威瑞信 (VRSN) 2009 Q4 法說會逐字稿

Good day and welcome to the fourth-quarter 2009 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Nancy Fazioli. Please go ahead, Ma'am.

Thank you, operator. Good afternoon, everyone, and thank you for joining us VeriSign's fourth-quarter 2009 earnings conference call. I'm Nancy Fazioli, director of investor relations, and I'm here today with Mark McLaughlin, President and CEO, and Brian Robins, Executive Vice President and CFO. Please note that this call and accompanying slide presentation are being webcast from our investor relations website located at investor.verisign.com. Please refer to our website from important information, including the Q4 2009 earnings press release and a reconciliation of our GAAP to non-GAAP information. A replay of this call will be available on our website within a few moments. Today's slide presentation will also be available for download after the call.

Financial results in today's press release are unaudited and the matters we will be discussing today include forward-looking statements and as such are subject to the risks and uncertainties that we discuss in detail in our documents file with the SEC, specifically the most recent forms -- report on Forms 10-K and 10-Q and applicable amendments which identify important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements. I would like to remind you that in light of Regulation FD VeriSign retains its longstanding policy to not comment on financial guidance during the quarter unless it is done through a public disclosure. The financial results from today's press release and the matters we will be discussing today include non-GAAP measures used by VeriSign. Detail of the items excluded from our non-GAAP financial information are located on the VeriSign investor relations website.

In a moment Mark and Brian will provide some prepared remarks and afterward we will open up the call for your questions. Unauthorized recording of this conference call is not permitted. With that I'd like to turn the call over to Mark. Mark?

Thanks, Nancy. Good afternoon, everyone. Let me add my welcome to all of you joining today's call. As the result indicates Q4 2009 capped a solid finish to the year for VeriSign, with year-over-year growth in core revenue of 8% while non-GAAP net income attributable to VeriSign and subsidiaries grew 23% from 2008 to 2009. Also during the year we concluded a significant restructuring effort that was initiated in late 2007 and involved a bundling and eventual sale of 14 non-core businesses. We are pleased with the accomplishments and the results for 2009, particularly in light of the challenging economic backdrop during the year. Although the year is not without its challenges we remained focused on our customers, operations and disciplined investments and growth prospects.

For 2010 and beyond, as the economy continues to improve, we believe that we're in a good position for future growth given our market-leading position and our two core businesses of naming and authentication services. We believe both businesses are indispensable to our customers and has made VeriSign's brand synonymous with trust on the internet. Also our infrastructure is unmatched in our industries and provides a significant and unique competitive advantage for the future. I appreciate the hard work from our dedicated team over the last year and like to thank them for their efforts and achievements.

In terms of the business unit results for the quarter I 'l start with Naming. Naming had a strong quarter.The base of registered names in .COM and .NET totaled 96.7 million names at the end of the quarter. This is an increase of 1.8 million net names added to the domain name base quarter over quarter compared to one million in the same quarter last year, or a 7% increase in net names year over year. We ended the quarter with registered domain names ahead of our forecast, as we saw strengthening in renewal rates and good international growth. During the fourth quarter we processed 7.3 million new names. This is a 4% increase quarter over quarter and up from 6.3 million new names in Q4 2008. The Q3 renewal rate was approximately 70.5%, an improvement over Q2, which had rounded up to 70%. While renewal rates are not fully measurable until 45 days until after the end of the quarter we believe that the renewal rate for Q4 2009 will be closer to 71%.

As a reminder, in mid-December we announced effective July 1, 2010, registry fees for .COM, .NET names will increase 7% and 10% respectively to $7.34 for .COM and $4.65 for .NET per year. As we look forward, given the data we have at this point in the quarter we would expect the Q1 net names added to the domain net base to be between 1.8 and 2.1 million names. To close out the naming discussion, we have no updates from our analyst day in November regarding the status of the case filed against VeriSign by the coalition for ICANN Transparency, or CFIT. The petition for a rehearing is pending and there is no prescribed timeframe for the court to respond.

