威瑞信 (VRSN) 2012 Q2 法說會逐字稿

Good day and welcome to the VeriSign second-quarter 2012 earnings call. Today's conference is being recorded. At this time, I would like to turn the call over to David Atchley. Please go ahead sir.

Thank you operator, and good afternoon everyone. Thank you for joining us on VeriSign's second-quarter 2012 earnings conference call. I am David Atchley, Director of Investor Relations and Corporate Treasurer. I'm here today with Jim Bidzos, Executive Chairman, President and CEO; George Kilguss, Senior Vice President and CFO; and Pat Kane, Senior Vice President and General Manager of Naming Services.

Please note that this call and accompanying slide presentation are being webcast from the Investor Relations section of our corporate website, Www.VeriSignInc.com. Please refer to that website for important information including the second-quarter 2012 earnings press release.

A replay of this call will be available on the website within a few hours. 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 filed with the SEC, specifically the most recent report on Forms 10-K and 10-Q and any 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 long-standing policy to not comment on financial performance or guidance during the quarter unless it is done through a public disclosure.

The financial results in today's press release 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 press 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 up the call for your questions. Unauthorized recording of this conference call is not permitted.

With that, I would like to turn the call over to Jim.

Thanks David. Good afternoon everyone. The second quarter was another solid quarter for VeriSign and we're pleased with the results.

In Naming, we processed 8.4 million new registrations in Q2, a second-quarter record, while adding 1.81 million net names, finishing the quarter with 118.5 million names in the domain name base. We were also able to achieve ongoing operating margin expansion through disciplined operations. Our balance sheet remains strong with $1.4 billion in cash and marketable securities.

During the second quarter, we continued our share repurchase program by repurchasing 1.9 million shares for $76 million. Thus far in 2012, we have repurchased approximately 3.7 million shares, or about $144 million, and we have approximately $687 million remaining in our share repurchase program, which has no expiration. We continually evaluate the overall cash and investing needs of the business and consider the best uses for our cash, including potential share repurchases.

On June 23, 2012, ICANN approved the renewal of VeriSign's agreement to serve as the operator of the .com registry for the term commencing on December 1, 2012 through November 30, 2018. As you may know, the .com renewal agreement terms, including the pricing provisions, are substantially the same as the terms contained in the existing agreement except for new provisions regarding indemnification and audit rights.

The US Department of Commerce, under an agreement called the Cooperative Agreement, is now reviewing the renewal of the .com registry agreement. We expect their approval on the renewal of the .com agreement by November 30.

During the month of July, we marked 15 years of uninstructed uptime for the .com and .net zone structure. This is a tremendous achievement and I would like to recognize the efforts of our engineering and operation teams for meeting this milestone. We continue to make protecting our DNS infrastructure a priority while continuing to meet and exceed requirements of our service level agreements.

I'll comment now on second-quarter operating highlights. In our Naming business, the base of registered names in .com equaled 103.7 million names while .net equaled 14.8 million names. The total base of registered names in com net was approximately 118.5 million at the end of June. This represents increases of 7.8% year-over-year and 1.6% quarter-over-quarter.

In the second quarter, we added 1.81 million net names to the domain name base and we processed 8.4 million new registrations for a 4.2% increase in new registrations over the same period a year ago.

The first quarter of 2012 renewal rate was 73.9%. While 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 2012 will be approximately 72.9%. This rate compares to 73.1% achieved in the second quarter of 2011.

While Q2 is our second strongest quarter on record for new registrations, our net names added to the domain name base was at the low end of our guidance primarily driven by what appears to be a softer-than-expected preliminary Q2 renewal rate. Our first-time renewal rate was the main driver of the decrease in the preliminary second-quarter renewal rate.

First-time renewal rates are driven by many factors and two factors had incremental impacts in the second quarter. First, search engine adjustments made over the past several months affected the economics which drove domain monetization rates in the first half of 2012. While monetization rates have increased for better-performing sites, lower-performing sites do not seem to be benefiting. We believe that some of these first-time renewing lower-performing sites did not renew during the quarter as a result of these changes, leading to the lower renewal rate. We have seen these search engine changes in the past and their resulting impacts on first-time renewing names and our overall renewal rate. Historically, the domain monetization community has adjusted within several months.

