VRSN
#Thank you, operator, and good afternoon, everyone.
Welcome to VeriSign's fourth-quarter and full-year 2016 earnings call.
With me are <UNK> <UNK>, Executive Chairman, President and CEO; <UNK> <UNK>, Executive Vice President and COO; and <UNK> <UNK>, 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 fourth-quarter and full-year 2016 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 upon 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, <UNK> and <UNK> will provide some prepared remarks, and afterward we'll open the call to your questions.
With that, I'd like to turn the call over to <UNK>.
Thanks, <UNK>, and good afternoon, everyone.
I'm pleased to report another solid quarter, which capped another solid year for VeriSign.
The year marked some significant milestones for the internet community and for VeriSign, with the completion of the IANA transition, our signing of the root zone maintainer service agreement with ICANN, and the dot-com registry agreement extension amendment, which extends the dot-com registry agreement until the end of November 2024.
Our fourth-quarter and full-year 2016 results 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.
During 2016, VeriSign delivered strong financial performance, including reporting $1.142 billion in revenues, expanding free cash flow to $666 million, and producing full-year 2016 non-GAAP operating margins of 64.5%.
Operationally, 2016 was a solid year for the Company.
VeriSign processed 35.8 million new dot-com and dot-net domain name registrations, and finished the year with 142.2 million dot-com and dot-net names in the domain name base.
During the year, we marked more than 19 years of uninterrupted availability of the VeriSign DNS for dot-com and dot-net.
As part of managing our business, during the fourth quarter we continued our share repurchase program, by repurchasing 2 million shares for $160 million.
During the full year of 2016 we repurchased 7.8 million shares for $637 million.
Effective today, the Board of Directors increased the amount of VeriSign common stock authorized for share repurchase by approximately $641 million to a total of $1 billion authorized and available under the share repurchase program, which has no expiration.
Our financial position is strong with $1.8 billion in cash, cash equivalents and marketable securities at the end of the year.
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 December, the domain name base in dot-com and dot-net was 142.2 million, consisting of 126.9 million names for dot-com, and 15.3 million names for dot-net.
This represents an increase of 1.7% year over year.
As noted in prior conference calls, the fourth quarter of 2016 was somewhat unique as the volume of domain name registrations up for renewal in the quarter had a larger than normal percentage of first-time renewing registrations, due to the strong performance during Q3 and Q4 2015 coming from China investors.
As first time renewing names have a lower renewal rate than previously renewed names, fourth-quarter 2016 deletes were elevated, and resulted in a domain name base decrease of 1.9 million net names, after processing 8.8 million new gross registrations during the quarter.
This larger percentage of first-time renewing names is also leading to an overall preliminary fourth-quarter 2016 renewal rate of 67.5%.
This preliminary rate compares to 73.3% achieved in the fourth quarter of 2015.
In the third quarter of 2016, the renewal rate was 73%, compared with 71.9% for the same quarter of 2015.
While activity from China has normalized over the last few quarters, the China name surge of late 2015 declined, but did carry over into the first quarter of 2016.
As a result, we expect a small group of names to contribute to a slight increase in deletes towards the end of the current Q1, and the beginning of Q2.
Based on these and other factors, we expect full-year 2017 domain name base growth of between 0.5% and 2.5%, with an increase to the domain name base of between 0.7 million and 1.2 million registrations in the first quarter.
Now, I'd like to provide two updates, before handing the call over to <UNK>.
First, as it relates to our becoming the registry operation for dot-web, on January 18, 2017, the Company received a civil investigative demand from the Antitrust Division of the US Department of Justice, requesting certain information related to VeriSign's potential operations of the dot-web TLD.
The CID is not directed at VeriSign's existing registry agreements.
As we said at the time of the auction last July, we strongly believe VeriSign is well-positioned to grow and widely distribute dot-web to provide an additional option for the TLD, given our proven track record of reliability and stability, and we look forward to explaining our views as we respond to the CID, and continue to cooperate with the DOJ.
Second, we continually evaluate the strategic opportunities for our business, and as you may have seen earlier today, we have decided it is in the best interests to sell our iDefense business to Accenture.
As part of this sale, VeriSign will continue as an iDefense customer, to benefit from the threat intelligence information provided by iDefense.
The announcement of the iDefense sale only relates to iDefense, and is not a sale of our other security services offerings, including DDOS protection and managed DNS.
The terms of this transaction are not being disclosed, and the financials associated with this business are not material to our overall business.
We anticipate closing the next few months, subject to customary closing conditions.
Now, I'd like to turn the call over to <UNK>.
Thanks, <UNK>, and good afternoon, everyone.
