Q2 2019 Earnings Call
Good day, everyone welcome to <unk> second 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 conference over to Mr., David actually Vice President of Investor Relations and corporate Treasurer. Please go ahead Sir.
[noise] Rader and good afternoon, everyone. Welcome to Verisign second quarter 2019 earnings call with me are Jim bids <unk> Executive Chairman, President and CEO touched Ruby 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 and are about verisign on Verisign Dot com. There you will also find our second quarter 2019 earnings release at the end of this present 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 on her documents filed with the FCC 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 afterwards, 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 second quarter results were 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 June the domain name base in Dot Com and Dot net totaled 156.1 million consisting of 142.5 million names for Dot Com and 13.6 million names for dot net with a year over year growth rate of 4.3%.
During the second quarter, we processed 10.3 million, new registrations and the domain name base increased by 1.34 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 second quarter of 2019 will be approximately 74%. This preliminary rate compares to 75% achieved in the second quarter of 2018.
For 2019 full year, we expect the domain name base growth rate to be between 3% and 4.25% narrowed from our previous range of 2.5% to 4.25%.
As noted during our recent earnings calls we are engaged in a process what I can to incorporate turns of amendment 35 to the cooperative agreement, including the pricing terms into the Dot Com registry agreement.
For those not familiar with this let me remind you that under the 2016 amendment to the Dot Com registry agreement with again, which extended the term of the Dot Com registry.
We agreement, we and I can also agreed to negotiate in good faith to flow through any changes that would be made to the cooperative agreement, including the pricing terms and in addition to preserve and enhance the security and stability of the dot com registry or the internet.
These discussions what I cant are ongoing and at this time there are no further details to share of course when appropriate we will update you.
During the second quarter, we continued our share repurchase program by repurchasing point 9 million shares of common stock for 175 million.
Our financial position remains strong with 1.22 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.
Thanks, Jim and good afternoon, everyone.
Second quarter GAAP results produced revenue of 306 million up 1.3% year over year.
Operating expenses totaled $105 million compared to 106 million last quarter, and 109 million in the second quarter a year ago.
Operating income totaled $202 million compared with $193 million in the second quarter of 2018.
The operating margin in the quarter came to 65.9% compared to 63.8% in the same quarter a year ago.
Net income totaled 148 million compared to $128 million a year earlier, which produced diluted earnings per share of one dollar and 24 cents in the second quarter. This year compared to one dollar and four cents for the same quarter last year.
As of June Thirtyth 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 582 million.
Automatically with the remainder held abroad.
I'll now review some additional second 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 2000 or 19 full year guidance.
As it relates to non-GAAP metrics second quarter, non-GAAP operating expense, which excludes 13 million of stock based compensation.
Totaled $91 million compared to 94 million last quarter, and 96 million in the second quarter a year ago.
The slight year over year decrease in operating expenses is primarily a result of lower expenses as a result of the sale of our security services business.
As well as the timing of spend related to periodic and plan changes too and investments in our infrastructure.
non-GAAP operating margin for the second quarter was 70.1% compared to 69.4% last quarter and 68.2% in the same quarter of 2018.
non-GAAP net income for the second quarter was 159 million, resulting in non-GAAP diluted earnings per share of one dollar and 33 cents based on a weighted average diluted share count of 119.4 million shares.
This compares to one dollar and 31 cents last quarter and $1.18 cents in the second quarter of 2018.
Operating cash flow for the second quarter was 165 million and free cash flow was 154 million compared with 202 million and $191 million, respectively for the second quarter last year.
The year over year decline was a result of the timing of cash tax payments, which were predominately made in Q1 last year versus occurring in the second quarter. This year.
Now I'd like to provide updates to our full year 2019 guidance.
Revenue is now expected to be in the range of 1.225 billion to 1.235 billion narrowed from the $1.220 billion to $1.235 billion range provided on our last call.
Our 2019 revenue range is based on our expectation for continued growth of our domain name base for the full year of 2019 of between 3% and 4.25%.
Our non-GAAP operating margin is expected to be between 68% and 69%.