Secondly, we also believe that some additional promotional activity by registrars during the middle of 2011 led to a lower first-time renewal rate this year. We expect the third-quarter net names added to the base to be between 1.6 million at 1.9 million names, reflecting continued growth in the underlying drivers of the Internet and seasonality.

Also, please note that starting, tonight, we will make available a summary of the number of active domain names registered in the .com and .net registries and the number of .com and .net domain names that are registered but not configured for use in the respective top level domain [phone] file. This information will be available from links on our Corporate and Investor Relations website, which will also include definitions and explanations of the data. This additional information will continue to increase transparency into the overall size of com and net zones as well as increase the frequency that this summary level information is available.

Our NIA business continues to exhibit steady year-over-year bookings growth. We are focusing our efforts to scale the NIA business to achieve quality of revenue and stable growth while better aligning expenses with revenue.

Now let me turn over the call to our CFO, George Kilguss.

Thanks, Jim, and good afternoon everyone. I am pleased to be with you today and to now be part of the VeriSign team.

For the three months ended June 30, 2012, the Company generated revenue of $214 million, up 13% from year-ago levels and 4% sequentially. Of note, during the second quarter, revenue included an out-of-period adjustment that reduced revenue by reclassifying approximately $1.8 million from previously recognized revenue back into deferred revenue. Without this one-time reclassification, revenue would have approached $216 million in the quarter.

During the quarter, the Company also delivered GAAP operating income of $107 million, up 30% from $82 million in the second quarter of 2011. GAAP operating margin in the quarter also improved to 50%, up from 43% from the comparable period a year ago, which was a result of expenses remaining relatively flat from year-ago levels. GAAP net income totaled $68 million compared to a GAAP net loss of $11 million a year earlier.

As Jim mentioned, our balance sheet remains strong. As of June 30, 2012, the Company maintained total assets of $1.9 billion, of which $1.4 billion was in cash and marketable securities. Of this $1.4 billion total, approximately $250 million was domestic with the remainder held overseas.

Total liabilities were $2 billion as of the second quarter, up slightly from $1.9 billion at year-end. Total debt on the balance sheet was $698 million at quarter end, consisting of $100 million of outstandings drawn under our $200 million credit facility and the $598 million present value of our $1.25 billion in convertible debentures. The convertible debentures will continue to be accreted onto our balance sheet through its $1.25 billion face value over its 25-year remaining term.

Let me now recap our performance for the second quarter for our key operating metrics, which are revenue, deferred revenue, non-GAAP operating margin, non-GAAP earnings-per-share, operating cash flow, and free cash flow. Then I will discuss our 2012 full-year guidance.

As mentioned, revenue totaled $214 million for the second quarter, up 13% year-over-year. Approximately 60% of our revenue was derived in the US and 40% was from foreign operations. Revenue from international sources grew 14.7% in the second quarter compared to the same quarter a year ago and slightly faster than our domestic sourced revenue which grew 11.6% for the same comparative period.

Deferred revenue ended the quarter at $804 million, a $75 million increase from year-end and a $90 million increase from the second quarter of 2011.

Second quarter non-GAAP operating expenses, which excludes $8.5 million of stock-based compensation, totaled $99 million and was flat sequentially. Non-GAAP operating margin for the second quarter continued to expand and totaled 54% compared to 51.9% in the first quarter of 2012.

Our second-quarter operating margin improvement was driven by revenue growth and our ability to keep expenses in line with the previous quarter. We will continue to look for further efficiencies in our business model and other ways to improve our operating margin.

Non-GAAP net income for the second quarter was $74 million, resulting in non-GAAP diluted earnings per share of $0.45 compared to $0.38 in the second quarter of 2011 and $0.42 last quarter.

Now I would like to update you on our taxes. As mentioned earlier, our international markets are growing slightly faster than our domestic markets. As a result, the proportion of income being generated overseas is also increasing. Our foreign income is taxed at a lower marginal rate than our domestic income, but we expect to see an improvement in our blended tax rate over time. Accordingly, we believe a more reasonable estimate of our non-GAAP tax rate would be 28% going forward, down from our previous estimate of 30%. We expect to use a 28% non-GAAP tax rate when reporting third-quarter 2012 non-GAAP results. In 2012, we now expect to pay cash taxes of about $35 million to $45 million.

