威瑞信 (VRSN) 2014 Q1 法說會逐字稿

) Operator Good day, everyone, welcome to the VeriSign's first-quarter 2014 earnings call. Today's conference is being recorded, and authorized recording of this call is not permitted. At this time, I would like to turn the call over to Mr. David Atchley, Senior Director of Investor Relations and Corporate Treasurer. Please go ahead, sir.

Thank you, operator. And good afternoon, everyone. Welcome to VeriSign's first-quarter 2014 earnings call. With me are James Bidzos, Executive Chairman, President and CEO; George Kilguss, Senior Vice President and CFO; and Pat Kane, Senior Vice President, Naming Services.

This call and our presentation are being webcast from the Investor Relations section of our website, www.VeriSignInc.com. There you will also find our first-quarter 2014 earnings release. At the end of this call, the presentation will be available on that site. And within a few hours, the replay of the call will be posted.

Financial results in our earnings release are unaudited, and our remarks include forward-looking statements that are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC. Specifically, the most recent reports on Form 10-K and 10-Q, and any applicable amendments which identify risk factors that could cause actual results to differ materially from those contained in the forward-looking statements.

VeriSign retains its long-standing 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 afterward, we will open up the call for your questions. Unauthorized recording of this call is not permitted. With that, I would like to turn the call over to Jim.

Thanks, David. And good afternoon, everyone. Our first-quarter results demonstrate a good start to 2014. We reported revenue of $249 million, which was 5% higher year over year, and delivered strong financial performance, including $130 million in free cash flow. We processed 8.6 million new registrations during the first quarter, and added 1.28 million net new names, bringing our name base to a total of 128.5 million active.com and .net domain names.

Our balance sheet remains strong, with $1.7 billion in cash, cash equivalents and marketable securities at the end of the quarter. We continue to see benefits from our focus and discipline in the execution of our strategic framework to protect growth and manage the business.

As part of managing our business, during the first quarter, we continued our share repurchase program by repurchasing 2.4 million shares for $132 million. At the end of the first quarter, 868 million remained available and authorized under the current share repurchase program. We continually evaluate the overall cash and investing needs of the business and consider the best uses for our cash, including potential share repurchases.

Before I get into the first quarter results, I want to provide updates on a few areas from the quarter. As we mentioned on our last earnings call, we intend to repatriate between $700 million and $800 million of cash held by foreign subsidiaries to the US. At that time, we had also indicated our expectation was that this would be done in either the second or third quarter of 2014. I'm pleased to inform you that we now believe this repatriation will happen sooner and will be completed during the second quarter of 2014.

During the first quarter, additional new generic top-level domains were delegated into the root zone. As you recall, VeriSign applied for 14 new generic top-level domains. 12 of these applications are internationalized domain name versions of .com and .net.

We applied for two IDN transliterations of .com in Chinese, both simplified and traditional Chinese, which are variance of each other. I can't place these two .com IDN applications in a string similarity contention set because they are variants. And subsequently, requested that we withdraw one of the applications until ICANN can address its policy on variance. For now, we have withdrawn our application for the transliteration of the .com IDN spring in traditional Chinese.

With the Chinese variant contention set behind us, we are now ready to engage in the negotiating and contracting process with ICANN on our remaining 13 applications. Also as an update, we do expect one of our back-end registry customers to register their top-level domain during the second quarter. We will provide further updates as appropriate regarding the status of our applications and the status of back-end registry customers.

On our innovation and patent programs, we do have progress updates. First, we talked about contracting for a pilot with a large firm for the use of an innovative new product service, which we have developed. The contracting for that pilot was completed earlier this year and the pilot is underway.

Second, there is an update on our patent program. We are beginning to receive inquiries from registry operators about using some elements of our patented registry technology.