Now moving on to Authentication Services. In business authentication we saw the install base of SSL certificates increase to 1.22 million certificates in the fourth quarter compared to approximately 1.2 million last quarter and approximately 1.12 million certificates in Q4 2008. This represents a 9% year-over-year growth in the base. The annualized average unit revenue, or AUR, for the installed base of VeriSign's Geo Trust and Thawte Branded Certificates for the fourth quarter was $228, which compares to $234 for the prior quarter. As I noted at our analyst day in November we believe that the AUR is impacted by the two factors; the mix and base, as lower-end brands growing at a faster pace of units than the VeriSign brand, and increased discounting in the recent economic slowdown. Since the economy is improved we have focused on -- have focused some efforts on reducing discounting and have made progress on that front in the fourth quarter. Also we saw strong bookings in the fourth quarter, as enterprises began to show confidence in market recovery.

We appreciated seeing many of you at our analyst day in November. At that event we discussed the opportunities we see in our core businesses given the increasing need for trusting the internet. I look forward to reporting on those initiatives as we progress through 2010. Our March launch of trust services at RSA conference is still on target.

I'll turn the call to Brian for a review of our financial results for the fourth quarter and 2009. Brian?

Thanks, Mark, and thanks to everyone for joining us this afternoon. Before discussing our results for the fourth quarter I'd like to highlight some of our accomplishments in 2009. For the year, core revenue was $1.026 billion compared to $948 million in 2008, up 8% year to year. Naming Services revenue was up 12% and Authentication Services revenue was up 3% from 2008 to 2009. Non-GAAP core operating margin for the full year rose 420-basis points to 37.7% versus 33.5% in 2008. Non-GAAP earnings per share was $1.28, which compares to $1 in 2008, a 28% year-over-year increase. Cash flow from operations was approximately $395 million for 2009. In 2009 free cash flow, or operating cash flow, adjusted to include excess tax benefit less net capital expenditures was $304 million. At Mark mentioned, we concluded our divestitures of all non-core businesses, generating total proceeds in excess of $765 million. We reduced headcount by 30%, approximately 1,000 positions. We utilized approximately $250 million in cash to repurchase 11.4 million shares of common stock in 2009.

Let's turn now to the fourth quarter. Revenue for our core businesses was $262 million, up 2% sequentially and up 5% year over year. Growth was largely driven by continued strength in Naming Services, with revenue of $159 million, up 9% year over year. Authentication Services revenue of $103 million was up 1% over the same quarter in 2008. In Q4 there was no material impact of revenue from currency exchange rates. For the full year we experienced currency exchange headwind of approximately $4 million, primarily related to the Yen. Our non-GAAP core operating margin was 36.8% in the fourth quarter, a 180-basis point reduction from the prior quarter. The Q4 non-GAAP operating margin was lower due to an out-of-period $4 million non-cash depreciations adjustment in G&A correcting for certain assets held at VeriSign Japan that were depreciated over a period longer than their useful lives. Normalizing for this G&A increase, non-GAAP core operating margin would have been 38.3%, in line with our original expectations for the quarter.

In non-GAAP other income and expense we incurred a loss of approximately $9.5 million in Q4 for our core operations. This loss was greater than expected due primarily to a mark-to-market of the contingent interest on the convertible debt that resulted in a loss of $1.3 million in Q4, as opposed to a gain as we saw in prior quarters of 2009. Transition Services revenue was $1.9 million in the fourth quarter compared to $1.2 million in the third quarter. Non-GAAP net income for the fourth quarter was $59 million, resulting in non-GAAP earnings per share of $0.31 compared to $0.33 in Q3. In Q4 we completed share repurchases of approximately $208 million equating to nine million shares. Approximately six million of the shares repurchased during the fourth quarter will come out of the share count in Q1 due to treasury stock method of accounting. As of December 31, 2009, we had existing authorization for approximately $700 million for additional share repurchases.