We had a weighted average diluted share count of 164 million shares in the second quarter compared to 163 million shares in the first quarter of this year. Dilution related to the convertible debentures was approximately 5.6 million shares based on the average share price during the quarter, an increase of 3.1 million shares from Q1. This increase was partially offset by the full impact of Q1 share repurchase activity and the weighted impact of the 1.9 million shares repurchased during the current quarter.

Operating cash flow was $135 million for the quarter, up from $110 million in Q1 of this year and up compared to $13 million for the same quarter last year, which included a $100 million continued interest payment to convertible bondholders. Free cash flow was $130 million for the second quarter of 2012, including $8 million in excess tax benefits from stock-based compensation and excluding $13 million in capital expenditures in the quarter.

With respect to 2012 guidance, we now think revenue for 2012 should be in the range of $870 million to $880 million, representing an annual growth rate of between 13% and 14%. We previously gave a range of $870 million to $890 million on the last call.

Non-GAAP gross margin is still expected to be at least 80%. Q4 2012 exit non-cash operating margin is now expected to be at least 55%. We previously gave a lower range of 52% to 54% on our last call. Non-GAAP interest expense and non-GAAP nonoperating income, net, is now expected to be an expense of approximately $39 million for 2012 compared with the $38 million estimate given on our last call.

And finally, capital expenditures for the year are now expected to be slightly lower and fall between 6% and 8% of revenue. We gave a 7% to 10% range on the last call. Our guidance is based on expectations of continued growth and increased operating efficiencies in our business, in addition to our financial projections for interest income and expense.

In summary, we continued to experience solid performance in the second quarter. We have grown non-GAAP operating income and net income, we have maintained a strong balance sheet, and expect strong operating cash flow generation to continue as a result of our financial model.

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

Thank you George. Before opening the call to your questions, I would like to share with you how we are thinking about the business across the four areas of focus that we believe will drive value creation. These four areas are to protect, grow, innovate, and manage the business effectively.

First, we protect the business by providing unparalleled registry services and network performance while acting as responsible stewards for the Internet infrastructure which we operate. We'll also continue to work with the Department of Commerce towards the renewal of our .com agreement. Second, in addition to the organic growth of our naming business, we see new GTLDs in our NIA business as adjacent potential growth opportunities. Third, we continue to focus on innovation and value creation through new services that we can build around the domain name system. And fourth we believe in managing the business responsibly from a financial perspective. We seek to run the business efficiently and effectively through managing costs and continued margin improvement. We believe that delivering on these four areas with the right balance should provide unparalleled performance for our customers and create value for shareholders.

We'll now take your questions. Operator, we are ready for the first question.

(Operator Instructions). Sterling Auty, JPMorgan.

Thanks, hi guys. You mentioned the search engine changes hitting the renewal rate. Could you give us some more color on that as well as was there anything else going on during the quarter that may have impacted the renewal rate?

Yes, it's Jim. Thanks. We think there were two main things that drove the slight reduction in the renewal rate. First of all, we mentioned a promotion by a large registrar that was very aggressive and led to an unusually large number of first-time renewing range -- names, which I think, coupled with the changes in the search algorithm, were the primary contributors to the reduce renewal rate.

The monetization community out there has a history. As this has happened before, it happened as you recall in 2008, and they have a history of rebounding. They generally sort of adapt to the changes after a quarter or two at most. So, we expect that to happen in this case and all of that is factored into the guidance that we gave.

All right, great. You mentioned the 8.4 million new names that were added. Can you give us a sense whether, maybe international versus domestic, what kind of trends you're seeing in the new name portion of the net names?

First of all, we obviously don't guide to new adds, but I will say that -- point out that 8.4 million names is a record for the second quarter and the second-highest overall. I'd like George to comment on the impact of domestic versus international.

