威瑞信 (VRSN) 2015 Q1 法說會逐字稿

Good day, everyone. Welcome to VeriSign's first-quarter 2015 earnings call. Today's conference is being recorded, and unauthorized recording of this call is not permitted.

At this time, I would like to turn the conference over to Mr. David Atchley, Vice President of Investor Relations and Corporate Treasurer. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. Welcome to VeriSign's first-quarter 2015 earnings call. With me are Jim Bidzos, Executive Chairman, President, and CEO; George Kilguss, Senior Vice President and CFO, and Pat Kane, Senior Vice President, Naming and Directory Services.

This call and our presentation are being webcast from the Investor Relations section of our website at www.veriSigninc.com. There you will also find our first-quarter 2015 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 report on Forms 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. With that, I would like to turn the call over to Jim.

Thanks, David, and, good afternoon, everyone. Our first-quarter 2015 results mark a solid start to the year and were in line with our objectives of offering security and stability to our customers while generating profitable growth and providing long-term value to our shareholders. We reported revenue of $258 million, up 3.9% year over year, and we delivered strong financial performance, including $126 million in free cash flow. We processed 8.7 million new registrations during the first quarter and added 1.51 million net new names ending with 133 million .com and .net domain names in the domain name base.

Our financial position is strong with $1.9 billion in cash, cash equivalents, and marketable securities at the end of the quarter. During the first quarter, we continued our share repurchase program by repurchasing 2.7 million shares for $160 million. As of March 31, 2015, we have $917 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.

I will comment now on a few recent events. In March, I was pleased to announce the appointment of Todd Strubbe as Executive Vice President and Chief Operating Officer. Todd joined us just this week, and we are delighted to have him on the team.

Also in March, we completed the issuance of our 10-year, $500 million senior unsecured notes with a 5.25% coupon. We are pleased with the results of this issuance, which further enhances our capital structure.

Finally, as you may recall, one way VeriSign has been participating in ICANN's new gTLD program was by applying for internationalized domain name transliterations of .com and .net.

As mentioned during the last earnings call, we have signed 11 IDN TLD registry agreements and are seeking a modified sunrise period from ICANN. Since we spoke to you last quarter, we have submitted our request for this modified sunrise period and are awaiting the response from ICANN.

The failure to gain approval could delay a general availability date or could result in VeriSign having to revise our go-to-market strategy for the IDNs.

I will comment now on first-quarter operating highlights. At the end of March, the domain name base in .com and .net was 133 million, consisting of 117.9 million names for.com and 15.1 million names for .net. This represents an increase of 3.1% year over year as calculated including domain names on hold for both periods.

In the first quarter, we added 1.51 million net names to the domain name base after processing 8.7 million new gross registrations. In the fourth quarter of 2014, the renewal rate was 72.5%, compared with 72.2% for the fourth quarter of 2013. 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 2015 will be approximately 73.5%. This rate compares favorably to 72.6% achieved in the first quarter of 2014.

As we discussed over the last few quarters, there are many factors that drive domain growth. These include Internet adoption, economic and e-commerce activity, and registrar go-to-market strategies. Based on these and other factors, we are forecasting second-quarter 2015 net additions to the domain name base to be between 0.3 million and 0.8 million names. 2015 will mark the third year in a row where the second quarter is expected to be the lowest quarter from a net additions perspective.

Q2 has been our lowest quarter as deletions are historically after seasonal high point in Q2. We believe this is because seasonal gross additions are typically at their high point in Q1, and most registrars take advantage of our 45-day grace period after expiry to delete domains which fall into the second quarter.

Similar to last year, we expect second-half 2015 net additions to increase relative to Q2's expected performance.

As noted in prior calls, updates to the domain name base are posted on our website at least once per day and reflect the definition change to include on hold status names as we discussed during the last earnings call. This website allows you to track the domain name base throughout the coming quarter.

And now I would like to turn the call over to George.