Moving on to cash flow and balance sheet items, operating cash flow was approximately $173 million in Q4 and was $395 million year to date. Consolidated capital expenditures was $51 million in the quarter and $117 million for the full year. Of the $51 million $26 million was related to the purchase of a critical data center facility. Approximately 92% represents capital expenditures for core services in the quarter. We ended the quarter with a strong balance sheet with ending cash, cash equivalents and restricted cash of $1.5 billion, up $45 million from the prior quarter after share repurchases of $208 million and purchase of the new facility, as I noted previously. In addition to divestiture proceeds of approximately $185 million, during the quarter we received distributions of approximately $12 million for the reserve funds. There remains $21 million of these funds as currently classified in other current assets.

Net consolidated DSO for the fourth quarter was 21 days, down eight days from last quarter, due primarily to the completion of the divestitures. Deferred revenue from continued operations ended the quarter at $888 million, up $7 million from Q3. Moving on to headcount. We ended the quarter with approximately 2,300 employees, down approximately 350 from last quarter as a result of the divestitures. There will be an additional reduction of approximately 200 employees with the wind down of CPS business and the completion of Transition Services. Factoring possible new hires during the year we expect to end 2010 with approximately 2,150 employees.

With regard to guidance, as we indicated at analyst day in November we anticipated that core revenue growth for 2010 will be in the range of 4% to 7% year over year. We also indicated that we anticipate continuing modestly expanding non-GAAP operating margin, expecting that we will exit Q4 2010 in a range of 39% to 39.5%. Non-GAAP other income loss is expected to be a loss of $32 million for 2010. Our guidance is based on continued growth and increased operating efficiencies in our Naming and Authentication Services business, in addition to financial projections for interest income and expense.

In summary, we're pleased with our 2009 financial results and business accomplishments. We had solid performances, strong execution on strategic initiatives and increased efficiency across the Company. That being said, the divestiture process has been complex from an accounting and tax perspective and we are happy to have largely behind us. As we enter 2010 we believe that our strong financial position will enable us to invest in top-line growth, expand our operating libraries while seeking opportunities to deliver increased shareholder value.

With that, I'd like to now open the call for your questions. Operator?

Thank you. (Operator Instructions). Our first question comes from Katherine Egbert of Jefferies.

Hi, good afternoon. Brian, a question on the guidance. You gave that guidance before you announced the price increase and it goes into effect in July, why isn't there more of a positive [tail-end] on revenue. Why are you sticking to the 4% to 7%.

When we talked about this at analyst day, Katherine, we said whether we did a price increase or not that the amount of revenue that we would receive in 2010 wouldn't impact the overall guidance and so with or without the price increase we'd be 4% to 7%. The amount of the revenue that we would receive from the price increase in 2010 is around $5 million.

Okay. So is the impact then more 2011, would you say?

Correct.

Okay.

It takes effect in July and then with the deferred revenue model it's every name that's renewed after July or new names added that we would get the revenue.

And I believe you said you could grow double digits in 2011. Is that still the case?

That's our objective.

Okay, and then one quick one. Can you just give us an update. You said you made some progress on the AUR by selling bundles, can you just give us some color? Thanks.

Hey, Katherine, it's Mark. Yes, what we're saying there is that on the AUR we knew we had the [two] factors net on the mix of the brands, as well as the discounting, so in the fourth quarter, given the economy was improving, we were able to spend some time on getting reduced discounting from a sales perspective and we were successful at that. We know we were doing le, but w. We had a very, very strong bookings quarter and less discounting going in the quarter so that's positive for us.

Next question, please.

Our next come comes from Todd Raker of Deutsche Bank.

Hey, guys, I had a question on deferred revenue. If I look at short-term deferred revenue it actually declined sequentially from Q3 and I'm just having trouble understanding, with the recovery you're seeing on DNS units and the stability in the asset sale business why deferred revenue would be down sequentially? And as part of this, are you discounting DNS names, is there any kind of marketing program going on that would account for that?

Hey, Todd, this is Brian, good question. Once again with the divested businesses and core businesses the balance still has a little bit of apples and oranges, and so deferred revenue for the quarter for the core businesses is approximately $10 million -- 9$ million. It's $6 million in the DNS and $4 million in SSL and then we added a fine of $1 million in DSJ. Because we wound down our prepaid business we had a decline of about $2.5 million of the prepaid deferred revenue, which resulted in a $7 million net increase Q3 over Q4. But if you take out the prepay at $2.3 million it was a little bit over $9 million for the quarter. That would explain the reduction in short-term deferred revenue.