Sure, Sterling. Thanks for the question. As I mentioned in my prepared remarks, we are really seeing the international markets grow a little faster than domestically, and they grew 14.5% in the comparable period versus 11.6% domestically. So I think if you use those revenue growth rates, that should give you a consistent idea of the growth we are seeing internationally versus domestic.

Great, thank you.

Phil Winslow, Credit Suisse.

Thanks. Just a question on margins and then the domain name guidance. Obviously, you guys had another big margin quarter this quarter and raised the full-year outlook or I guess ending -- end-of-the-year outlook. When you think about just your margin structure here, can you give a sense for where you think sort of the incremental margins are, and especially when you get into potentially the renewal season next year with some of the changes to the contract and incremental fees just, if that changes at all?

And in terms of just the guidance for Q3 for net adds, just wondering what was behind that. Did you assume somewhat lower first-year renewal rates or just what was baked into that? Thanks.

This is George speaking. So with regard to operating margin, clearly we just updated our guidance to exit the fourth quarter at at least 55%. I think, if you look back historically at how we have done from a margin expansion perspective, it's really come from our revenue growth. We've historically been a pretty good shepherd of our funds, and maintaining our operating expenses in line. While we've had growth in between marketing or in between R&D, you've seen we've managed that expense pretty well.

As it relates to net adds guidance, clearly, as Jim mentioned, there have been some changes in the search algorithms and that typically takes a few quarters to wash through. So we are just reflecting that experience into our current guidance for Q3.

This is Jim. I think you also asked about ICANN fees next year and its potential impact on margins. I guess I'll leave the math to everyone. But basically the changes in the ICANN .com contract took us from annual fees of roughly $17 million based on an alignment now, the change aligns us with their other registry agreements and it essentially puts us, based on a zone of roughly 100 million names at about $25 million per year. So roughly $8 million additional ICANN fees in 2013 anticipated.

Great, thanks guys.

Walter Pritchard, Citigroup.

Thanks, just wanted to ask about the small reclassification of revenue back to deferred revenue. What was the driver there and is this something that could recur in the future?

Sure Walter. The $1.8 million non-recurring revenue charge was related to a system error of a seldom used feature in our revenue recognition database. One of our secondary controls caught the error in our quarterly review process, and we made the out-of-period adjustment this quarter. We fixed that system issue and we've actually implemented a number of additional processes and procedures to avoid this problem from recurring in the future.

Great. Then just on the renewal rate, I guess I understand we've seen the search engine changes in the past. I'm just wondering why you only saw that in the first-time renewals and not in the base. It would seem like there probably were some names in the base as well that might've been impacted by changes to the search engine and might've also had a lower renewal rate as a result.

This is Pat. So we did see it across both the first-time renewing names and the previously-renewed names, but we saw a larger impact in the first-time renewing names.

Thanks for taking my questions.

Steve Ashley, Robert W. Baird.

Thank you very much. In terms of new GTLDs, did you run the expenses for those applications through the P&L this period? And is there any more expense that we should expect from that in the future?

No, we recorded most of that expense in Q1. There was I think one application that we did incur in Q2, but most of that hit our sales and marketing expense last quarter.

Great. And then I wonder if you could talk maybe qualitatively about your thoughts on the timing of the next price increase, what kind of considerations would go into that.

Yes. This is Jim. I think it's a bit early probably for us to talk about that. I think, every time an opportunity comes for us to notice a price increase, we have to take into account the considerations that surround the business. And I guess it's premature really to talk about that. Assuming that -- as we do expect that the contract will receive consent from the Commerce Department for the renewal and be effective no later than November 30, then the first opportunity to do so would be in December. So, I think we would probably be in a better position to talk to you about that then, what the factors, the economic factors, the climate would be, and give you some more information than, but I think it's premature at this point.

Okay, thank you.

Dan Cummins, ThinkEquity.

Thank you. (technical difficulty). Sorry. I did hear you say take off the headset. A question for Jim on your strategy around the managed security services. How is that going? Are you pleased with the progress and does your higher year-end profit projection reflect any change in your investment posture around some growth initiatives? Thanks.

Okay, I assume when you said MSS you meant NIA, or (multiple speakers) --

Yes. Exactly, the NIA. Yes.

