VeriSign, Inc. (VRSN) Earnings Call Transcript & Summary

Good day, everyone. Welcome to VeriSign's Fourth Quarter and Full Year 2019 Earnings Call. Today's conference is being recorded. Recording of this call is not permitted unless preauthorized. 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 Fourth Quarter and Full Year 2019 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 presentation are being webcast from the Investor Relations website, which is available under About VeriSign on verisign.com. There, you will also find our fourth quarter and full year 2019 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, 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 in 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. Good afternoon, everyone. I'm pleased to report another solid quarter for VeriSign that caps off not only a solid year, but also a strong decade in which we focused on our core business, expanded the domain name base and returned value to our shareholders. In 2019, we marked more than 22 years of uninterrupted availability for the VeriSign DNS for .com and .net. 2019 was also a strong year for the .com and .net domain name base as we processed a record 40.3 million registrations and concluded the year with 158.8 million names. Finally, 2019 was characterized by solid financial performance with revenues of $1.232 billion and free cash flow of $714 million. On January 3, VeriSign and ICANN announced a proposed agreement to amend the .com Registry Agreement and a new proposed framework for working together on initiatives related to the security, stability and resiliency of the domain name system in the form of a binding letter of intent between the 2 organizations. Together, these agreements fulfill commitments that ICANN and VeriSign made in 2016 when the .com Registry Agreement was previously amended. The new proposed amendment updates the .com Registry Agreement to reflect certain changes under Amendment 35 to the Cooperative Agreement with the U.S. Department of Commerce, including the pricing changes. According to the terms of the proposed letter of intent, VeriSign will have a onetime commitment to provide $4 million per year over 5 years beginning on January 1, 2021, for ICANN to support activities to preserve and enhance the security, stability and resiliency of the DNS and the Internet. We believe that the activities funded by this commitment will benefit the entire Internet community. ICANN's public comment period for these 2 documents closes February 14. The steps that follow the comment period's closing, according to ICANN's website, are that ICANN staff will prepare a report of the public comments by March 6, 2020, and then ICANN will submit the report to its Board of Directors. Now I'll discuss fourth quarter operational highlights. At the end of December, the domain name base in .com and .net totaled 158.8 million consisting of 145.4 million names for .com and 13.4 million names for .net, with a year-over-year growth rate of 3.9%. During the fourth quarter, we processed 10.3 million new registrations, and the domain name base increased by 1.46 million names. Although renewal rates are not fully measurable until 45 days after the end of the quarter, we believe that the renewal rate for the fourth quarter of 2019 will be approximately 73.7%. This preliminary rate compares to 74.3% achieved in the fourth quarter of 2018 and 72.2% in the fourth quarter of 2017. Looking forward to 2020, we expect the domain name base growth rate of between 2% and 4%. During the fourth quarter, we repurchased 1 million shares of common stock for $195 million. During the full year 2019, we repurchased 3.9 million shares for $738 million. Effective today, the Board of Directors increased the amount of VeriSign common stock authorized for share repurchase by approximately $743 million to a total of $1 billion authorized and available under the share repurchase program, which has no expiration. Our financial position remains strong with $1.218 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. Lastly, regarding .web, as we mentioned last quarter, a hearing on VeriSign and NDC's request to participate in the arbitration process was held last year. We expected a ruling on our request in 2019, but we have been told by the panel that it now hopes to issue its ruling this month. And now I'd like to turn the call over to George.

