威瑞信 (VRSN) 2017 Q2 法說會逐字稿

Good day, everyone, and welcome to VeriSign Second Quarter 2017 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, VP of Investor Relations and Corporate Treasurer. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. Welcome to VeriSign's Second Quarter 2017 Earnings Call. With me are Jim Bidzos, Executive Chairman, President and CEO; Todd Strubbe, Executive Vice President and COO; and George Kilguss, Executive Vice President and CFO.

This call and our presentation are being webcast from the Investor Relations section of our verisign.com website. There you will also find our second quarter 2017 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 Forms 10-K and 10-Q, 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 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 are 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 $289 million, up 0.7% year-over-year and delivered strong financial performance, including non-GAAP EPS of $1.05 and $171 million in free cash flow. During the second quarter, we continued our share repurchase program by repurchasing 1.7 million shares for $150.5 million. Our financial position is strong, with $1.8 billion in cash, cash equivalents and marketable securities at the end of the quarter. We continually evaluate the overall cash and investing needs of the business and consider the best uses for our cash, including potential share repurchases.

At the end of June, the domain name base in .com and .net was $144.3 million, consisting of 129.2 million names for .com and 15.1 million names for .net. The domain name base increased by 0.68 million net names during the second quarter after processing 9.2 million new gross registrations. Although 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 2017 will be 73.9%. This preliminary rate compares to 73.8% achieved in the second quarter of 2016.

We are updating the full year 2017 domain name base growth guidance to be between 2% and 2.75%. Also, we expect the domain name base to increase during the third quarter between 0.8 million to 1.3 million registrations.

I'll comment now on a few recent events. In June, the .net registry agreement between VeriSign and ICANN was successfully renewed. The new agreement does not contain changes to the material terms such as pricing terms, renewal rights, the 6-year term or fees paid to ICANN.

Also in June, we issued $550 million of senior unsecured notes with a 4.75% coupon maturing in 10 years. This offering closed in early July, and we're pleased with the result of this issuance.

Lastly, 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, 2018, the annual wholesale fee for a .net domain name registration will increase from $8.20 to $9.02. We believe this positions .net competitively in the marketplace while keeping .net price lower than other popular legacy TLDs.

And now I'd like to turn the call over to George.

Thanks, Jim, and good afternoon, everyone. Revenue for the second quarter totaled $289 million, up 0.7% year-over-year. During the quarter, 60% of our revenue was from customers in the U.S. and 40% was from foreign customers. As it relates to our GAAP results, operating income in the second quarter totaled $175 million compared with $176 million in the second quarter of 2016. The operating margin in the quarter came to 60.6% compared to 61.5% in the same quarter a year ago.

Net income totaled $123 million compared to $113 million a year earlier, which produced diluted earnings per share of $0.99 in the second quarter this year compared to $0.87 for the second quarter last year. The second quarter include a pretax gain of $10.6 million on the sale of the iDefense business, which increased GAAP diluted earnings per share by $0.09.

As Jim mentioned earlier, the company continues to manage its capital structure. Earlier this month, we took advantage of what we felt were favorable market conditions and added another long-term fixed rate piece of debt into our capital structure. The 10-year note issuance, which totaled $550 million, is scheduled to mature on July 15, 2027, and carried an interest rate of 4.75%. As this offering closed in early July, our second quarter ending balance sheet does not reflect the net proceeds from this issuance.

As of June 30, 2017, the company maintained total assets of $2.3 billion and total liabilities of $3.5 billion. Assets included $1.8 billion of cash, cash equivalents and marketable securities, of which $269 million were held domestically with the remainder held abroad.

I'll now review some additional second quarter financial metrics, which include non-GAAP operating margin, non-GAAP earnings per share, diluted share count, operating cash flow and free cash flow. I will then discuss our 2017 full year guidance.

As it relates to non-GAAP metrics, second quarter operating expense, which excludes $13 million of stock-based compensation, totaled $100 million as compared to $99 million in the same quarter a year ago and $101 million in the first quarter of 2017. Non-GAAP operating margin for the second quarter was 65.3% compared to 65.4% in the same quarter of 2016. Non-GAAP net income for the second quarter was $130 million resulting in non-GAAP diluted earnings per share of $1.05 based on a weighted average diluted share count of 124 million shares. This compares to $0.91 in the second quarter of 2016 and $0.96 last quarter based on 130.6 million and 124.5 million weighted average diluted shares, respectively.