Okay, yes. We are still achieving bookings growth as we plan for that business. I did mention in the last couple of calls and I mentioned again in this call that we are working to scale that business better for the quality of revenue that's more consistent with what we get from our naming business and I also mentioned, in this call, which I've not mentioned before, that we are looking at ways that we can align expense with revenues. So I think those are some -- we don't break it out separately of course, but I think that should give you a feel for where we are going with that business.

Does it still figure somewhat in your M&A strategy or potential M&A strategy? I know you said before it's a market you like very much, and you've mentioned before the problems associated with finding quality revenue.

Yes, I would say our M&A policy is unchanged, and whether it applies to that or any other part of our business, it's the same. We would certainly look at opportunities if they helped us get on our product roadmap or our strategy faster. We do not have M&A on our radar; that is not part of our strategy. We don't view M&A as a strategy. I think what you should expect from us is, if there was a small tuck-in opportunity, we would look at it if it helped us accelerate our strategy, but that would be the only reason.

Thank you very much.

Rob Owens, Pacific Crest.

Thank you very much and good afternoon. On the revenue reclass for the $1.8 million, was that a cumulative number that you just effectively took in this period, or was that something that was an error relative to this period?

Thanks for the question Rob. Yes, that was a cumulative -- I'll call it error that we accounted for in this period. So approximately of the $1.8 million, approximately $1 million related to 2011, and the balance was related to first quarter of 2012.

Great. I apologize if I missed this, but what was the net new names guidance for Q3? Was that given earlier in the call?

Yes, it was. It was $1.6 million to $1.9 million.

Sorry about that. We are managing multiple calls. And then lastly, what are names up for renewal in Q3? Do you have that metric in front of you?

Let's see if we can find that. John, do you have that?

George Kilguss; I think it's about -- this is George. I think it's 23.7 million names that are renewing in the third quarter.

Thanks George. Thanks guys.

(Operator Instructions). Gray Powell, Wells Fargo.

Thank you very much. I just had a couple quick questions. So I guess longer-term, assuming the .com renewal goes according to plan, once you have that visibility on the next six years of revenue, how should we think about your comfort with leverage and potentially increasing your leverage target?

Sure, Gray. This is George. So I would start by saying that, look, I've been in the chair for two months, so we are continuing take a look and evaluating our capital structure. This will be something we will be spending some more time on in the next few quarters. But I can give you maybe a few thoughts that I have developed over the past two months.

On the lever side, being a former lender early in my career, I tend to look at the total debt obligations outstanding the Company has compared to its EBITDA as a measure of leverage. And when I look at VeriSign, we have, as you know, a $1.25 billion convertible bond plus about a $200 million revolving credit facility, so somewhere between $1.35 billion and $1.45 billion of total outstanding debt and commitments today. If you were to simply annualize our second-quarter EBITDA and then compare that to the debt level that we have, you'd probably get a ratio of somewhere between 2.6 or 2.8 times.

So the real question we need to answer as a firm over the coming quarters is what is the appropriate leverage ratio for the business? We clearly have some debt capacity, but it's really all a matter of what is the appropriate risk profile for the business. So, we'll have to do some more work to do on that, but that's really the current framework that I'm thinking about the debt that we have on the books, and thoughts about our capital structure.

Got it, that's very helpful. And then just one other question if I can. What kind of investment should we expect you to incur to support the new GTLDs that you recently won? And should we think about that showing up as -- or I guess when should we think about that showing up as incremental CapEx or OpEx?

Clearly will have some incremental costs in bringing those on. I think what we really have to do is to wait for ICANN to go through their process and their approval process. Then we'll have a definitive idea of who has been awarded what names. But clearly we will have some incremental expense to do that but, again, that probably won't affect too much of 2013, but we will probably give you more information and guidance to that on our fourth-quarter call as we give guidance for 2013.

I would just add to that, that we talked last quarter about the numbers. The number was 220 brands that had signed on to have VeriSign run their backend registry services, and that number was the result of a process. As Pat in the call last quarter, and I think as I mentioned as well, we actually did not take all the business that was available to us there.

