威瑞信 (VRSN) 2015 Q2 法說會逐字稿

Good day, everyone. Welcome to VeriSign's second-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 second-quarter 2015 earnings call. With me are Jim Bidzos, Executive Chairman, President, and CEO; Todd Strubbe, Executive Vice President and COO; 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, www.verisigninc.com. There you will also find our second-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. I'm pleased to report another solid quarter for VeriSign. Second-quarter results were in line with our objectives of offering security and stability to our customers while generating profitable growth and building long-term value for our shareholders. We reported revenue of $263 million, up 4.9% year over year. And we delivered strong financial performance, including $171 million in free cash flow.

We processed 8.7 million new registrations during the second quarter and added 0.52 million net new names, ending with 133.5 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.

Our track record of returning cash to shareholders continued during the second quarter as we repurchased 2.5 million shares for $156 million. As of June 30, 2015, we have $761 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.

Before I get into the second-quarter results, I want to provide a few updates since our last earnings call. Today we announced an increase in the annual wholesale fee for a .net domain name registration, as allowed by our agreement with ICANN.

As of February 1, 2016, the annual wholesale fee for a .net domain name registration will increase from $6.79 to $7.46. As of the end of Q2, there were approximately 15 million .net registered names. Also, as you recall, one way VeriSign has been participating in ICANN's new gTLD program was by applying for internationalized domain name versions of .com and .net.

Based primarily on feedback from domain name community stakeholders, we have revised our IDN launch strategy. We will offer these new IDN top-level domains as stand-alone domain names, subject to normal introductory availability and rights protection mechanisms available to all new gTLDs. This revised approach will not require ICANN approval and is designed to provide end users and businesses with the greatest flexibility; and, for registrars, a simple and straightforward framework to serve the market.

Finally, we believe this approach should provide the best opportunity for increased universal acceptance of IDNs. We expect to begin a phased rollout of the IDNs towards the end of this year. And we'll provide more information on our launch plans when appropriate.

I'll comment now on second-quarter operating highlights. At the end of June the domain name base in .com and .net was 133.5 million, consisting of 118.5 million names for .com and 15 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 second quarter we added 0.52 million net names to the domain name base after processing 8.7 million new gross registrations. In the first quarter of 2015, the renewal rate was 73.4% compared with 72.6% for the first quarter of 2014. 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 2015 will be approximately 72.6%. This preliminary rate compares favorably to 71.8% achieved in the second quarter of 2014.

As we discussed over the last few quarters, there are many factors that drive domain name growth. These include Internet adoption, economic activity, e-commerce activity, and registrar go-to-market strategies. Based on these and other factors, we are forecasting third-quarter 2015 net additions to the domain name base to be between 0.6 million and 1.1 million names.

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 our February earnings call. This website allows you to track the domain name base throughout the coming quarter.

Now I'd like to turn the call over to George.

Thanks, Jim; and good afternoon, everyone. During the second quarter we generated revenue of $263 million, up 4.9% year over year, and delivered GAAP operating income of $149 million, up 4.1% from $143 million in the second quarter of 2014. The GAAP operating margin in the quarter came to 56.7% compared to 57.2% in the same quarter a year ago.

GAAP net income totaled $93 million compared to $100 million a year earlier, which produced diluted GAAP earnings GAAP earnings per share of $0.70 in the second quarter this year compared to $0.71 for the second quarter last year. GAAP net income was lower year over year, primarily based on an increase in interest expense related to the new senior notes and continued interest on the convertible debentures.

As of June 30, 2015, the Company maintained total assets of $2.6 billion. These assets included $1.9 billion of cash, cash equivalents, and marketable securities -- of which $844 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'll now review some of our key second-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'll then discuss our 2015 full-year guidance.

As mentioned, revenue totaled $263 million for the second quarter. 61% of our revenue was derived from customers in the United States, and 39% was from international customers. Deferred revenue at the end of the second quarter totaled $932 million, a $41 million increase from year-end 2014.