Okay. But if I look -- with the impact we're seeing in terms of the recovery of DNS units and typical seasonality in Q4 has typically been greater than that, I guess two questions. Are we done with the balance sheet noise, or should we expect that to continue going forward? And are there any special marketing programs that you guys are doing on the DNS side in Q4?

On the Q4 deferred revenue increase from Q3, it was actually -- we had a very strong Q4, more than we anticipated, and Q3 to Q8 -- Q3 2008 to Q4 2008 we increased deferred revenue $3 million and increased it $6 million this year, and so we doubled the deferred revenue growth 03 to 04, 2008 versus 2009.

And Todd, this is Mark. On your question on the professional programs, we continue to run professional programs that we've had in the business for a long time, but nothing out of the ordinary. So there is no -- there's nothing special going on there from promotional programs.

Okay, thanks, guys.

Our next question comes from Steve Ashley of Robert W. Baird.

I guess maybe my question to start with is on the absence of first quarter guidance?

Hey, Steve, this is Brian. As we go into 2010 we've given guidance for the full year of 4% to 7% on revenue and said that we would incrementally increase our operating margin. We have given domain name guidance. The only thing that we haven't given is the revenue range. To the extent that if we're off from a revenue growth perspective we would update you on that. But based on the overall economy and some of the uncertainties out there we aren't going to be giving quarter-to-quarter revenue guidance.

Can you maybe talk about the ASP on the [SSL] -- on the new business that was added in the fourth quarter just how that might have compared to the AUR -- pardon me, the AUR on SSL that were added in the fourth quarter, (inaudible) that that business was just stabilizing, the new business?

Yes, Steve, it's Mark. So we've seen on the -- I'll talk in terms of ASP to answer that question because it's one quarter there instead of an annualized number. So from an ASP standpoint we've seen the same kind of behavior on ASP that we've had in the past except that we were doing less discounting at the high end so we had improvement from an ASP perspective in that regard on the high end.

Right. And in terms of the share count for full-year 2010, is there any kind of high-level guidance, Brian, you might be able to give us?

On the buy back, this is -- I really can't because we have $700 million authorized and we can't comment on future repurchases. (inaudible) commented at analyst day is we'll look to return value to the shareholders. We purchased a little over $200 million in fourth quarter. Due to the treasury stock accounting method we only removed three million shares out. There will be an additional $6 million to come out in fourth quarter and then we've also said that we'll -- I'm sorry, in the first quarter, and then we also said that we will continue to buy back (inaudible) and I can't really expand farther than that.

Thank you.

Our next question comes from Phil Winslow of Credit Suisse.

Hi, guys, just two questions here. First on just the operating expense side you guys reiterated your margin guidance to exit the year at 39% to 35%, but how should we think about the progression of OpEx over the course of the year? You mentioned areas for cost reduction, but also headcount additions, how do we see those two baking out? And then also just one housekeeping item. That interest and other income line what are your expectations for 2010? Thanks.

Hey, Phil, this is Brian. On the interest income line, other income, on the analyst day we said that'd be $2 million and it's roughly about the same quarter to quarter so we'd expect it to be a loss of about $8 million per quarter. We will have some choppiness related to our imbedded derivative on the convert and you saw that between third and fourth quarter. Net-net, last year in 2009 we had a $500,000 gain on the derivative, and so that will be one thing that we'll call out for you that will potentially change the $32 million quarter to quarter, but for the year $32 million is a good number to use. And on the operating expense line we continue to look at areas to take expenses out of the business to become more efficient and as we do that, we'll invest some back into the growth opportunities, like trust services that we talked about at analyst day, and we'll look to incremental increase that quarter to quarter.

Got it. Thanks, guys.

Thanks, Phil.

Our next question comes from Rob Owens of Pacific Crest Securities.

Great. With revenue near the end of the range for the quarter, why don't we see more lift on the operating margin, and I guess specifically on sales and marketing. Were there some unique programs in the quarter. or seasonal? Anything unusual?