Thanks, Jim, and good afternoon, everyone. For the year ended December 31, 2019, the company generated revenue of $1.232 billion, up 1.4% from 2018; and delivered GAAP operating income of $806 million, up 5% from $767 million a year ago. As a reminder, revenue growth during 2019 was partially offset by lower revenue from our divested Security Services business as most customers' contracts transitioned to the buyer during the year. For the full year 2019, revenue from U.S. customers was 63% of total, with 37% coming from foreign customers. Fourth quarter revenue came to $311 million, up 1% year-over-year. GAAP operating expense totaled $112 million compared to $103 million last quarter and $113 million in the fourth quarter a year ago. The quarter-over-quarter increase in operating expense is primarily a result of increased investment in our business, including increased sales and marketing programs as well as investments in our operational infrastructure and security capabilities. Fourth quarter operating income totaled $199 million compared with $194 million in the same quarter of 2018. The operating margin in the quarter came to 63.9% compared to 63.1% in the same quarter a year ago. Net income totaled $148 million compared to $182 million a year earlier, which produced diluted earnings per share of $1.26 in the fourth quarter this year compared to $1.5 for the same quarter last year. For the year-over-year comparative results, remember that 2018 results included the gain of our -- on the sale of our Security Services business, which increased fourth quarter 2018 GAAP net income by $52 million and earnings per share by $0.43. Related to non-GAAP results, fourth quarter 2019 non-GAAP operating expense, which excludes $12 million of stock-based compensation, totaled $100 million and was higher sequentially for the reasons I discussed earlier and slightly lower than fourth quarter 2018 levels. Non-GAAP operating margin for the fourth quarter was 67.9%. Non-GAAP net income for the quarter was $154 million, resulting in non-GAAP diluted earnings per share of $1.31. Finally, the full year 2019 non-GAAP operating margin was 69.6%. As a reminder, beginning with the first quarter of 2020 results, we will no longer be presenting nor discussing non-GAAP metrics, with the exception of free cash flow and adjusted EBITDA. As of December 31, 2019, the company maintained total assets of $1.854 billion and total liabilities of $3.344 billion. Assets included $1.218 billion of cash, cash equivalents and marketable securities. Operating cash flow for the fourth quarter was $194 million, and free cash flow was $185 million compared with $219 million and $211 million, respectively, for the fourth quarter last year. The year-over-year difference was primarily related to higher cash taxes in the fourth quarter of 2019 and a lower working capital benefit. I will now discuss full year 2020 guidance, which is now based solely on GAAP metrics. Revenue is expected to be in the range of $1.250 billion to $1.265 billion. This revenue range forecast reflects a growth rate slightly below the expected domain name base growth rate of between 2% and 4% as 2020 revenue no longer reflects any residual revenue from the Security Services business, which in 2019 was about $10 million. GAAP operating margin, which includes stock-based compensation, is expected to be between 64.5% and 65.5%. This guidance range reflects our expectation of incremental investment in our operational infrastructure and security capabilities during 2020. Interest expense and nonoperating income net is expected to be an expense of between $68 million and $75 million. This range reflects both lower nonoperating income from the transition services agreement, which will cease during the first quarter, and lower expected interest income on cash balances. Capital expenditures are expected to be between $45 million and $55 million. The GAAP effective tax rate is expected to be between 18% and 21%. We expect the cash tax rate for 2020 to also be within the same range. In summary, VeriSign continue to demonstrate sound financial performance during 2019, and we look forward to continuing strong execution in 2020. Now I'll turn the call back to Jim for his closing remarks.

Thank you, George. The fourth quarter was another solid quarter for VeriSign, capping a solid year for the company. There was further expansion of the domain name base and year-over-year revenue growth. We generated and efficiently returned value to shareholders. We continued our work to protect, grow and manage the business while continuing our focus on providing long-term value to our shareholders. We'll now take your questions. Operator, we're ready for the first question.

[Operator Instructions] And we'll take our first question today from Rob Oliver with Baird.

A question for you, George. Just on the full year guidance, just curious if you could help us understand what might be in there in terms of -- because we're expecting price increases to roll in starting later this year and if that's been factored in. And additionally, on .web, I know tough to know exactly when that closes, but expecting that it would in '20, obviously less meaningful, but just curious whether those were included in the guide. And then I just had a quick follow-up.

Yes, Rob, we don't guide to price increases. But I can tell you, in our guidance, there are no price increases in the guidance.

And there's no -- none of the guidance that you've been given includes any revenue from .web at this point.

Okay. Great. Very helpful. And then just as a follow-up, I know you also mentioned in your prepared remarks increase in sales and marketing. And just was wondering if -- and domain growth obviously was strong, coming in stronger than expected. Just wondering if that's just kind of normal channel incentive activity or if there's anything else structural going on in terms of driving increased sales and marketing and potential increased spend going forward.

Yes, Rob. So from a marketing perspective, I would say, in general, the programs and types of programs that we ran this year were similar to last year. So there's really not a huge change in what we're doing. Again, if you recall last year, we also had some seasonal increase in sales and marketing in the fourth quarter, and we articulated that in our 10-Q that we filed last quarter, that we expected that to go up as a percent of sales as well.

Next, we'll hear from Nick Jones with Citi.

First, I guess, is there anything noteworthy as far as geographic mix goes? I know China has had an impact on renewal rates. And I guess, given kind of the coronavirus issue there, is that creating any challenges with registrations in that region?

I'm sorry, I didn't catch the second part of the question.

I'm just wondering if the kind of health care issues in China is having an impact on registrations or renewals.

Okay. So yes, I mean, in the fourth quarter, we had a very strong fourth quarter. As Jim alluded to, 10.3 million new additions, which was up from 9.5 million in the fourth quarter of '18. When we look at where that demand came from, it came from registrars based in the United States, Asia Pacific region and EMEA. So as far as renewal rates, again, they vary by geography. It's something we keep an eye on. But as it relates to any virus over in China, we're not seeing any impact to date, but it's something we'll keep an eye on.

Got it. And then one more. The investment with ICANN, can you provide a little more color around kind of what needs improvement and preservation? Is it mostly on going CapEx? Or is there anything kind of figure that you can call out?

So the question, Nick, that was about spend on the infrastructure? Was that the question?

Yes. The $4 million per year over 5 years.