Second-quarter non-GAAP operating expenses, which exclude $12 million of stock-based compensation, totaled $102 million -- down from $104 million in the first quarter of 2015 and compared with $98 million in the same quarter a year ago. Non-GAAP operating margin for the second quarter was 61.3% compared to 60.9% in the same quarter of 2014.

Non-GAAP net income for the second quarter was $99 million, resulting in non-GAAP diluted earnings per share of $0.74 using a weighted average diluted share count of 133.3 million shares. This compares to $0.68 in the second quarter of 2014 and $0.74 last quarter, using 141.1 million and 133.8 million weighted average diluted shares, respectively.

Year-over-year non-GAAP earnings per share improved primarily due to a lower share count and the use of a 26% non-GAAP tax rate this year compared with last year's 28% non-GAAP tax rate. Operating cash flow and free cash flow for the second quarter were $175 million and $171 million, respectively, compared with $121 million and $129 million respectively for the second quarter last year.

The year-over-year increase in cash flow was primarily related to last year's second-quarter international cash tax payment related to the offshore repatriation of cash. Also, as we have discussed on recent earnings calls, we expect 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 $1.045 billion to $1.055 billion, representing an annual growth rate of 3.5% to 4.5%. This revenue range is narrowed from the $1.043 billion to $1.057 billion given on our last call.

Non-GAAP gross margin is still expected to be at least 80%. Full-year 2015 non-GAAP operating margin is also still expected to be between 60% and 62%. Our non-GAAP interest expense and non-GAAP non-operating income net is still expected to be an expense of between $104 million and $110 million. Capital expenditures for the year are also 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 second quarter. We have grown non-GAAP operating income, operating cash flow, and free cash flow. We have maintained a strong financial position 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 second quarter we furthered our work to protect, grow, and manage the business while delivering value to our shareholders. 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 operating margins, efficient capital structure, and through the return the value to shareholders by 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.

Just this past week we marked 18 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. As businesses and economic activity rely increasingly on digital infrastructure, availability will become more and more important.

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

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

Thank you very much. I just wanted to go back, Jim, to the revised strategy. And maybe you can just help us understand: what has changed? What is the revision, and how is it different from the original plan you had?

Okay. Originally we had a modified plan for a sunrise offering, where we would reserve some names for certain preregistered names at IDN.com. Based on feedback that we received from the community, it seems that it will work better for everyone -- and the preference on the part of our community, especially brand holders -- is that we offer a standard form of sunrise.

So that means that we will proceed with a standard TLD rollout for all of our IDNs, which does not require any ICANN approval. I think the important difference here in today's news versus what we talked about to you a quarter ago is that we no longer are waiting or require any ICANN approval.

And we have some more certainty around the timing in rollout. We know what we need to do now. We have these set activities that precede an actual rollout. So we can say with some confidence that our staged rollout of our 11 IDNs will begin by the end of the year.

And under the previous plan, you had really hoped to provide, I think, more protection to brand holders by extending the sunrise period and making sure that a name a .com holder had the rights to -- they would be the only ones who would have the rights to the new IDNs. Are you saying now that the third parties after the sunrise period would be able to buy some of these IDNs?

Under some circumstances that might be possible. There are a number of different approaches that are available to all TLD registries under the new RA that we signed, the new registry agreement. And so our marketing plan could include some of the capabilities that you talked about.

What we aren't doing is specifying a plan that requires approval from ICANN that doesn't contain some of the precise sunrise provisions that were there before. It's a standard sunrise that will be rolled out. And I would like Pat to comment further on that part of the process.

Another thing that we've -- we would contemplate changing is to not hold a reservation for grandfathered .com registrations during the sunrise. And that's the modification that we were trying to get approval from ICANN on, and we've taken that out. So we can move forward.

Perfect. Thank you.

Sterling Auty, JPMorgan.