And, as you may have seen, we joined with Juniper Networks in the quarter to provide multi-level, optimized protection from diverse types of DDoS attacks. The new offering can provide highly scalable always-on DDoS protection by removing mitigation from Juniper's on-premise DDoS-secure appliance to VeriSign's higher-capacity cloud-based DDoS protection service.

Further, VeriSign and Juniper plan to develop and promote open source standards for communications between on-premise and cloud-based DDoS protection. No delivery dates are forecast for these activities or provided at this time, but will be announced as available.

During the first quarter, the National Telecommunications and Information Administration, or NTIA, announced its intent to begin a process to transition to the global stakeholder community its oversight of what is called the IANA functions and related route zone management functions, which principally include processing changes to the route zone, like the addition to the route of new top-level domain names, as well as oversight of the IP address base.

VeriSign makes changes to the route zone that are approved by NTIA, including adding new gTLDs, and then publishes the zone file as part of its route zone maintainer role, which we have performed without compensation spanning three decades. This function is independent from and not related to our contracts with ICANN to manage the .com and .net registries.

As we stated in our March 17 news release, the announcement by NTIA does not affect VeriSign's operation of the .com and .net registries. The announcement does not impact VeriSign's .com or .net domain name business, nor impact its .com or .net revenue, or those agreements which have presumptive rights of renewal.

I'll comment now on first-quarter operating highlights. At the end of March, the total base of active registered domain names in .com and .net was 128.5 million, consisting of 113.2 million for .com, and 15.2 million names for .net. This represents an increase of 4% year over year. In the first quarter we added 1.28 million net names to the domain name base after processing 8.6 million new gross registrations.

In the fourth quarter of 2013, the renewal rate was 72.2% compared with 72.9% for the fourth quarter of 2012. While renewal rates are not fully measurable until 45 days after the end of the quarter, we believe that the renewal rate for the first quarter of 2014 will be approximately 72.6%. This rate compares to 73.3% achieved in the first quarter of 2013.

As we discussed last quarter, while there are many factors that drive zone growth, changes to certain domestic and international registrar marketing tactics have had a near-term moderating impact on the zone. As they are focused on increasing bundled product offerings rather than on driving domain name sales, and have been running fewer discount programs on new domains.

While it is too early to say for how long or how much this factor may affect zone growth, we see it impacting registration growth in the second quarter. By the way, since we discussed this during our February earnings call, we have seen some refocus by certain registrars back to customer acquisition and discount programs.

Also as we have discussed in previous calls, the overall renewal rate has been softer, primarily due to the lower renewal rates for first-time renewing names. Given our forecasts for zone growth, including the factors just discussed, we expect .com and .net names added to the zone in the second quarter of 2014 to be between 0.3 million and 0.8 million names.

As noted in prior calls, updates to the zone are posted on our website at least once per day, allowing you to track how the zone is growing throughout the coming quarter. Now I'd like to turn the call over to George.

Thanks, Jim, and good afternoon, everyone. During the first quarter, we generated revenue of $249 million, up 5% year over year and delivered GAAP operating income of $140 million, up 4.7% from $133 million in the first quarter of 2013.

The GAAP operating margin in the quarter came to 56.1% compared to 56.4% in the same quarter a year ago. GAAP net income totaled $94 million compared to $85 million the year earlier, which produced diluted GAAP earnings per share of $0.64 in the first quarter this year compared with $0.52 for the first quarter last year.

As of March 31, 2014, the Company maintained total assets of $2.6 billion, which included $1.7 billion of cash, cash equivalents and marketable securities. Liabilities totaled $3.1 billion at the quarter-end. Of the $1.7 billion in cash, cash equivalents and marketable securities, $192 million was domestic, with the remainder held internationally.

I'll now review some of our key first-quarter operating metrics, which are revenue, deferred revenue, non-GAAP operating margin, non-GAAP earnings per share, operating cash flow and free cash flow. I will then discuss our 2014 full-year guidance.