Results for the second quarter included pretax gain of $10.6 million on the sale of the iDefense business, which increased non-GAAP diluted earnings per share by $0.06. As noted in our last earnings call, beginning with the second quarter financials, we are now using a 25% non-GAAP tax rate when reporting non-GAAP results.

Operating cash flow for the second quarter was $181 million and free cash flow was $171 million compared with 161 -- $167 million and $161 million, respectively, for the second quarter last year.

Dilution related to the convertible debentures was 22.5 million shares based on average share price during the second quarter compared with 21.9 million for the same quarter of 2016 and 21.3 million shares last quarter. The share count was reduced by the full effect of first quarter 2017 repurchase activity and the weighted effect of the 1.7 million shares repurchased during the second quarter.

With respect to full year 2017 guidance, revenue for 2017 is now expected to be in the range of $1,155,000,000 to $1,165,000,000 increased and narrowed from the $1,145,000,000 to $1,160,000,000 range provided on our prior earnings call. Full year 2017 non-GAAP operating margin is still expected to be between 64.5% to 65.25%. Our non-GAAP interest expense and non-GAAP nonoperating income net is now expected to be an expense of between $103 million and $110 million as compared with the $93 million to $100 million range provided on our last call, reflecting the additional senior note interest expense from the recent issuance.

Capital expenditures for the year are now expected to be between $40 million and $50 million, changed from the $35 million to $45 million range provided on our last call. And cash taxes for the year are still expected to be between $20 million and $30 million. The majority of expected cash taxes in 2017 are foreign, primarily because of domestic tax attributes, including cash tax benefits from our convertible debentures.

As we said in prior calls, these convertible debentures are an important part of our capital structure and our intention, based on current conditions, is not to redeem these debentures as they become redeemable in August of this year, which will allow the tax benefits to continue to accrue.

In summary, the company continue to demonstrate sound financial performance during the second quarter of 2017.

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

Thank you, George. In closing, during the second quarter, we continued our work to protect, grow and manage the business while continuing our focus on providing long-term value to our shareholders.

We have marked some significant milestones since our last call. In addition to renewing the .net registry agreement with ICANN for another 6 years, earlier this month, the company surpassed 20 continuous years of 100% availability in the .com and .net DNS. This record is the result of the expertise of our people and our specialized infrastructure.

We believe our focus on profitable growth and disciplined execution will extend the long trend lines of growth in our top and bottom line and allow us to continue our consistent track record of generating and returning value to our shareholders in the most efficient manner.

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

(Operator Instructions) We'll go first to Rob Oliver with Robert W. Baird.

This is Matt Lemenager on for Rob. Question on the strength of the domain name activity quarter to date in the guidance, it's a little bit above what maybe we expected at least a few quarters ago at $0.8 million to $1.3 million. Because we think about what is driving that strength. Is there any direction that you can point us? Is it perhaps promotional activity or international domain name? I don't know, if there's any color you could add there.

I think probably the biggest contributors there are or there is some strengthening in the economy. There's more economic activity, which generally contributes to domain name growth. But I also think the strong brands that common net represents, their strong, recognized, trusted global brands are showing their strength and contributed to that good performance as well.

The only other point I'd put on that, Rob, is as you saw in the first quarter, we had also good demand coming out of the U.S. market and that strength in the U.S. continued into the second quarter.

Great. And then just one other question on the -- on the expense structure. Are there any expenses that are kind of more second half weighted as we think about the EBIT margin guidance, we've kind of been above -- the word -- at the high end of that range for the full year guide? Is there anything for the second half, that may be expenses that are second half-specific that would cause that EBIT margin to come in at that lower end of that guide?

Well, we provided our guidance for our non-GAAP operating margin for the full year just now, but as far as how expenses flow, what we've outlined in our 10-Q is we do expense our sales and marketing expenses to be higher in the second half of the year. But we'll continue to manage all the expenses of the business, and we expect to be within the non-GAAP operating margin of between 64.5% to 65.25%, just given earlier.

And we'll go next to Sterling Auty with JPMorgan.

This is Ugam Kamat on for Sterling Auty. Just to expound on the domain name question. You said about the strengthening economy in the U.S. that is driving the growth in domains. What are you seeing within the international market currently versus what you saw about a year ago? And how should we think about it going forward?