For the year ended December 31, 2016, the Company generated revenue of $1.142 billion, up 7.8% from FY15, and delivered GAAP operating income of $687 million, up 13% from $606 million for the full year 2015.
Revenue for the fourth quarter totalled $286 million, up 5% year over year, and down 0.4% sequentially.
This small sequential decline was a result of the 1.9 million reduction in the domain name base during the quarter that <UNK> discussed earlier.
During the quarter, 59% of our revenue was from customers in the US, and 41% was from international customers.
GAAP operating income in the fourth quarter totalled $169 million, up 6.6% from $158 million in the fourth quarter of 2015.
The GAAP operating margin in the quarter came to 59%, compared to 58.1% in the same quarter a year ago.
GAAP net income totalled $106 million, compared to $102 million a year earlier, which produced diluted GAAP earnings per share of $0.84 in the fourth quarter this year compared to $0.76 for the fourth quarter last year.
As of December 31, 2016, 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 $368 million were held domestically, with the remainder held abroad.
I'll now review some additional fourth 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.
Fourth quarter non-GAAP operating expense which excludes $14 million in stock-based compensation totalled $103 million, as compared to $100 million in the third quarter of 2016, and $103 million in the same quarter a year ago.
The sequential increase was primarily a result of increased marketing expenses deployed in the quarter.
Non-GAAP operating margin for the fourth quarter was 63.9%, compared to 62.4% in the same quarter of 2015.
Non-GAAP net income for the fourth quarter was $115 million, resulting in non-GAAP diluted earnings of $0.92, based on a weighted average diluted share count of 125.5 million shares.
This compares to $0.79 in the fourth quarter of 2015 and $0.93 last quarter, based on 133.4 million and 127.8 million weighted average diluted shares respectively.
Dilution related to the convertible debentures was 20.6 million shares, based on the average share price during the fourth quarter, compared with 21.4 million for the same quarter in 2015, and 20.8 million shares last quarter.
The share count was reduced by the full effect of third-quarter 2016 repurchase activity, and the weighted effect of the 2 million shares repurchased during the fourth quarter.
Operating cash flow was $195 million, and free cash flow was $198 million for the fourth quarter, compared with $189 million and $176 million respectively for the fourth quarter last year.
With respect to full-year 2017 guidance, the financial guidance that I will provide reflects the expected completion of the iDefense asset sale within the next few months.
Revenue for 2017 is expected to be in the range of $1.138 billion to $1.158 billion.
Full-year 2017 non-GAAP operating margin is expected to be between 64% and 65%.
Our non-GAAP interest expense and non-GAAP non-operating income net is expected to be an expense of between $93 million and $100 million.
Capital expenditures for the year are expected to be between $35 million and $45 million.
And, finally, cash taxes for the year are expected to be between $15 million and $25 million.
Substantially all of the expected cash taxes in 2017 are international, primarily because of domestic tax attributes, including cash tax benefits from our convertible debentures.
These convertible debentures continue to generate cash tax benefits while they remain outstanding, and they are an important part of our capital structure.
Although we will have the right to redeem these debentures under the terms of the indentures starting August of 2017, our intention, based on current conditions, is not to redeem these debentures, which will allow the cash tax benefits to continue to accrue.
In summary, the Company continued to demonstrate sound financial performance during the fourth quarter and full year 2016.
Now, I'll turn the call back to <UNK> for his closing remarks.
Thank you, <UNK>.
In closing, during the last year, we expanded our work to protect, grow and manage the business, while continuing our focus to provide long term value to our shareholders.
We think that our focus on profitable growth and disciplined execution will extend the long trend lines of growth in our top and bottom line, and will 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.
<UNK>, thanks for the question.
In general, our renewal rates both domestically and internationally have been relatively consistent with one another.
But the vast majority of the decline that we saw in our international renewal rates really related to the China names.
That was the biggest factor.
Everything else stayed relatively consistent for us.
Yes, for the group of names that are similar ---+ the group of names.
It was about 750,000 to 1 million names that came in, in the first quarter of 2016, that was also from what we believed to be the China investor phenomena.
We expect those to have similar renewal rates as the names that renewed in the fourth quarter of 2016.
Sure, I think there is a variety of factors that go into our revenue guidance, which is $1.138 billion to $1.158 billion for next year.
Clearly, we had a very strong 2017.
We were up 7.8%.
I'm sorry, 2016, we were up 7.8% 2016 versus 4.9% 2015.
And as we talked about, a lot of that revenue growth was from a unique event, which was attributed to the strong China investor community.
And as we mentioned, about a third of those names renewed in the fourth quarter.
