VeriSign, Inc. (VRSN) Q1 2015 Earnings Report, Transcript and Summary

Good day, everyone, welcome to the VeriSign's First Quarter 2015 Earnings Call. Today's conference is being recorded. An unauthorized recording of this call is not permitted. At this time, I'd 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 and 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 had a 1.51 million net new names ending with 133 million dotcom and dotnet 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 31st 2015 we have 917 million remaining in our share repurchase program which has no exploration. 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'll comment now on a few recent events. In March I was pleased to announce the appointment of Todd Strubbe as the 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 the five and quarter percent coupon. We're 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 [Indiscernible] program was by applying for internationalized domain name transliterations of dotcom and dotnet. As mentioned during the last earnings call we have side 11 IBM TLP…

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 of 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 bare 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 500 million senior secured notes due 2025. As of March 31, 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 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'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 2015 full year guidance. As mentioned,…

Thank you, George. During the first quarter we further our work to protect grow and manage the business while delivering value to our shareholders. We continue to protect the business by providing more than 17 continues years of 100% availability of the dotcom and dotnet DNS. This previous record is due to the expertise of our people in 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, technology and services. Finally we've 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'll now take your questions. Operator we are ready for the first question. Question-and-Answer Session

Thank you. [Operator Instructions]. Will take our first question from Steven Ashley with Robert W. Baird.

I guess first of all I was going to ask about the [position with icon] for the modified sunrise period has not got response back yet is there any anymore color you can provide has there been a dialogue are you are aware of the situation or is there any color you can provide around that?

The only update that we have at this point is that we've taken a step of filling the [RCEP] it's a common practice it's a normal method available to anybody who wants to modify registry service and so we've employed it. At this point I cannot make this evaluation and respond so we are waiting for that response but we just submitted it recently in this quarter.

Perfect. And just lastly from 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 Kilgus. So, as we mentioned our fourth quarter filed renewal rate came in at 72.5% versus the 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 about 90 basis points from 72.6% in the year ago period we're seeing that improvement come from both first time renewing names as well as previously renewed names and we're pleased with that result. As far as what that data point for future renewal rates I think it's a bit early to speculate there but we'll keep an eye on it and report that got 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 then improvement in international rates for previously renewed names. Domestic previously renewed renewal rates were relatively flat in the first quarter, again the renewal rate is preliminary, we will give you the final rate in next call but we're pleased to see that renewal rate has increased in the quarter.

Thank you. [Operator Instructions] And will take our question from Walter Pritchard with Citi.

Hey, guys. This is [Indiscernible] for Walter. This first question for maybe Jim or Pat if you are there you guys hit the high end of your range on the zone file in Q1 and I guess the early trend in Q2 looks like a little bit more average [Indiscernible] counts about 50,000 net as it. Any activity in Q1 that you think you guys might have done to maybe go 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's just simply due to fundamental demand for the strong dotcom brand and the growth that we've alluded to in the past particularly in Asia. So I think basically strong underline drivers, strong demand for quality names, there could some other or less factors that affected but I think that's it predominately. 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'll make about Q2.

Ken, this is George Kilguss, I would agree that we're very similar to last year at this point in time, we’re a little slow out of the gate. I think the website you're correct it's about 60,000 names and we're about 30,000 names light from last quarter, but as Jim mentioned in 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's affecting I think the quarter-to-date or the month-to-date number that you’ve seen today, but as we've 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 will fall within our guidance that we gave 300,000 names for the second quarter.

Got you and then George maybe on the OpEx lines, sales and marketing and G&A were both roughly flat sequentially. I think historically it trends down from Q4 just wondering if there was anything you need to call out in terms of how you guys are spending in Q1?

Yes, so you're absolutely right we were flat for 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 have increased programmatic spend in Q1 of this year relative to the last year by about 2.5 million as we pushed out some of our marketing programs earlier in the year as compared to last year so that's 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 onetime 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 I mean 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.

Thank you. We'll take our next question from Gregg Moskowitz with Cowen & Company.

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

So Gregg, this is George. I think it's 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 previous renewed names. So we're excited about that. We think that's a good trend, but we just need a few more quarters to see if this data point continued on our trend and we'll monitor it, and like I said, we report back out to you next quarter on that.