Increased from the 67.5% to 68.5% range provided on our last call and we'll continue to include certain immaterial operating cost associated with providing transition services for security service customers.
Our interest expense and non operating income net is still expected to be an expense of between $42 million and $49 million and consists primarily of net interest expense, partially offset by income recognized as part of the affirmation transition services agreement.
Capital expenditures in 2000, or 19 are still expected to be between 45 million and $55 million.
Cash taxes are now expected to be between 85 million and $100 million now it from the 85 million to 105 million range provided previously.
In summary, the company continued to demonstrate sound financial performance during the second quarter of 2019.
Now I'll turn the call back to Jim for his closing remarks.
Thanks, Georgia, the second 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 returned value to shareholders.
We continued our work to protect grow and manage the business, while continuing our focus on providing long term value to our shareholders last week. The company Mark 22 years of 100% availability in the Dot com and Dot net domain name system. This achievement is the result of the dedication and expertise of our team and our specialized infrastructure.
Well now take your questions operator were ready for the first question.
Thank you at this time, if you do have a question that will be star. One if you are using a speaker phone. Please make sure. Your mute function is off to a lot of your signal to reach our equipment also in order to receive the best signal. Please refrain from using your headset to ask a question and again that will be start one for questions well hear first today from Sterling Auty with JP Morgan.
Yeah. Thanks, Hi, guys, maybe to to kick off Jim can you give us an update on where things stand with the Dot web arbitration then situation.
Hi, Sterling. Thanks sure since we last spoke to you there has been some movement in the process I cant has filed a response to affiliates as complaint which is a public response and its posted on <unk> web site.
So there is some movement, but beyond that we don't have any update as a reminder.
One of the looting, losing bidders in the Dot web auction affiliates one of our competitors filed this arbitration in November of 2018 against I can trying to continue to delay the process were not a party to that arbitration, but we are continuing to seek to participate in the proceedings.
All right Great and then.
You noticed noted the initial renewal rate, 74% to is down anything in particular in terms of either the types of names that didnt renew at the same rate tour mix. So you know.
First year renewals versus you know versus multi.
A second time or more renewal names anything that you can kind of call out that drove that trend.
Oh sure Sterling. This is George so as far as our renewal rates are as you know a preliminary renewal rate is estimated at 74%, which is down about 1% year over year.
I'd say one of the prime contributors as a slightly lower first time renewal rate, which is being driven by a higher proportion of names coming up for renewal from our Chinese registrars.
As we've talked before historically, China like other emerging domain name markets.
Have lower renewal rates more than say mature markets like the U.S. in Europe , and so accordingly, what we're seeing is that the first time renewal rate is being impacted by this a weighted average effective more Chinese names coming up for renewal.
And is that also impacting the 10.3 million new names processed is towards the upper end of what we typically see was that also being impacted by China or what other influences did you see there.
Yeah, I think the short answer is yes as weve.
[noise] talked about in previous quarters or some of the big drivers our registrars operating both in China and the U.S., but we're we're seeing a lot of registrars performed well in Q2, but.
China continues to perform well for us.
Okay and then just last question you know given the you know the results on the operating income operating margin line for the first half.
To get down to to the full year guidance, you know would suggest some compression in operating margins in the back half of the year.
What are going to be some of the investments and certain things that we should look for that would cause that to happen.
Oh, yes sure Sterling. So you know when maybe the best way to answer that is just to talk about some of the variances year over year and that I can give you some color as to the rest of year, but you know year over year, our expenses are down by about 4.7 million 91.4.
Million, where it ended the quarter and you know the two big cost there of being down year over year. One is about two and a half million of cost associated with VSS. We again sold that business last year and then the remaining 2 million of that variance is really related to the timing of investments in a telco and networking in our network I mentioned that in my prepared remarks.
You know as we go forward here, we are and as we say in our Q that that's filed this afternoon.
We expect that we will have a slight increases.
As a percent of revenue for both sales and marketing for cost of goods sold and for DNA as well, but oh.
You know we continue to invest in our network will probably still spend some more money in sales and marketing next year and we will continue to invest.
In our cyber activities throughout the year with.
Okay perfect. Thank you so much guys.