We do have the benefit of a long history of operating experience, a long reliability record, and plus the fact that we just don't run .com and .net; we run other domains as well. We run .tv and .name and we have a structure that lends itself to supporting this type of a multiple domain structure.

I think we're very carefully prepared and positioned and more experienced, and I think we have a pretty good view into this. I think George's comments were accurate in that, first of all, we have to wait and see which applications actually get through and what the actual number is. But there was a lot of thought and a lot of process and a lot of careful consideration given to arriving at the 220 number. And so we feel comfortable that we are prepared and our structure is pre-designed to support multiple domains. So I think we're in good shape.

Got it. Thank you very much. That's very helpful.

Gregg Moskowitz, Cowen.

Good afternoon. Just to follow up on the new GTLDs, curious if there's any update on the process just over the past four to five weeks from your vantage point, and then also if you have any thoughts as to when you think we could potentially go live.

I'll let Pat comment. I'll just say we are currently at a point where now the application periods is over, the reveal is made and everybody sees the strings that are applied for. I can't, as of now, undertake a [nits] evaluation of all those applications and at some point there will be a process that yields the ultimate result. Maybe for a little more color, I'll ask Pat to comment.

I think the one thing to keep in mind during the evaluation process there's a lot of things that will take place in terms of what ICANN does, what the Government Advisory Committee does and we believe that there will be additions to the root zone come Q2 of 2013 in terms of things that will be meaningful at the top-level domains.

Okay, thanks. And then we saw, on another note, we saw the world IPv6 launch take place last month. Is there a point at which IPv6 can become a meaningful revenue opportunity for VeriSign and how do you think about that?

I don't know if I can tell you what that point is, but I think that, gradually over time, helping our customers transition from IPv4 to IPv6 is certainly an opportunity for us. And we are examining, as part of our innovation efforts, opportunities that we have to add value to that transition process mainly around better security optimization. So we do see that as an opportunity, but I think it's too early to talk about when or exactly what it is.

Thank you.

Ed Maguire, CLSA.

I just had a question about the input into the capital efficiency -- that since you raised your margin expectations and lowered capital expense guidance for the year, what is behind this? It looks like you're getting greater and greater efficiencies out of your current infrastructure.

I don't think there's anything material behind it. We continue to be good stewards of the business. We are looking for ways to be more efficient in the business and drive increased profitability. I just think it's continuing being prudent of looking at projects, evaluating them and making sure that we're doing the best job for the shareholders that we can.

I would add to that that our -- the four points of our strategy, protect, grow, innovate and manage, there are four for reason. We focus on them and in manage, we try to manage the business efficiently. So there is this longer tail of the restructuring that we undertook five years ago. I know it's been quite a while since 2007 when we began the divestiture, but it was, even though it was completed in 2010, there are many opportunities for us to optimize and to do our business more efficiently. When you go from greater than 5000 employees to roughly 1000, you don't fix everything overnight. So we are finding efficiencies and I think that's reflected in our increasing margins.

Great. And I did want to follow-up, you had made the comment about 220 registry agreements that you've signed with applicants. I was wondering if there's a possibility that might change or are there any of the contracts still up for potential bid. And it sounds like you've also got a pretty high-quality filter in terms of the agreements that you're seeking to go after. So any color there would be helpful.

This is Pat. So they still have to go through all of the approval process, so that's 220 that we submitted at the end of the application window. So basically there's no more applications that will be taken by ICANN at this point in time. But we know that we've got other unique services that we can provide to the Registry operator so it doesn't mean that the 220 we have today are the ultimate end set of what we do. But that being said, ICANN still has to approve all of these PLDs still, so it could go down.

I appreciate it. Thanks a lot.

(Operator Instructions). Jaimin Soni, Bank of America.

Thanks for taking my question. I just wanted to go back to margins quickly. Can you just, if you can, please tell us if the margins that -- are they tracking to your internal plan, or are you beating those targets that you have internally?

And then going forward, I was just wondering if there is anything that you think is stopping you from really taking this upside you're getting in margins and investing it in other businesses like the NIA business. If there are some limitations on the scale or demand or some type of technological limitations or whatnot that you think is a barrier for further investment into other adjacent businesses that can potentially drive topline growth.