Okay and how many names I guess in the Q1 are base represent names that they were on and on hold status?

So they weren't much changed from Q4, Q4 as I mentioned was 870 and I think we're 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.

Okay right perfect and then just lastly, I guess question for Jim, so it does seem like new gTLDs are starting to gain a little bit more momentum just wanted to get your latest thoughts and opportunity that represents to VeriSign, talking about the backend gTLD obviously not the IDN? Thanks.

Well, I guess let me answer that in two parts. Gaining more momentum, we do have dot realtor and dot jobs as backend, .realtor is a good performing name but those names are available for the first year for free to all, all of credited realtors. So we're seeing some good growth there and we hope that will continue beyond the first year. New gTLDs are all about I think just over maybe 5.25 million in total at this point 14 or 15 months in the market. Comments were I just heard 8.7 million names gross adds this quarter and 1.5 million net for the quarter, so I think -- but I think your statement is fair and we certainly don’t guide to specific growth and deployment and revenue production from our backend, registry customers are still many of them that enough and delegated yet. Many of them not launched their products yet. So I don't want to speculate about what that means for revenue, but I think it's a good trend. We think we do have nearly 200 about our 175 or so back end customers so we should know something in the coming quarter to and will certainly let you know.

[Operator Instructions] And will take a question from [Indiscernible]

Hi, guys. Couple of questions one to George in an interest rate environment at 0% why are we paying almost 6% for financing and to Jim could you talk at all about what's going on outside the DNS business I've seen a few announcements on the DDoS partnerships that talk to that?

Sure. So, Fred this is George. Regarding your first question I mean when you look back historically for the companies that are rated DD plus like we are historically a rate and the rate could be a little attract 4.62% on our first bond and 5% in a quarter, 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're looking to do that. We like others think that we're on historical loads 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're able to attract was a very fair rate and favorable rate for the company.

And 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 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 in it and so the were some of the recent announcements that we’ve made relate to a strategy that we're 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’s a way for those hardware vendors to basically right to expect that allows them to seamlessly transition to in a cloud mitigation using our DDoS protection service, we think that's really a great trend in the future it's great for customers, it's a great distribution model for us, it's more efficient it's part of our ongoing efforts to streamline and optimize our security services unit, so we help to see a lot more than that but thanks for noticing that, that's really about an effort on our pipe such as basically make DDoS protection more available in a way on demand where it's needed to the customers in a way that they want using our service available through the cloud.

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

We'll will let you know as soon as it is till than it’s not this quarter but we'll let you know what it is we continue to see progress and worth we can 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 was scale much better for us so stay tuned.

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

While we do have a couple of other components to the NIA unit one is a manage DNS which is very 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're working on strategies to make those products more widely available and change the distribution model as well so yes we do it 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 and intelligence networks from [Indiscernible] etcetera?

While we have a broad set of customers that include many companies well know security companies so we do think some of our malware identification service as to and other trade intelligence so yes we work very hard to broaden the market for those services but it's not limited to hand users it is in fact security companies and fire wall vendors of the type you are talking about.

Thank you. Will take our last question from Sterling Auty with JPMorgan.

Hi, guys this is Jackson [Indiscernible] for sterling. Couple of questions from our side the first thing 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 up?

So, this is Pat. So there is a process that we have to go through start off with what's call pre-delegation which will happen in early May and there is a controlled interruption phase which last for 90 days, which actually have to deal with the main collisions and may concern that there is not any unwanted behaviors within the new gTLD space and don't get launched after that at the earliest, so it all really depends upon the getting approval from ICANN on the modified Sunrise period and see what we can do from there.

Okay and remind, these you have a little bit flexibility with pricing if I am not mistaking, is that correct do you might just clarifying that for us?

Yes, there are no shared prices within new registry agreements for the IDN and gTLDs. 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 that should we choose to change those prices would be a six-month notice period. We have additional flexibility in that applied for 11 of these IDNs. Most of them are .com some of them are.net. All of them are spread across different countries in different local language character sets and we are free also to price differently in those geographies or differently for [congruent]. We have complete flexibility on 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 just a housekeeping one, how many names are up for renewal in March and in the June quarter?

So 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.