Thanks, Jim, and good afternoon, everyone. During the first quarter, we generated revenue of $258 million, up 3.9% year over year and delivered GAAP operating income of $144 million, up 3% from $140 million in the first quarter of 2014. The GAAP operating margin in the quarter came to 55.8%, compared to 56.1% in the same quarter a year ago. GAAP net income totaled $88 million compared to $94 million a year earlier, which produced diluted GAAP earnings per share of $0.66 in the first quarter this year compared to $0.64 for the first quarter last year.

During the first quarter, the Company continued to manage its capital structure through the issuance of its $500 million, 10-year senior secured notes offering. The notes, which are not callable, mature in 2025 and bear a fixed interest rate of 5.25%.

In addition, the Company also entered into a new, five-year, $200 million unsecured revolving credit facility that matures in April 2020, which takes the place of our prior unsecured revolving credit facility. The Company had no borrowings under this facility at the end of the quarter.

The first quarter ending balance sheet reflects the March 2015 issuance of the $5 million senior secured notes, due 2025.

As of March 31, 2015, the Company maintained a total assets of $2.6 billion. These assets included $1.9 billion of cash, cash equivalents, and marketable securities, of which $901 million were held domestically with the remainder held internationally.

Total liabilities were $3.6 billion at the quarter end, up from $3 billion at the end of 2014.

I will 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 2015 full year guidance.

As mentioned, revenue totaled $258 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 the end of the first quarter totaled $925 million, a $35 million increase from year-end 2014.

First quarter non-GAAP operating expense, which excludes $10 million of stock-based compensation, totaled $104 million, the same as for the fourth quarter of 2014 and compared with $99 million in the same quarter a year ago. Non-GAAP operating margin for the first quarter was 59.7% compared to 60.1% in the same quarter of 2014.

Non-GAAP net income for the first quarter was $99 million, resulting in non-GAAP diluted earnings per share of $0.74, using a weighted averaged diluted share count of 133.8 million shares. This compares to $0.64 in the first quarter of 2014 and $0.70 last quarter, using $148.6 million and $135.9 million weighted average diluted shares respectively.

Operating cash flow was $133 million for the first quarter compared to $170 million for the fourth quarter of 2014 and $142 million for the first quarter last year. First-quarter free cash flow was $126 million, including $6 million of excess tax benefits from stock-based compensation and reduced by $13 million in capital expenditures.

With respect to taxes, as we noted in our last earnings call, starting with the first quarter of 2015, we have used a tax rate of 26% to calculate our non-GAAP net income and non-GAAP earnings per share.

Also, as we have discussed on recent earnings calls, we expect our tax rate -- our cash tax rate to stay well below our tax rate used for non-GAAP calculations for at least the next several years.

In 2015, we still expect to pay cash taxes of approximately $35 million to $45 million. Substantially all of the expected cash taxes in 2015 are international.

With respect to our full-year 2015 guidance, revenue for 2015 is now expected to be in the range of $1.043 billion to $1.057 billion, representing an annual growth rate of 3% to 5%. This revenue range is changed from the $1.040 billion to $1.060 billion range, given on our last call. This revenue range still assumes a domain name base growth rate of between 2% and 3.5% for 2015.

Non-GAAP gross margin is still expected to be at least 80%. Full-year 2015 non-GAAP operating margin is still expected to be between 60% and 62%. Our non-GAAP interest expense and non-GAAP nonoperating income net is now expected to be an expense of between $104 million to $110 million, changed from between $84 million and $90 million for 2015 and reflects the interest expense of the new bond issue. Capital expenditures for the year are still expected to be between $40 million and $50 million.

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 continued to demonstrate sound financial performance in the first quarter. We have grown non-GAAP operating income and non-GAAP net income. We have maintained a strong financial position and expect our strong operating cash flow generation to continue as a result of our financial model.

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

Thank you, George. During the first quarter, we furthered our work to protect, grow, and manage our business while delivering value to our shareholders. We continue to protect the business by providing more than 17 continuous years of 100% availability of the .com and .net DNS. This peerless record is due to the expertise of our people and our specialized infrastructure.