It's Jim. Thanks for your question. Let me refer you back to this four-pillar sort of strategy for managing the business. So protect, grow, innovate, and manage. So you're referring to the part we think of as managing the business efficiently, which is where margin expansion would occur.

The answer to your question is we don't really think about it as any single or some number of barriers to increasing margins. We think of it as a balance across those four areas.

Job one is to protect the business. We have growth areas that we have committed investments in. That's all baked into our guidance on margins. We think that we have intellectual capital and intellectual property that we can exploit in innovation which doesn't require great investment, no great capital investment. And so what you get through that process of balance is the guidance that we gave you in margin.

So I think what you're seeing is sort of a steady growth in margins based on essentially a thoughtful balance across those four areas of our resources. So, I really don't think of it as a single barrier. George, do want to comment further?

I would just say the Company has also commented in previous calls on the long tail of the restructuring. And you can never know until you actually go through the quarter as to what other efficiencies you may obtain. So clearly obviously we had guided 52% to 54%. Now we've increased that guidance to 55%, so we are just seeing those efficiencies come out of the business as we manage it on a day-to-day basis.

Again, I think the fact that manage is one of the four pillars of our strategy I think is just our way of saying to you that we pay close attention to that. We are actively looking for opportunities and have long-tailed the restructuring not exclusively to save money but to optimize and be more efficient, and serve our customers better. And it's working.

Got it. Thank you very much.

Sterling Auty, JPMorgan.

Look at that, I get to start and finish. Hey, listen. On the -- where we started with a discussion in terms of the search engine changes, so when Google adapted to AdSense program which I think was in the summer of 2008, a lot of discussion that we had was how much of the base of names is actually advertising or pay-per-click driven. Since these are first-time renewals and they're trying to drive traffic to those types of pages, is there a similar type of analysis that you've done so we can get a sense as to maybe what portion of base are first-time renewals and what portion of those might be these types of advertising names that could get impacted?

We haven't talked about any specific numbers I think actually since 2008. Back then, we did talk about what we believed to be the advertising makeup of the base. My sense of it is now, without any specific data to give you at this moment, is first of all the base -- the zone is obviously much larger. My guess would be that the advertising names were probably larger than they were at the time. However, if you look at the renewal rate of 72.9% over the last two quarters, just looking back -- I'm sorry -- in the two periods of 2010 and 2011, the Q2 periods, it differs only by -- and we did not have, by the way, any search engine changes in those periods. You're only talking about respectively a 0.2 and 0.3 percentage point difference in the renewal rates. So my sense is that the safety in numbers theory is at work here, and the zone is larger and even though the number of advertising names may be larger, this rather rare change in search engine algorithms -- 2008 now 2012 actually have smaller impact than it did back then. I'm sure you remember, in 2008, the impact was quite significant. Here we are with a larger zone and larger number of advertising names, and yet the impact was rather modest, literally 0.2% compared to the same period a year ago, or 0.3% 2010 and 2011. So that's the way we tend to think of it. The impact was very, very modest. I don't know if you want to add anything Pat?

No, I think that covers it.

Last question and I'll let you go. Is there a sense of whether there's going to be a pickup in registrar marketing and promotional campaigns here in the September quarter that might help offset some of the falloff that you just saw this quarter?

I think registrars -- we got insight into some of their plans but not all of their plans of course. I think that they run promotions from time to time and on a regular basis in terms of what's going on and the kind of client they are trying to attract. So I think you'll see that, yes.

Thank you.

That concludes our question-and-answer session for today. I'd like to turn the call back over to David Atchley for final comments.

Thank you operator. With regards to the events in the third quarter, please note that Jim and George will be presenting at the 2012 Citi Technology Conference at 130 p.m. Eastern time on Wednesday, September 5 in New York. The webcast registration details for this conference will be available on the Investor Relations section of the VeriSign website. Please call the Investor Relations department with any follow-up questions from this call. Thank you for your participation and continued support. This concludes our call. Thank you and good evening.

Once again, that does conclude our conference call for today. Thank you for joining.