Well, is that -- let me see if I understand your question properly. By international markets, I can point to one thing that has changed. We did mention in several past quarters that the so-called China surge, which began in late 2015 and continued into 2016 including the second quarter, of course, affected renewals for 2017. We believe now that, that effect, the China effect, so to speak, has pretty much pushed through the system. So I think that might be a factor. Certainly, some activity I would point to in terms of the international market. There is general strong growth in the international market. But as George pointed out, some growth in the U.S. market in the first quarter continued into the second quarter as well. So there are good signs. There's general growth outside the U.S. and an economic activity in the U.S. has contributed to some continuing growth here.

Perfect. That's really helpful. And another one on expenses. Operating margins came somewhere around 65.3% versus somewhere 66% we were estimating. Any particular expenses that were higher within the quarter that related to -- that led to the dipping of margins?

So we did see a slight increase in G&A expense in the quarter. During the quarter, we purchased some additional software licenses for the core business, and we also had slightly higher legal fees in the quarter. But again, on a non-GAAP basis, we were pretty much flat. We can consistently be around that $100 million non-GAAP operating expense level.

Okay. And if I could sneak one more in. Where are you currently in the .web entry lawsuit? And what is the normal procedure and time line you are expecting with that particular suit?

Well, there's really no update to provide on .web at this point. With respect to our interactions with the Department of Justice, we continue to cooperate with DOJ as it pertains to the CID we discussed last quarter. That dialogue is constructive -- has been constructive. We produced the documents with information. We'd answered questions as needed. And we're meeting with the department. So that's an ongoing process and beyond that, there's really nothing to say at this point.

And we'll take our last question from Gregg Moskowitz with Cowen & Company.

Just, I guess, to start off, a follow-up on that last -- on one of those last questions. I was wondering if you might be able to, George, put a finer point on the amount of excess G&A expense in Q2 just for us to get a little bit of a more normalized sense of the OpEx?

Not sure what you mean by excess expense, Gregg. We continue to manage all the lines of expenses throughout the business, pretty much on a quarterly and monthly basis. And each quarter, there's always going to be some type of expense that comes in that might not have been planned or one might call nonrecurring. But I think if you continue to call those out, any expense you could almost view is nonrecurring. As I said, in the quarter, we did purchase some additional software licenses in the quarter, and we did have some higher legal costs in the quarter. But we will have, from time to time, the need to purchase additional software licenses in the business, and we'll have the need to spend additional money from a legal perspective for the company. And so again, I'd look back at the big picture, on a non-GAAP basis, total expense was a little over $100 million, $100.7 million. And compared to last quarter, which was a similar amount and year-over-year, I believe, it was $99 million a year ago quarter versus $100 million there. We did have a little bit higher stock-based compensation in the quarter on a GAAP basis and that's really a function of 2 areas. One, since last year, we have brought on some additional senior management to the company, in particular, (inaudible), an SVP of Product. And then we also, as a senior management team, do have some longer-term incentive programs and as we continue to execute on our plan and deliver on results over and above some of the goals that were set, we do have some accelerators that are going to accrue there as we continue to execute. So we'll continue to try to do that. But again, from a GAAP perspective, we had a little bit more stock-based compensation. And as I said, we had a few other nits and nat in the quarter. But in general, very consistent with the year-ago period as well as sequentially.

Okay. That's helpful. And then I guess, just one other question. As you noted in your prepared remarks, you recently issued a little over $500 million in debt. Are you looking to put that to work in relatively short order? Or can you give us an update on what you plan to do with the cash?

Sure. So as you point out, we absolutely added some additional debt to capital structure. And as you know, as a company, we try to actively manage that capital structure. One of the things that we clearly look at and monitor is our ability to erase debt in the market and the ability to execute it and also with the -- with interest rate, we can do that. And when we look at the market, we felt that where the market was, it was an attractive time for us to go add another piece of long-term capital to our capital structure. So as far as use of proceeds, as we mentioned in the offering, we plan to use those proceeds for general corporate purposes that would also include potential share repurchases. As you know from following us, we don't guide the share repurchases. But we try to be very prudent with the capital of the company, and we'll continue to look for ways to generate positive returns for the shareholders.

And with that, I'd like to turn the conference back over to 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.

Again, this does conclude today's presentation. We thank you for your participation.