We drive profitable growth by strengthening and marketing our current service offerings. We continue to actively invest in the development of new products, technologies, and services. Finally, we have been managing the business effectively, as demonstrated by our improved operating margins, improved capital structure, and through the return of cash to shareholders through share repurchases. We remain committed to offering the security and stability that are at the core of our business and make VeriSign a company with an unparalleled DNS service record and a company committed to long-term value creation for our shareholders.

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

(Operator Instructions). Steve Ashley, Robert W. Baird.

First of all, I was going to ask about the petition with ICANN for the modified sunrise period. Have not gotten a response back yet. Is there any more color you can provide? Has there been a dialogue? Are you aware of the situation? Or is there any more color you can provide around that?

The only update that we have at this point is that we have taken a step on filing the [RSAP]. It is a common practice. It is a normal method available to anybody who wants a modified registry service, and so we have employed it. At this point, ICANN will make its evaluation and respond, so we are waiting for that response. But we have just submitted it recently in this quarter.

Perfect. And just lastly for me, the renewal rate, again, the estimate for the first quarter looks to show some improvement, and I wonder if there was some color around that.

Sure, Steve. This is George Kilguss. So, as we mentioned, our fourth-quarter final renewal rate came in at 72.5% versus a year ago period of 72.2%. So slightly up in the fourth quarter. And our preliminary first-quarter renewal rate is expected to be 73.5%, which is up about 90 basis points from 72.6% in the year ago period.

We are seeing that improvement come from both first time renewing names as well as previously renewed names, and we are pleased with that result.

As far as what that data point portends for future renewal rates, I think it is a bit early to speculate there. But we will keep an eye on it and report back out to you next quarter when we have some additional information.

As far as renewal rates between international and domestic geographies, what I can tell you is that in the Q1 preliminary number, we saw increases in both domestic and international first-time renewing rates and an improvement in international rates for previously renewed names. Domestic previous renewal rates were relatively flat in the first quarter.

Again, the renewal rate is preliminary. We will give you the final rate next call, but we are pleased to see that that renewal rate has increased in the quarter.

(Operator Instructions). Walter Pritchard, Citi.

It is Ken Wong for Walter. Just a first question for maybe Jim or Pat, if he is there. You guys hit the high end of your range on the zone file from Q1, and I guess the early trend in Q2 looked a little below average. I think I am counting about 50,000 net adds. Any activity in Q1 that you think you guys might have done to maybe pull forward, or is it really just the seasonal trend shifting away from Q2?

Well, first of all, Q1 was a strong quarter, but I think that is simply due to fundamental demand for the strong .com brand and the growth that we have alluded to in the past, particularly in Asia. So I think basically strong underlying drivers, strong demand for quality names, there could be some other lesser factors that affect it, but I think that is it predominantly.

There is some seasonality in Q2 that will drive this growth, but our models and our forecasts and our guidance, of course, are the only comments we will make about Q2.

Ken, this is George. I would agree that we are very similar to last year at this point in time. We are a little slow out of the gate. I think the website -- you are correct -- it is about 60,000 names, and we are about 30,000 names light from last quarter.

But, as Jim mentioned in the call, because we have more gross adds in the first quarter in that 45-day grace period for deletions, we tend to get more deletions in the second quarter, and we tend to get actually more of them in April than any other month in the second quarter. So that is affecting, I think, the quarter-to-date or the month-to-date numbers that you are seeing today.

But, as we mentioned, we still believe that the growth rate for the domain name base this year will be between 2% and 3.5%, and we believe we will fall within our guidance that we gave of 300,000 to 800,000 names for the second quarter.

Got you. And then, George, maybe on the OpEx line, sales and marketing and G&A were both, let's say, roughly flat sequentially. I think historically it trends down from Q4. Just wondering if there was anything unique to call out in terms of how you guys were spending in Q1?