Thanks. Hi, guys. Wondering first, on the IDNs, will all of your IDNs roll off simultaneously? Or will it be a phased rollout beginning at the end of the year?

The rollout will be phased. We are not going to roll out all 11 at once. You shouldn't expect that we are going to sequentially space out 11, either. It will be phased. It will be based on a number of different considerations -- certainly the size of each market, the complexity of each market, the opportunities that exist will all be factors. But we can say that the rollout will begin before the end of the year.

Is there any update on pricing that you are willing to give us at this point?

Only that we're still working on it and that, as you know, we do have complete flexibility by each individual IDN and by each region. So we also have the flexibility to utilize premium pricing. There are a number of different -- of course, it's very different from the provisions of the .com registry agreement. So we have tremendous flexibility, so we are working through that. But I don't expect that to slow down the rollout. And it is a bit early for us to describe to you what that pricing will be.

And last question: have you guys done any additional work to get a sense of what the .com and .net base looks like in each of the regions that you are going to roll out an IDN? So in other words, is there any sense of what we can expect in terms of uptake once they launch?

I'm not sure I understand your question exactly, Sterling. Are you saying that -- in announcements of the existing --?

If you look at where those IDNs are targeted in terms of the languages -- so if you look at the countries of those languages -- we talked a little bit about this last quarter -- I didn't know if you went back and did any additional work; just, say, well, of the .com base, we see this many names in that region; and if you take a reasonable percentage that might also want that IDN, here is what the uptake might look like.

Well, first of all, we don't have precise visibility into that, because of course we're working through registrars. And not all the Whois data is available to us. So it's not with great precision that we understand exactly what the distribution of .com registrations is geographically. But of course we do have some idea, and we are very aware of that. And that certainly factors into our plans. But I'm not sure if I answered your question.

No, I think that's fine. Thanks, guys. I appreciate it.

Gray Powell, Wells Fargo.

Thanks. This is actually Priya Parasuraman in for Gray. Could you talk about renewal rates, especially with respect to first-time and previously-renewed rates and also across geographic markets?

Sure. So this is George Kilguss. Your first question was on renewal rates. So our renewal rate for the second quarter was 72.6%, clearly up from 71.8% a year ago. We continue to see improvement in that renewal rate, primarily as a result of previously-renewed names.

We saw about a 70% -- 70 basis points increase year over year to about 82.6% for previous renewed rates. First-time renewal rates are close to 50% still. So most of the improvement we've seen have been in previously renewed rates. As far as domestic -- I think you were asking about different geographies --.

Right.

They haven't changed too much from previous reports. We do see first-time renewal rates being a little lower in emerging markets, whether those be markets in Asia-Pacific, or India, or greater Asia markets, than we do here domestically. But we continue to see strength in the previously-renewed names.

Thanks. Just one more: could you talk about your new DNS file product and how it's been received so far?

Sure. It's a fairly new product, so it's a bit early to give you any real detail -- financial detail. But we can tell you that the reception is good in the market. There's tremendous interest in it. Most large enterprises and virtually all ISPs do operate their own recursive servers, and we operate our recursive service as well.

The market feedback that we received was that a firewall would be a very, very welcome and important aspect of that to give these customers more precise control over filtering access -- using the DNS as essentially another layer to prevent malware, which is, of course, something that's on everybody's mind these days. So I would certainly say that the initial response from the market is good.

There's tremendous interest, particularly in the firewall aspect of this recursive service. So we're certainly hoping for success with the product. But it's early to really give you any more detail than that. But specifically to answer your question, the initial reception is strong interest and very much so, specifically in the firewall aspect.

Thank you.

(Operator Instructions) Gregg Moskowitz, Cowen and Company.