Thank you.
Well hear next from Nick Jones with Citi.
Hi, Thanks for taking the question.
I saw some headlines that I can uncapped dot or just.
A pricing rate increases do you have any comments on kind of what I can you know what kind of like as move may mean for the broader industry does that have any kind of future implications.
For dotcom or dot net of it is it possible to get uncapped in the future.
Or is there any kind of color.
Her commentary you guys have around that.
Sure.
Well. These are these new agreements that I cant negotiated or more like the new generic TLD program agreements in that they no longer have price gaps, but they do have to practice uniform pricing and provide the customary advance notices of any changes to pricing.
So implementing the pricing feature of a beat features of amendment 35 to the cooperative agreement for us simply restores the pricing flexibility that formerly existed for com domains from 2006 to 2012.
The ability to unilaterally increased prices by up to 7% four times during the six year term of the registry agreement.
So the.
The I cannot registry agreements for Oregon, filling because by the way were renewed late June and they completely lifted their price gap. So we can't speculate if a similar approach would be used for the next review renewal of Dot net.
And as you know the pricing for Dot Com is regulated by the cooperative agreement. So that's really a different animal and in that process.
Got it so is there maybe a tilt for I can to take out more hands off approach and have to be less involves set a trend maybe you're seeing or is it you know.
Kinda Dot org seems kind of more like a one off.
Oh, well I can't speak for I can but I can tell you that the.
That they did as I mentioned a these agreements are now more like the generic TLD agreements and they do have roughly a thousand of those and those are somewhat standardized and they don't have price caps.
Got it thank you for taking my questions.
Sure.
Our final question will be from Rob Oliver with Baird.
[noise], great things, it's Matt Lemenager on for Rob. Thanks, a quick question on the Jim I wanted to ask about now your ability to vertically integrate I think on the last call.
He said if it's you know it's something you guys would think about internally, but no update at that time just wanted to see if anything changed is there any.
Discussion on on what that might look like or what you could look like if if you chose to vertically integrate there.
Yeah, no nothing to update since the last time, we talked about that really <unk> nothing specific at this point that changes, we'll certainly let you know.
But again no family for the Noncomp deal. The Dot Com is not part of that of course, I think you're aware that that's yeah.
We yeah.
But nothing to update at this point sorry.
Okay, and then just one thing on or do you think there's any it sounds like it's mostly registrars in China and the U.S. I'm just looking at that the 10.3 million gross new names in that accelerated second quarter in a row and accelerated do you expect I mean, the head of the I guess late October timeframe next year when prices are going to be increasing do you think there's any oh, I guess rush of people to come and buy names ahead of those price increases are the price increases maybe not.
A substantial enough that that people it may not matter and it may not drive business ahead of that.
You know I really couldn't speculate on ER on the price increase I mean, we see demand in markets. A dry from you know continued penetration of the Internet continued growth of ecommerce sales Ah and people getting online and.
We see those trends continuing we think domain names in general we benefit from that and we're trying to compete in the market against the other deals in the market internationally Cctld is and new Gtld is for that matter. So you know we just see continued demand in markets, where ecommerce is flourishing and and we think domains are a part of that.
Okay got it and I guess, just my last one the the process on the dot com pricing with with I can is that something that's maybe taking longer than you thought to get that amount or is this about the timeframe that you thought nothing outside of.
The time frame, then that you expected to get that kind of stamp of approval from the I can already amendment.
So we're actively engaged in this process as I said and we won't be able to comment and don't comment on the details of discussions.
Like I said in my prepared remarks, we're going through a process to incorporate the terms approved an amendment 35.
Including the pricing turns into the calm agreement when I can so.
But also as part of that 2016 Amendment Verisign and I can 820, 16 amendment that we made back then to extend the calm agreement Verisign and I cant agreed to negotiate in good faith to flow through those changes, including pricing, but in addition to preserve and enhance the security and stability of the Com registry of the Internet. So.
No updates beyond that.
Okay, Alright, thanks, Jim Thanks, George.
Thank you.
And at this time I'd like to turn things back to David actually for 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.
Again that does conclude today's conference. Thank you all for joining us.