Yes. So you're absolutely right. We were flat for our OpEx sequentially, but year over year, Q1 to Q1, we were up about $5 million. The year-over-year increases were primarily in marketing and G&A, as you point out. In marketing, we had increased programmatic spend in Q1 of this year relative to last year by about $2.5 million as we pushed out some of our marketing programs earlier in the year compared to last year. So that is really more of a timing issue.

On the G&A front, we were up about $3 million from the year ago period. And the majority of that increase, approximately $2 million was the result of a one-time, non-income related tax accrual that we made in the quarter. But, as we talked about again on the call, or our prepared remarks, we still expect full-year 2015 non-GAAP operating margin to be between 60% and 62% for the full year.

Okay. So that G&A, we should, all things equal, that should step down by $2 million in the June quarter.

We expect that it should come down slightly from Q1, yes.

Gregg Moskowitz, Cowen and Company.

Just a follow on to Steve's question. I know you are still kind of parsing the data set but on the renewal rate because it really had been ticking up nicely, and this quarter in particular saw a significant jump. I'm just kind of wondering, do you have any sense that this is the maturation of the customer base, or is there something different in the way that some of the registrars are engaging with their customers?

Gregg, I think it is a little too early to speculate on that. We do note the slight increase. It has happened both as I mentioned in the first time renewing names, as well as in the previously renewed names. So we are excited about that. We think that is a good trend. But we just need a few more quarters to see if this data point continues on a trend, and we will monitor it and, like I said, we will report back out to you next quarter on that.

Okay. And how many names in the Q1 base represent names that were on hold status?

They were not much changed from Q4. Q4, as I mentioned, was [870] and I think were maybe [890] in Q1. But, again, the domain name base includes those names, and so the 1.5 million net additions is an apples to apples comparison of the increase.

Right. Okay. Perfect. And then, just lastly, I guess a question for Jim. So it does seem like new details. These are starting to gain a little bit more momentum. Just wanted to get your latest thoughts on the opportunity that that represents to VeriSign. I am talking about the backend (inaudible), obviously, not just the IDN. Thanks.

Well, I guess, let me answer that in two parts. Getting more momentum, we do have .realtor and .jobs as backend. .realtor is a good performing name, but those names are available for the first year for free to all accredited realtors. So we are seeing some good growth there, and we hope that will continue beyond the first year.

New gTLDs are at about, I think, just over maybe $5.25 million in total at this point or 14 or 15 months in the market. Comments registered 8.7 million names gross add to this quarter and 1.5 million net for the quarter.

So I think your statement is fair, and we certainly don't guide to specific growth in deployment and revenue production from our backend registry customers. There are still many of them that have not been delegated get. Many of them have not launched their products yet. So I don't want to speculate about what that means for revenue, but I think it is a good trend. We do have nearly 200 -- about 175 or so backend customers. So we should know something in the coming quarter, too, and we will certainly let you know.

(Operator Instructions). Fred Ziegel, Topeka Capital Markets.

A couple of questions. One to George. In an interest rate environment at zero, why are we paying almost 6% on financing? And, Jim, could you talk at all about what is going on outside the DNS business? I have seen a few announcements on the DDoS partnerships. Can you talk to that?

Sure. Fred, this is George. Regarding your first question, I mean, when you look back historically for companies that are rated BB-plus like we are, historically, in the rates that we will be able to attract 4.62% on our first bond and 5.25% today. Historically, those are actually fairly attractive rates.

Clearly, we believe that we can put those funds to good use in the company to drive profitable growth, as well as to drive shareholder returns. So we are looking to do that. We, like others, think that we are at historical lows from an interest rate perspective, and while we don't know when, we do think that rates eventually will increase, and we thought it was a timely opportunity to go into the market, to raise some capital, and we think that the rate that we were able to attract was a very fair rate and favorable rate for the Company.

Fred, this is Jim. If you didn't have a follow-up to George, I will go ahead and answer your second question.

Yes.

