global.

The quarter increase in operating expenses is primarily a result increased investment in our business.

<unk> increased sales and marketing programs as well as investments you know operational infrastructure and security capabilities.

[noise] income totaled 199 million compared.

And with 194 million in the same quarter 2018.

The operating margin in the quarter came to 63.9% compared to 63.1% in the same quarter a year ago.

Net income totaled 148 million compared to 182 billion a year earlier.

Which produced diluted earnings per share a $1.26 cents in the fourth quarter. This year.

Compared to $1.50 cents for the same quarter last year.

Well the year over year compounded results remember that 2018 results included the game.

On the sale of our security services business.

Which increased fourth quarter.

GAAP net income by 52 million and earnings per share by 43 cents.

Related to non-GAAP results.

Fourth quarter 2019, non-GAAP operating expense does the schools 12 million of stock based compensation totaled 100 million.

Dolls, and it was higher sequentially for the reasons I discussed.

<unk> lower than fourth quarter 2018 levels.

Non-GAAP operating margin for the fourth quarter was 67.9%.

Non-GAAP net income for the quarter was 154 million.

Looking at non-GAAP diluted.

Earnings per share of $1.31 cents.

Following the full year 2000, and Nike non-GAAP operating margin was 69.6%.

As a reminder, beginning with the first quarter of 2020 results will no longer be presenting discussing non-GAAP metrics.

The exception of free cash flow and adjusted EBITDA.

As of December 31st 2019, the company, making total assets of 1.854 billion in total liabilities of 3.344 billion.

Assets exceeded 1.218 billion of cash.

Cash equivalents in marketable securities.

Operating cash flow for the fourth quarter was 194 million and free cash flow.

5 million compared with 219 million at 211 million respectively.

Quarter last year.

Year over year difference was.

We related to higher cash taxes in the fourth quarter of 2019, and a lower working capital benefit.

I will now discuss full year 2020 guidance, which is now based solely on GAAP metrics.

Revenue is expected to be in the range of 1.250 billion.

The 1.265 billion.

This revenue range forecast for Flexibles, great slightly below the expected domain name base coal fleet of between 2% and 4% as 2020, rather than moldings watch any residual revenue from the security services business, which in 2000 and.

19 was about $10 million.

GAAP operating margin.

Stock based compensation is expected to be between 64.5% and 65.5%.

This guidance range reflects our expectation of incremental investment operational infrastructure security.

Capabilities during 2012.

Interest expense and non operating income that is expected to be an expensive between 68 million 75 million.

This range reflects both lower non operating income from the transition services agreement, which will cease during the first quarter.

And lower expected.

Interest income and cash balances.

Capital expenditures are expected to be between 45 million and 55 million.

The GAAP effective tax rate is expected to be between 18% and 21%. We expect the cash tax rate for 2020 to also be.

On the same range.

In summary, Verisign continued to demonstrate solid financial performance during 2019.

For the continuing strong execution and 2020.

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

Thank you George the fourth quarter was another solid quarter for Verisign.

That being a solid year for the company. It was further expansion of the domain name base and year over year revenue growth. We generated officially returned value to shareholders. We continued our work to protect grow Nancy 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.

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So in order to receive the best signal. Please refrain from using your headset. The asked the question once again a star one if you have a question.

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Well take our first question today for Rob Bolivars with Baird.

Great. Good afternoon, gentlemen, thank you for taking my question.

A question for you George just on the on the full year guidance. Just curious if you could help us understand what might be in there in terms of.

No that's because we're expecting price increases you know so role in starting later this year and if that's been factored in.

And Additionally on Dot web.

No.

You know exactly when that closes, but I'm expecting that it would've been 20, obviously less meaningful but just curious what do those were.

Because the guys and then there's not a quick follow up thanks.

Right.

Yeah, Rob we don't guide the price increases what I can tell a guidance there are no price increases in the guidance.

No no none of the guidance, but you've been given includes any revenue from swept at this point.

Okay, Great very helpful. And then just as a follow up I know you also mentioned in your prepared remarks increase in sales and marketing and.

Just was wondering if you know in domain growth, obviously was strong coming in stronger than expected just wondering if you just cats.

Kind of normal channel incentive activity or if there's anything else structural going on in terms of.

Driving increased sales and marketing and potential increase spend.

Going forward. Thanks, guys appreciate it.

Yeah, Rob so from a marketing perspective, I would say.

General the programs and types of programs that we ran a this year were similar to last year.

So there's really not a huge change what we're doing again, if I recall last year. We also had some seasonal increase in sales and marketing in the fourth quarter and we articulated that in our Colorado.

Q.

Thank you that we have filed last quarter that we expected that to go up as a percentage sales as well.

Great. Thanks again.

Next we'll hear some Nick Jones with Citi.

Hi, Thanks for taking my questions first I guess is there anything noteworthy as far as geographic Mexico.

I know, China had an impact on renewal rates and I guess given.

Kind of the current buyers eight issue there that create challenges with registrations in that region.

I'm sorry, he gets the second part of the question.

There's wondering if de kinda.

Healthcare issues in China.

Having an impact I love just duration or renewals.

Okay.

No.

In the fourth quarter, we had a very strong fourth quarter as Jim alluded to 10.3 million, a new additions, which was up from 9.5 million in the fourth quarter of 18.

Well when you look at where that demand came from the came from registrars based in the United States Asia Pacific Region EMEA.

So as far as a renewal rates again, they vary by geography.

It's something we keep an eye on but hazard.

I'd like to money.

Oh.

Virus over in a in China were not seeing any impact to date, but it's something we'll keep an eye.