So we do have some names, as I just mentioned coming up in the first quarter, that should ---+ if they had the same renewal rate, will delete out of a zone sometime in the late first quarter, early second quarter.
And so that is part of what's influencing it.
Also to a lesser extent, you're correct, the iDefense business, we expect that revenue to get out of the business as we close this transaction.
And so without disclosing any details on the iDefense business which we're not, I would say it is really those two factors that are giving our view of revenue today.
And as always we'll update our guidance each quarter, as we get more visibility into the year.
Sure.
Well, I think, in my comments I not only said all I should, I think I said all there really is to say at this point.
There is no information beyond what I told you.
I can give you a little bit more color, I guess.
We certainly said in the past that inorganic growth is part of our growth strategy, and sometimes regulatory review becomes part of that process.
So we received the CID, which is like a subpoena.
We have been discussing it with the DOJ since shortly after we received it.
And we provided some information already, and we're continuing to cooperate.
So like I said in my remarks, we believe we're well positioned to grow dot-web, we think that the industry is extremely competitive.
Beyond that, it is too early in the process to say anything beyond that.
It is just speculation, and I really can't do that.
Well, dot-net was also impacted by the China activity in 2015, and so we did see some of dot-net names also churn out of the zone, in the fourth quarter of 2016.
Dot-net is still a great brand for us, globally.
It's well-recognized, it continues to do well in markets internationally, as well as domestically.
But there is a lot of choice in the domain name industry, and there is clearly competition, whether it be from ccTLDs or other technologies.
But we still are looking to drive demand in dot-net, and it is still a great brand for us globally.
Certainly dot-net is not the brand that dot-com is.
Com is a stronger brand, but there are 15.3 million dot-net registrations.
It's a globally recognized and trusted brand.
It had in the past couple of years actually dipped briefly below 15 million names, and it's recovered.
So I think its growth trajectory is different than dot-com, it is still a very, very strong and recognized brand.
It's the second largest generic TLD behind com.
Well, we currently have three of the transliterations of com and net generally available.
That's two of the Korean or Hangul transliterations, one for com and one for net.
And the Japanese or Katakana script of dot-com.
At this point, we're not providing any additional details on other launches.
As we mentioned last quarter, we do continue to work on our licensing process to operate the Chinese IDNs, and we will update as we develop our plans further.
I don't know if you're on a cell phone.
The very end of that was a little difficult to understand.
You said that other revenue was higher in the quarter, and then you said something else that at least I wasn't able to get.
Try again, please.
I got your first question.
Okay.
Let me address your first question about iDefense.
I think you were asking about strategic rationale.
We've certainly said consistently that we are certainly better suited to be a consumer rather than a producer of threat intelligence.
Our primary business is obviously the secure and stable operation of infrastructure supporting dot-com, and dot-net.
That is our primary mission, that's the most important thing that we do.
We obviously need good cyber defenses in order to do that, but we will continue to be an iDefense customer, and receive it.
But it's a little different than the other security services, and as I mentioned in my remarks this is specifically iDefense, it is not our managed DNS business, and it is not our DDOS protection businesses.
So I think it is just a logical sort of business progression for us.
Your other question was about other revenue and I'll ask <UNK> maybe to address that.
Yes, so there was nothing unusual in the quarter.
I'm not sure how your models track our revenue performance, but nothing unusual from an other revenue perspective.
If I can just throw out some additional color for you, we've had, as you know, a number of different growth initiatives, and we did monetize some patents in 2016, and we expect to do so in 2017 as well, but the amount is not material.
We've adjusted our growth efforts to align with a rapidly-changing domain name market.
Some of those changes include shifts in traditional channels for domain names, possible secondary market activity, and corresponding changes to how we invest in marketing.
While we're planning to realize 2017 revenue from these other efforts, we don't expect it to be material, and none of it is in our guidance.
Yes, sure, <UNK>.
Be happy to.
So if you looked at the quarter from a non-GAAP basis, we had about $103 million of expenses in the quarter.
That was up about $3 million from the third quarter, where we had about $100 million.
And the majority if not all of that increase was spent in the marketing area.
We continue to partner with our registrars, to put more marketing dollars in various markets to drive domain name growth.
So we were able to put that money to work, and we continue to look to opportunities to partner with registrars to do that, in markets that we think can drive profitable growth for us.
The general availability for the earliest ones was not until second quarter of 2016, so we're not up to our first year.
We haven't lapped yet.
I think it's too early to tell.
They are such a different product.
Yes, we don't guide to the renewal rates, but there is only a few more months and that information will be available.
Thank you, operator.
Please call the Investor Relations department with any follow-up questions from this call.
Thank you for your participation in this call.
That concludes our call.
Have a good evening.