Okay. Thanks. Yes. With respect to DDoS, obviously, cyber security is a white-hot space, and DDoS is a very large component of cyber security. DDoS attacks are growing in size and intensity and frequency. And for those on the call who are not familiar, DDoS is a portion of our NIA component, our security unit.

And so some of the recent announcements that we have made relate to a strategy that we are employing where it started with Juniper last year, but, basically, our strategy is to provide an open interface -- a standard, essentially -- to allow those who are using on-premise equipment to provide initial protection against DDoS attacks and mitigate them. It is a way for those hardware vendors to basically write to a spec that allows them to seamlessly transition to in a cloud mitigation using our DDoS protection service.

We think that is really a great trend in the future. It is great for customers. It is a great distribution model for us. It is more efficient. It is part of our ongoing efforts to streamline and optimize our security services unit, so we hope to see a lot more than that, but thanks for noticing that. That is really about an effort on our part to just basically make DDoS protection more available in a way on demand where it is needed to the customers in a way that they want using our service available through the cloud.

Is it getting close to being a reportable number, meaning 10% of your business?

Well, we will let you know as soon as it is. Until then, it is not this quarter, but we will let you know when it is. We continue to see progress and growth. We continue to work on optimizing the strategy, the team, and, more importantly, the distribution model, and the mechanism by which we deliver the technology. We think this will scale much better for us. So stay tuned.

Can you talk about what other initiatives you have got on the security side?

Well, we do have a couple of other components to the NIA unit. One is a managed DNS, which is really more of a performance component, and we do have our iDefense unit, which is a threat intelligence capability. Not only do we provide that service to a number of well-known large clients, we are also a consumer of that service ourselves. We are working on strategies to make those products more widely available and change the distribution model as well.

So yes, we do. It is primarily a threat intelligence capability going to malware, but certainly not limited to that, and a lot of cyber security experts who work in that unit.

Would you be tying into other threat intelligence networks from Palo Alto, FireEye, et cetera?

Well, we have a broad set of customers that include many companies -- well-known security companies who we do feed some of our malware identification services to another threat intelligence. So yes, we work very hard to broaden the market for those services, but it is not limited to end-users. It is, in fact, security companies and firewall vendors of the type you are talking about.

Sterling Auty, JPMorgan.

This is Jackson Ader on for Sterling. A couple of questions from our side. The first theme, just to touch back on the IDN, even with the sunrise period, do you guys have the best guess as to when those will actually go live?

This is Pat. The process that we have to go through, it starts off with what is called pre-delegation, which will happen in early May. And then, there is a controlled interruption phase, which lasts for 90 days which actually has to deal with name collisions and making sure that there is not any unwanted behaviors within the new gTLD space, and then we would launch after that at the earliest. So it really all depends upon, though, getting approval from ICANN on the modified sunrise period and seeing what we can do from there.

Okay. And remind me, you have a little bit of flexibility with pricing, if I am not mistaken. Is that correct? Do you mind just clarifying that for us?

Yes. There are no set prices within the new registry agreements for the IDN TLDs.

And let me just be a bit more specific there, too. We are free to set any initial price that we choose under the new registry agreement, and the only requirement should we choose to change those prices would be a six-month notice period. We have additional flexibility in that we applied for 11 of these IDNs. Most of them are .com. Some of them are .net. All of them are spread across different countries and different local language character sets. And we are free, also, to price differently in those geographies or differently for .com or .net. We have complete flexibility in how we price those products. So that does afford us a great deal of flexibility.

Thanks. That's helpful. And then, the last one from us, just a housekeeping one. How many names are up for renewal in March and in the June quarter?

In the first quarter, there were 29.5 million, and next quarter there are 28.3 million names that are expiring.

That concludes today's question and answer session. Mr. David Atchley, at this time, I will turn the conference back to you for any additional or closing remarks.

Thank you, operator. Please call the Investor Relations department with any follow-up questions from this call. Thank you for your participation. This concludes our call. Have a good evening.