As mentioned, revenue totaled $249 million for the first quarter. 61% of our revenue was derived from customers in the US, and 39% was from international customers. Deferred revenue at quarter-end totaled $886 million, a $30 million increase from year-end 2013.

First-quarter non-GAAP operating expense, which excludes $10 million of stock-based compensation, totalled $99 million compared with $106 million in the fourth quarter of 2013, and $96 million in the same quarter a year ago. The sequential decline in the expense is primarily a result of timing differences related to implementation of certain planned marketing programs.

Non-GAAP operating margin for the first quarter expanded to 60.1% compared to 59.6% in the same quarter of 2013. Non-GAAP net income for the first quarter was $95 million, resulting in non-GAAP diluted earnings per share of $0.64 compared to $0.58 in the first quarter of 2013, and $0.65 last quarter.

With respect to taxes, we continue to use a non-GAAP tax rate of 28% for our non-GAAP net income and non-GAAP earnings per share calculations. In 2014, we still expect to pay cash taxes of approximately $35 million to $50 million, which primarily relate to international taxes, including withholding tax on our intended repatriation.

We had a weighted average diluted share count of 149 million shares in the first quarter, compared to 150 million shares in the fourth quarter. Dilution related to the convertible debentures was 14.3 million shares based on the average share price during the first quarter, compared with 7.9 million for the same quarter in 2013. The share count was reduced by the full effect of fourth-quarter repurchase activity and the weighted effect of the 2.4 million shares repurchased during the first quarter.

Operating cash flow was $142 million for the first quarter compared to $147 million in the fourth quarter of 2013, and $151 million for the first quarter last year. First-quarter free cash flow was $130 million.

With respect to our 2014, our full-year guidance includes updates to our revenue and capital expenditure projections. Revenue for 2014 is now expected to be in the range of $1 billion to $1.015 billion, representing an annual growth rate of 4% to 5%. This is a change from the $1 billion to $1.02 billion, or growth rate of 4% to 6%, as given on our last earnings call.

Non-GAAP gross margin is still expected to be at least 80%. Full-year 2014 non-GAAP operating margin is still expected to be between 58% and 60%, as we expect sales and marketing spend to accelerate in future quarters. Our non-GAAP interest expense and non-GAAP non-operating income net is still expected to be an expense of between $73 million and $77 million for 2014.

Capital expenditures for the year are now expected to be between $50 million and $70 million, changed from the $60 million to $80 million range given on our last call. Our guidance is based on expectations about the outlook of our business, in addition to our financial projections for interest income and expense.

In summary, the Company demonstrated sound financial performance in the first quarter. We have grown non-GAAP operating income and net income as compared with the first quarter of 2013. 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'll turn the call back to Jim for his closing remarks.

Thank you, George. During the first quarter, we furthered our work to protect growth and manage the business. We have protected our business by providing over 16 years of 100% availability of the .com and .net DNS, and this month celebrated the Company's 19th year. This track record is due to the strength and experience of our people, our commitment to excellence and our specialized and purpose-built infrastructure. Our innovation efforts support our goals to drive profitable growth through the development of new products and services.

Finally, we have been managing the business effectively, as demonstrated by improved operating margins and delivery of value to shareholders through share repurchases during the first quarter. We remain committed to offering the security and stability that are at the core of our business, and provide value to our customers, employees and shareholders.

We will now take your questions. And operator, we're ready for the first question.

Thank you.

(Operator instructions)

Sterling Auty from JPMorgan.

Jim, in your prepared remarks, you touched upon the NTIA and the transfer of the IANA contract. We heard your prepared remarks, but we still get a number of questions -- people wondering the next time that .com comes up for renewal, for example, is there any additional risk that this change would actually add in terms of any possibility that you would lose the contract?

Thanks for that question, Sterling. Yes, we get some questions, too. I think there is confusion because of just similar technology. But the best way I can describe it is to simply say these are entirely separate, they're entirely unrelated. And whatever plays out in NTIA's intent to exit IANA and transition this to ICANN is an entirely separate process.