Got it and then one more.

The industrial it I can can you talk a little more Colorado that kind of what need improvement at present ratio and is it mostly I got a capex or is there anything kind of.

Figure that you can call out.

Susan the question Nick that was about to spend on the infrastructure was that the question.

Yeah, the 4 million per year over five years.

Okay.

I'm sorry can you just.

A question about the letter of intent.

The 4 million over five years I'm, sorry, if I gave you a little more Carl what what exactly the money go the all in charge and then you know.

What needs to be approved well need to be preserves was there any kind of additional color you can provide there.

Well, it's that security of stability for both the BNS and for the Internet, there's a broad variety of areas.

Where that fund they will go there's things that such as I would governance, which impacts everybody every relying party on a global Internet I can't core mission as security and stability and that's where this funding is going but you may have followed last year for example.

Hi, Ken executed on something called the Cascade rollover.

[noise] refreshing a critical part of the global security system for the Internet, there's a broad variety of areas that.

Need additional funding that everybody, including Verisign, but the entire global Internet community will benefit from and so the the funding in the yellow why his specifically targeted in that brought security stability and resilience.

See area and I can't support mission.

Got it thank you for taking my questions.

We will take I last question from Sterling Auty with JP Morgan.

Yeah, Thanks, guys, but a couple of questions first wanted to revisit the renewal rate I know you mentioned that renewal rate.

Varies by geography pilots given that was down year on year any more color that you can give it just an extra then we're the renewal rates in each of the geography is consistent with last year or did you see any changes in any of the renewal rates in those geographies.

Sterling I mean, as you know ER.

You know period to period, but I think so big picture perspective, as we articulated last quarter.

It really is it seems to be a mixture of all the names that we sold the prior year coming up for renewal, we had a more names being sold.

Oh last year, a in the Asia Pacific in China region of becoming as.

Portion of the base and so they are having a slight impact there.

Other than that we're not seeing huge variances again I was just remind you. If you look back over the last couple of years.

The company's renewal.

It's been around 72% and has recently increased up into the 74% range and wallet is down you know a year over year by about 60 basis points, it's still in general.

Moving as the base agent so I.

I would just remind folks have been pretty stable renewal rate within the.

Okay, and then following up on that 7.3 million.

Gross additions you basically said there's growth out of U.S. Asia Pacific and AMEA, but can you peel that back a little bit more yeah. So at some 0.3 is better than what we have that's yeah. I think it's the first time, you're done over 10 billion in quite some time.

Hi, which area contributed more than you know what what you had been seen in other words, which which geography generated incremental growth this quarter.

Like I said those three with the largest contributors to the growth again, you know recall were a thin registry so.

So what we're reporting on is the registrations by our registrars, where they are domiciled to do business. So.

To some degree it a it may not be completely trashcans to where the end users audio registrars have Douglas and they should not necessarily us all but our customers are registrars and.

Fourth quarter. The U.S. continued remains strong asset Asia Pacific and in EMEA.

The other thing I'll just I'll just comment on is also what happens sometimes from year to year.

New companies, becoming registrars and they tend to pop up in new markets and we have sometimes consolidation in the market where a one registrar.

They acquire some business from another registrar, so but those three regions.

Performed well for us in the quarter.

Okay got it and I want to clarify Jim you mentioned in terms the panel decision on thought well that's just the final decision as to whether.

You can be a party to the process or what does that decision that you're waiting for this month.

Yes, certainly that's the issue before the panel a they indicated that a they could rule before the end of the year, but that didn't happen. The indication now is that they hope to rule this month, but to be issue before them that they will be willing on.

Is the active participation right verisign during this process.

Okay and.

And then backup operationally you mentioned the investments that you're making both in sales marketing as well as some infrastructure investments can you kind of parse out where was the bigger.

Of course.

You know that investment in which of those two areas.

I ended up we're prepared to talk about that level of detail there a lot of different components to the security infrastructure investments as you know Sterling we are very different than most other registries. Many of them are actually [noise] marketing.

Registries, rather than operating registries, we operate the common that infrastructure, which requires that somehow stringent performance requirements. So we make investments that are I think far beyond what most others do a there a lot of scheduled investments that we make but as you know the cyber security threat environment is dynamic and ever changing if there are new threats.

Yes.

If there are new technologies, new products that strengthen our.

Our infrastructure in our core mission and we're not going to hesitate to make those investments we have all of the above in the corner in the quarter, along with sales and marketing.

We haven't done I think we're prepared now to break that out in any detail.

All right last question is.

As one of the questions I get frequently for investors is what your appetite what your view would be odd acquisitions and being a consolidator in the market, especially now that you've got the ability to be a vertically integrated company outside of Dot Com you know, what's your interest level and.

Pursuing those opportunities.

I don't think there's any update we can provide you. There's certainly no no guidance or particular interest as you know our focus is on common that we've actually made investments in our BFS business. We are pursuing dot lab as a growth opportunity we do have additional.

No idea is that we expected deploying a future I think security and stability in our current growth plans that we've talked about her.

Our what we're prepared to talk about there's not anything else that that would speculate about or guide to a I would just say that goes you heard as you heard that George and myself comment earlier the guidance that we've giving for 2020.

It does not include any provision for price increases doesn't include any revenue from dot web. So we tend to be more conservative in those areas and that's probably as much as I can tell you at this time.

Understood. Thank you.

That concludes today's question answer session I'm, not trying to conference over to Mr. David.

Actually for any additional closing remarks.

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.

[noise] that does conclude todays conference. Thank you for participation you may now disconnect.

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