Hey, Rob, this is Brian, good question. There was actually two things related to sales and marketing. One on our commission side, a lot of accelerators were hit in fourth quarter due to the strong bookings that Mark talked about in his prepared remarks, then so there is about a $1 million increase in commissions related to that. And then also on the VeriSign Japan we had about $1 million over normal run rate, as well. So the two of those were slightly over $2 million, that was really fourth quarter-related end of year and commissions and accelerators and some additional marketing activities that took place in Japan.

Great. Then second, do you have the mix of .COM and .NET in the quarter?

As far as the break down of new names?

Yes.

Hang on just a second. Com was 84 million and net was 12 -- 12.7.

Thank you.

That's the zone, Rob.

Yes, got it.

Thanks, rob.

Our next question comes from Kash Rangan of Merrill Lynch.

Hi. In the security business, Mark, just wondering if -- it looks like you seen some prices (inaudible) on the high end of VeriSign brand, but are we still seeing a mix shift away from VeriSign, the Geo Trust and Thawte, and when do you think the mix shift will stabilize and that therefore the lack of discounting on the high end can actually help your AUR and margins going forward?

Hey, Kash, I think -- well, we're definitely seeing from a mix shift perspective the low end still grows at much higher rates than the high end, almost 4X higher than the high end, and I think we're going to continue to see the low end grow at a higher rate, whether it's 4X or not at a higher rate than the high end of this. So I think we'lll have continued mix shift dynamics there that would impact the AUR for quite some time. So, obviously, if you were able to improve ASPs at the high end that'll help, but my expectation is, is that the AUR, as I said at analyst day, would continue to decline for some time.

Mark, any evidence at all -- and maybe hopefully this is not the case -- that there is a trade down from the VeriSign edition to the lower-end editions at all, or do you allow that to happen to customers?

No. Well there's two things I can tell you that would lead me to believe that's not happening, Kash. The first is that the renewal rates at the high end for VeriSign brand are very, very high, so we don't lose customers up there and implied in that, I think, is that they're not trading down on a brand, so I don't see that happening. The second thing, in the fourth quarter, like I said, we had a pretty strong quarter from bookings perspective and that was particularly at the high end.

Got it. Thank you very much, Mark.

Our next question comes from Sterling Auty of JPMorgan.

Yes, thanks. Hi, guys, a couple questions. First on the Naming business, you talked about the pick up that you're seeing in the name growth and particularly you're seeing the new names pick up. You mentioned international, but is there any other sources that you can point to, whether it be advertising, new business creation, what the drivers to some of that new name growth is?

Hey, Sterling, it's Mark. Well, we track two, I'll call them macro trends, as we mentioned before, on-line, advertising eCommerce. Both of those have appeared to pick up nicely in the fourth quarter, so I always listen to Google, Yahoo! , those guys calls from an on-line advertising standpoint and both of those companies are reporting strong growth in the fourth quarter and smooth sail on the head on that. Also, some of the metrics that we look at as far as tracking those things have revised their scenarios to increase the expectations as far as what on-line advertising and eCommerce will grow at for rates in 2010, so that's a positive force, as well. Like I said, we always tend to lag a couple quarters, either up or down. on that depending what happens, but those are good indications for our

And then on the SSL business, we all watch this AUR from quarter to quarter so closely maybe taking a step up, as you think about the 47% growth in core revenue in 2010, how should we think about that growth being split out between the Naming business and the SSL business?

Yes, I think you -- primarily we'd see a lot of the growth coming on the Naming side. We had the price increase that's -- won't really take impact until end of the year 2011, so there's the price aspect, there's the Naming growth, and then you have the Authentication business. Right now from the Authentication standpoint that's growing in the low single digits, so you have to keep that in mind. We're doing some work to increase that growth rate, including launching our new trust services here at RSA. But I would say either you're going to see more of that growth coming out of the Naming side for a good portion of this year on the Authentication side until we ramp that up.

Last question would be on the margin side, Brian. Talking about the modest sequential improvement and operating margins through 2010, should we base that off the 36.8% reported, or backing out the VeriSign Japan impact and really work off of the 38.3%?