I know that there are some politics that swirl around it as well. But the bottom line is that the .com and .net contracts are entirely separate. They are separate agreements, they stand alone, and nothing has changed since those contracts were signed. Meaning that the only way we could lose those contracts is if we breach those contracts and fail to cure it.

All of this activity swirling around IANA has no impact whatsoever on it. And I guess I'm not sure how to be more clear than that. But that's the best description I can give you. So in a word, if your question is how can all this IANA stuff impact our common .net renewals, the answer is: not.

And I think part of where people are coming from is, is this a sign that the US as a government is relinquishing control? And if you had international stakeholders more in influenced positions with ICANN, could it somehow change what would happen to the contracting process the next time?

Well, the contracts survive any assignment or termination. Our obligations survive. ICANN or its successor's obligations survive. So our obligation to perform and their obligation to renew if we perform, all survive. So all of those politics, all of those potential changes.

Now, also, if you watched the hearings, you saw the testimony of Larry Strickling from NTIA and Fadi Chehade, ICANN's CEO. They both testified that there will not be a transition without appropriate safeguards. ICANN is not leaving the US. And so I think those are just simply further indications that these -- that what NTIA said, that it is really transitioning what it believes is a clerical role, is the way that it sees this.

So we have a long way to go while these safeguards are developed. But given that and given the standalone protected nature of all of the registry agreements, including .com and .net, I just don't see a scenario where there is any impact on these contracts. They are completely separate.

Okay. And maybe one last follow-up question. Looking at the .net additions in the zone and the guidance for the June quarter, from your perspective, do you think that the new gTLD program is starting to have an impact on the growth of the .net, .com zone?

There are a lot of factors that affect the zone. There are the things that we have been talking about for some time. Obviously, the changes to search engine algorithms, the changes in PPC, the law of large numbers as the zone grows, and also these behavioral changes in registrars that we've talked about.

Now, having said that, additionally there are roughly over 100 new gTLDs that are delegated into the zone. And they're accepting registrations right now, and have been pretty much for most of the first quarter, for roughly almost three months now. And in total, there are about 570,000 registrations collectively in all of the gTLDs year to date. I think that information is current as of just a couple days ago.

So it is too soon to tell if any of those registrations or what part of those registrations are at the expense of a .com or .net registration. Because until we see the first renewal cycle on these new gTLDs, it is really going to be difficult to assess how much impact they might have on the .com .net zone.

Okay, thank you.

(Operator Instructions)

Steve Ashley from Robert W. Baird.

Thank you very much. Just maybe to follow up on Sterling's comment here regarding -- and Jim, you did a very nice job of just touching on all of the things that have been impacting the pace of domain name growth, with the behavioral change at the registrar, the algorithm changes, law of large numbers.

Is it your hope or would it be your expectation that at some point in the future we could see the growth rate of the zone re-accelerate and get stronger? I'm not asking for a timeframe. Just conceptually, is it possible that we could see an acceleration in growth down the road at some point?

Well, I think what we can say and that we said last quarter -- and I'll let George add some comments to this. But our models, which we have a fair amount of confidence in, were fairly good in giving us the basis for our first-quarter guidance. They do show that second quarter is a little bit weaker, and they do show recovery in the third and fourth quarter.

I did mention also that since February, we have seen a return to focus on new unit acquisition and discount programs by some of the registrars. So I think it is early to tell if that's a trend. But I think given all of those, and the fact that we did see 8.6 million gross apps during the quarter in .com and .net says that there is strong activity and strong registration. So certainly in terms of future zone growth, I'm very confident.

George, did you want to add anything to that?

Yes. Steve, the only other commentary I would provide you is, if you recall our guidance that we gave on our last call, we talked about a zone growth of 2% to 4% in 2014. And that's still our expectation for 2014. As Jim mentioned, there are many factors that impact us inter-quarter. But in totality, we're really looking at a zone growth between 2% to 4% for 2014.