Thank you very much and good afternoon, guys. There seems to be more volatility in net adds activity over the past six to nine months than anything we've seen, probably, over the past five-plus years. And I know there's been recent promotional activity that's on and off, but that's always been the case, in some fashion at least. So I'm just wondering if there's anything that you would kind of point to that might be driving some of the volatility in net adds from month to month or quarter to quarter?

Gregg, this is George. I mean, there are many, many factors that happen inter-quarter or inter-year with domain names. Clearly we have varying growth rates in markets around the world, as I had mentioned last quarter, and it holds true for this quarter as well.

We still see more growth internationally than we do domestic. Our Asia, in general, markets are growing much faster. But as far as the individual nuances for the .net zone, some of those factors hearken back to promotions that registrars may have run a year ago and their respective renewal rates and effectiveness of those programs.

Other issues may go to programs running this year that are driving net adds. So it's really a confluence of, obviously, adds and deletes. You are probably seeing more volatility only in the sense that the net adds in each quarter from several years ago are smaller than they used to be -- or they are currently. But we saw 500,000 net adds in the second quarter. As you can see our guidance -- we are expecting, just like last year, the third quarter to continue to improve quarter over quarter. And we still see strong demand for our product globally.

Okay. Great. Thanks, George. And then just one follow-up, if I could, on .net names. So the attrition of .net did pick up a little bit in Q2. Obviously you are going to be raising pricing by 10% in Feb of next year. Just wondering if there are kind of any concerns that you might have around price elasticity for .net? Thank you.

Sure. We still believe that the .net product is a very fairly priced asset in the marketplace. We look at a lot of the competitors who are priced higher than we are; we think there's a lot of value in that brand. And yes, .net's growth has been a little bit muted. But as we talked about, you have to keep in mind there's been over 700 new competitors entering the marketplace -- a lot of those clearly targeting both the .com and .net and the other legacy gTLDs.

But clearly .net probably has been more affected than .com has, even though I think they've been both targeted from competitors. But .net has held up very well. We think the product is quite well priced in the marketplace and fairly priced for the value of asset that we're delivering and the value of the product. So we expect .net to continue to perform.

Great. Thank you very much.

Fred Ziegel, Topeka Capital Markets.

I guess this might be for Pat. In your .brand customer base that you are working with, what's your sense of how they are thinking about it from the perspective of -- are they going to move from .com to .xyz or whatever? Or are they more thinking that this will be an incremental domain?

So not all of our brand customers have determined exactly how they are going to use their top-level domains. But we would imagine that some would complement their current .com with their own offering. But we don't see them abandoning their .com.

And just to clarify -- this is Jim -- I'm not sure what you meant by your question, but there can be two answers to that. Number one is -- the way you put it, I assume you meant .brand, where customers may take their own. And I think Pat is right.

So, for example, if we were to employ verisign, we would never abandon verisign.com. Like most brands, we've invested heavily in promoting it. And everybody is familiar with it. And it would simply -- we would probably redirect traffic from one to the other; we would never abandon it. Since we run the registry -- we would be running the registry for both .com and for .verisign, for us it's the same reliable platform.

But we do see -- we are aware of some brands who -- in fact, most of the .brands that have applied, many of them are our back-end registry customers. So they are not only keeping their .com, but they are also moving their .brand onto our platform to make sure that it runs on the same reliable 18 years of 100% availability infrastructure that we operate. At this point I think the traffic for anybody in .com is so valuable that I don't see anybody abandoning their .com for either .brand or for another TLD.

So the answer shortly -- I guess it's largely incremental as opposed to cannibalizing .com?

Well, I think if you just look at the numbers for .com in net adds, you will see that, being the powerful brand that it is, it's still growing quite briskly. So I think those numbers speak for themselves; .com is the reliable brand, and people are choosing great names in it. And the registration numbers are strong.

It's in demand. And people are registering .coms. And, of course, needless to say, all of the global brands are on .com. And I don't expect that to change.

Okay. Thanks.

And there are no further questions at this time. I'd like to turn the conference back over to Mr. David Atchley 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.