Great question, Sterling, and thanks for asking that. Work off the 38.3%. The VeriSign Japan was an out-of-period adjustment that will not occur in first quarter.

All right, thank you.

Our next question comes from Craig Nankervis of First Analysis.

Yes, thanks, good afternoon. I guess on the domain name side, first of all you had a nice Q4. You talk about good color for advertising-- on-line advertising, et cetera, yet the Q1 guidance for names is about flat, I think, with year-over-year comp. Wonder if you could comment on why you're guiding flat year over year?

That's a great question, Craig. This is Mark. We did see a strong fourth quarter, obviously, and we would expect the new names -- or the new names being registered to be strong in the first quarter because we have great seasonality in the first quarter.

Right.

The reason we're a little bit hesitant to go any further than that is in the first quarter we have largest -- a much larger number of expiring names in the first quarter than over the fourth quarter, almost two million more names. So even though the renewal rates are increasing nicely and even though we would expect a good pick up in new names registered, just given the fact that the expiring name basis is that much bigger in the first quarter than the fourth quarter, you're going to -- you're kind of starting at a deficit, if you will, when you apply the renewal rate to that. Does make sense?

I guess so.

Well, then let me be more specific then, because if -- with almost two million more names in the first quarter expiring, if you apply the renewal rate to that's that's close to 700,000 names that you have to get over before you're adding, if you think of it on a quarter-over-quarter basis.

But on a year-over-year basis it's not -- we can talk about it more offline.

Okay, okay..

On the international side, can you comment on whether .CN closing to individuals provides any sort of incremental spur to your activity over there?

Yes, it's possible, Craig. For the folks -- the benefit for everybody else, in China .CN is under review by the Chinese government for some of their registration policies and registrars registering .CN as they go through an increased level of validation before they can register names. So there's speculation that given that names that might previously be renewed -- or registered at .CN might move to a different TLD, and obviously, if that was the case one of the things at the top of the list might be .COM. So if that's all true and plays out that way, we could expect that we might see an increase in registrations coming out of China, but it's early days.

Okay. And then I guess not providing guidance for Q1, the comment was there's economic uncertainty, is that -- is there something new on the landscape that points uncertainty for you because there was uncertainty through 2009 but maybe you had it with that and (inaudible) any longer guide, but I just wondered if there's something incrementally new that's causing you to not guide for the quarter?

Yes, Craig, there really isn't. Our business model is a deferred revenue model, w We have high visibility in what the revenue is, and there's really not -- the only thing that we aren't giving that we've given previously is revenue and there's really not much difference -- your model for revenue in first quarter is going to be within -- very close to what the number will be.

Do you have -- lastly, do you have any trust services revenue baked into your 2010 guidance?

We have some but it's less than $5 million.

Thank you very much.

Thanks, Craig.

Our final question comes from Shaul Eyal from Oppenheimer & Company.

Thank you. Good afternoon, guys, two quick questions. $4 million in headwind in terms of currency from the Yen, as you start thinking about the first quarter are you guys hedging against the Yen?

Yes, we're 100% hedged on the balance sheet -- this is Brian -- but we don't hedge on the P&L because we don't want to take FX exposure if the revenue is not attained.

Got it. And as you -- thinking I might have missed that, but as you start think being your cash flow for 2010, what's the estimate for capital from operations for the year?

So, Shaul, thanks for bringing that up, good question. We talked about it at analyst day. Once you add back excess tax benefit the operating cash flow will be approximately $450 million.

Got it, fair. Thank you very much. Happy birthday, Brian.

Thanks, Shaul.

This concludes today's question-and-answer session. I'll turn the call back to Ms. Fazioli for any closing remarks.

Thank you very much. We anticipate that our next quarterly conference call, which will reflect our first-quarter 2010 results, will be held on Thursday, April 29th at 2:00 PM Pacific Time. I should also mention that RSA is coming up the week of March 1st through March 5th. We'll be conducting a meeting for analysts and institutional investors on Wednesday, March 3rd. An invitation will go out shortly. The event will be webcast and details will be available on the investor relations website. Please call the investor relations department with any follow-up calls from the questions from this call. Thank you for your participation and continued support. This concludes our call. Thank you and good evening.