Yes. Put another way, we're essentially -- we're certainly not changing our full-year 2014 guidance.

Perfect. Thanks so much, guys.

Sure.

Fred Ziegel from Topeka Capital Markets.

Hi guys. The question on the non-domain business, what's the status there? What are we doing? There is an awful lot of activity in DDoS. And I know you know that, that with Juniper. But what -- can you give us an update on the product schedule in that part of the business, which I know is a small piece at the moment?

Yes, we don't break it out separately, as you know. I don't have any updates as specific to any particular product schedule. Juniper did make a detailed press release, and you can look there for indications from their perspective on this particular partnership.

And I did provide the three updates. We did get to the signing of a pilot agreement with a large firm that we're conducting a pilot with. I did mention some activity in patents.

On the Juniper thing, I think one of the interesting aspects of that particular announcement is that it is quite different and interesting in a sense that it is a hybrid solution, and it matches both our in-cloud DDoS mitigation service and Juniper's own on-premise equipment, DDoS mitigation offering. And certainly the DDoS market is growing. It is an area where companies are very concerned and they're making investments.

So I look at this as an indication that two companies that are major players in that market are getting together to try to provide a more optimized offering against more specialized attacks. I think at this point, the only update that we can give you is that we partnered with someone to address what we think is a growing market. Beyond that, unfortunately, we just can't say more at this point.

Are you applying more resources, people, R&D, to the non-domain part of the business, given the slowdown in .net adds?

Well, let me try to answer your question this way. When we put together our plans for 2014, we baked in investments in a number of growth initiatives. And those are fully funded, and we're executing in investing in those growth initiatives. So all of our guidance contains all of that. We don't expect to change that.

So to the extent we've planned for and budgeted for growth initiatives, we are absolutely spending that money. We're making those investments. We've made our bets. We've chosen our innovation programs. We've chosen our new products and services to pursue, and we're pursuing those. And so we're staffing and funding those programs.

Okay. Thanks.

Sure.

Walter Pritchard from Citibank.

Hi, thanks. Just on the guidance, the operating margin guidance, 58% to 60%, you're running at the high-end of that range right now. You've had a history of outperforming on the margin side. And you're also talking a bit about some spending in the second half.

So I guess I'm just trying to get a sense of that margin guide. Why shouldn't we see you hold this margin at 60% through the year? And then just had a follow-up question around some of the specific spending.

Yes, sure, Walter, this is George Kilguss. So as I mentioned in my prepared remarks, we did have some marketing expense that got pushed into later quarters. Basically, as I've talked about, we put a little bit more rigor around evaluating some of our marketing programs.

Today we do quite a bit of marketing through registrars, and they actually give us joint marketing proposals, which we evaluate. And as we're looking at those to see if we think they're good for us driving profitable growth, we put some more rigor and analysis around those. And that has actually caused a little bit of a slippage under the approval of those programs. So some of those have slipped into Q2 and subsequent quarters.

I would say approximately about $4 million or so of spend we expected to spend in marketing has slipped out of the first quarter. And I would say a fair bit of that will go into the second quarter. But some has slipped to the previous quarter.

So again, it's really a timing difference. We do continue to have desires to invest further in sales and marketing, and we're doing that. But we're trying to do that in a measured way. And so as a result of that timing difference, we're still keeping the same guidance between 58% and 60% for the full year of non-GAAP operating margin.

Got it. Thanks, George. And then, just follow up on that a little bit. It sounds like you did have some registrars get a bit more aggressive on marketing spend -- or at least on promotional activity marketing spend. I'm assuming that's more their own -- under their own choice or their own investment.

I'm wondering, as you think about deploying more marketing dollars into the field, especially in the second half of the year, is that what the driver is in terms of you believing that the zone file will stabilize and improve in terms of growth? Or could walk -- just remind us of the factors that will drive that improvement?

Yes, so we made comments last quarter that we saw some registrars go for more ARPU-type of activity than they did for using domain name registrations to acquire customers. And we talked about domestic and international registrars both having that tactic. As Jim mentioned, we did see -- there are still some particular US registrars that are still keeping on with that ARPU strategy.

But we have seen some of the international registrars regroup and go back to more of trying to acquire customers using domain names as their method to do it. So more of a customer acquisition. So we have seen a little bit of change in that behavior.

We also talked in our last call that in January we saw a little softness from emerging markets in the month of January, particularly around China. Now, post January and post our fourth-quarter call, we've actually seen a pick up in some of the emerging market activity, particularly in China. We saw February and March be relatively strong in those markets.

And so we're clearly looking for those markets to continue to perform there. But again, there is a number of, a confluence of factors that are going on that we mentioned there. But we still believe that our zone will grow between 2% and 4% in 2014.

Thank you.

(Operator Instructions)

Gregg Moskowitz from Cowen and Company.

Thank you very much, and good afternoon, guys. We noticed that a couple of your larger registrars are running $0.99 first-year .com promotions in recent months. And just wondering if that was able to simulate some decent level of demand in the quarter and maybe be a partial offset to some of the bundling and some of the going after ARPU dynamics that you guys had pointed out?

So, Gregg, this is George. We definitely saw some of our registrars re-target domain names as a customer acquisition vehicle. They were doing some discounting there. And I think they've seen some improved results from that. But not all registrars have adopted that.

Some registrars have done variants of that, where they may have -- they do something called re-targeted or targeted price discounting, where maybe if you come back to their site multiple times, you might get a lower price, depending on your interest. But clearly, internationally, we have seen some registrars go back to discounting. And that has helped .net registrations.

Okay. Thanks, George. And then have just one follow-up. Wondering if you happen to have the number of names up for renewal in the Q2?

Sure, I can get that for you. 27.5 million.

I'm sorry, George, I didn't catch that.

27.5 million.

Fantastic. Okay. Thanks very much. I appreciate it.

You're welcome.

Priya Parasuraman from Wells Fargo.

Thank you. This is actually Priya for Gray. I was wondering if you had more color on the Chinese IDN transliteration, which you talked about in your prepared remark?

I'm sorry, I had trouble hearing the very last part of your question. Was it about the Chinese IDN?

Yes. I was wondering if could you provide any more color on that, and if that could be reinstated? Or is that temporary?

Yes. So let me just describe what happened there. So basically, ICANN's policy was not prepared to address the situation where a single applicant had a variant. We had communications with ICANN going back over a year. Early on, they advised that we file separate applications until they sorted out their policy. They have not sorted out that policy as of this time. And so the simple way to move forward was to withdraw one and move forward with the other, which we've done.

However, when they do sort out that policy, we expect that new policy to mirror their ccTLD policy, which does allow for these multiple variants. And so, yes, hopefully we will have the opportunity to reinstate and bring in the other Chinese IDN. But this, at least, allows us a way forward with the traditional Chinese IDN. And it also allows us to move forward with contracting for the other 12.

So for a total of 13 IDNs, transliterations of .com and .net, we are now engaging in the contracting process with ICANN. And I have Pat here as well, who is a little closer to all this, if you wanted to add anything, Pat.

The only thing I would add, Jim, is that when we chose between the traditional and the simplified Chinese variant, we chose to retain the simplified and withdraw the traditional because the simplified Chinese is the bigger market.

I hope that answered your question.

Yes, that was helpful. Thank you.

You're welcome.

And that concludes our question-and-answer portion for today. Now I'd like to turn the call back over to David Atchley.

Thank you, operator. During the second quarter Jim and George will presenting at the JPMorgan Global Technology, Media and Telecom Conference at 10 AM Eastern Time on Wednesday, May 21, in Boston. 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.

And that concludes today's conference. Thank you for your participation, and have a great day.