VeriSign, Inc. (NASDAQ:VRSN) Q1 2019 Earnings Conference Call April 25, 2019 4:30 PM ET
David Atchley - Vice President of Investor Relations & Corporate Treasurer
Jim Bidzos - Executive Chairman, President & Chief Executive Officer
Todd Strubbe - Executive Vice President & Chief Operating Officer
George Kilguss - Executive Vice President & Chief Financial Officer
Conference Call Participants
Sterling Auty - JPMorgan
Nick Jones - Citi
Rob Oliver - Baird
Good day, everyone. Welcome to VeriSign's First Quarter 2019 Earnings Call. Today's conference is being recorded. 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 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 our presentation are being webcast from our Investor Relations website, which is available under About VeriSign on verisign.com. There you'll also find our first quarter 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 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. Good afternoon everyone. I'm pleased to report another solid quarter for VeriSign. First quarter 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. At the end of March, the domain name base in .com and .net totaled 154.8 million, consisting of 141 million names for .com and 13.8 million names for .net with a year-over-year growth rate of 4.4%.
During the first quarter, we processed 9.8 million new registrations and the domain name base increased by 1.82 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 first quarter of 2019 will be approximately 75%. This preliminary rate compares to 75.3% achieved in the first quarter of 2018. For 2019 full-year, we now expect the domain name base growth rate to be between 2.5% and 4.25%. Last quarter, we said that we began the process with ICANN to incorporate features of Amendment 35 to the Cooperative Agreement including the pricing terms into the .com Registry Agreement. There are no updates to share at this time, but we continue to be engaged in this process that may take some number of months to complete.
Just to remind those not familiar with this process under the 2016 amendment that extended the term of the .com Registry Agreement, we also agreed to negotiate in good faith the flow-through changes made in the Cooperative Agreement, including the pricing terms and to preserve and enhance the security and stability of .com or the Internet. We are negotiating these items now, and we'll update you as appropriate.
During the first quarter, we continued our share repurchase program by repurchasing 1.0 million shares of common stock for $175 million. Our financial position remains strong with $1.25 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.
And now, I'd like to turn the call over to George.
Thanks Jim, and good afternoon everyone. First quarter GAAP results produced revenue of $306 million, up 2.4% year-over-year. Operating expense totaled $106 million, compared to $114 million last quarter and $113 million in the first quarter a year ago. Within the quarter were lower sequentially, primarily due to the elimination of approximately $3 million of costs associated with our Security Services sale last quarter, and the seasonal timing of marketing program spend. Operating income totaled $200 million, compared with $185 million in the first quarter of 2018. The operating margin in the quarter came to 65.4%, compared to 62% in the same quarter a year ago.
Net income totaled $163 million, compared to $134 million a year earlier, which produced diluted earnings per share of $1.35 in the quarter this year compared to $1.09 for the same quarter last year.
As of March 31, 2019, the company maintained total assets of $1.9 billion and total liabilities of $3.3 billion. Assets included $1.25 billion of cash, cash equivalents and marketable securities of which $685 million were held domestically with the remainder held abroad. During the quarter, we repatriated $249 million from our international entities net of withholding taxes.
I'll now review some additional first quarter financial metrics, which include non-GAAP operating margin, non-GAAP earnings per share, operating cash flow and free cash flow. I will then provide updates to our 2019 full year guidance.
As it relates to non-GAAP metrics, first quarter non-GAAP operating expense, which excludes $12 million of stock-based compensation totaled $94 million, compared to $102 million last quarter and $101 million in the first quarter a year ago. Operating margin for the first quarter was 69.4% compared to 66.7% last quarter and 66.3% in the same quarter of 2018.
Non-GAAP net income for the first quarter was $158 million resulting in non-GAAP diluted earnings per share of $1.31 based on a weighted average diluted share count of 120.3 million shares. This compares to $1.58 last quarter and $1.07 in the first quarter of 2018. Last quarter's non-GAAP diluted earnings per share included a $0.36 benefit due to the gain related to the sale of our Security Services customer contracts.
Operating cash flow for the first quarter was $187 million and free cash flow was $178 million compared to -- with $90 million and $82 million respectively for the first quarter last year. Last year's first quarter 2018 cash flow included higher cash taxes related to international withholding taxes associated with last year's repatriation activities as well as higher cash interest related to our convertible debentures before they were retired.
Now I'd like to provide updates to our full year 2019 guidance. Revenue is now expected to be in the range of $1.220 billion to $1.235 billion now from the $1.215 billion to $1.235 billion range provided on our last call. Our 2019 revenue range is based on our expectation for continued growth of our domain name base for the full year of 2019 of between 2.5% and 4.25% being partially offset by the loss of revenue associated with the sale of our Security Services customer contracts.
Our non-GAAP operating margin is still expected to be between 67.5% to 68.5%, and we'll continue to include certain nonmaterial operating costs associated with providing transition services for the security service customers. Our interest expense and non-operating income net is still expected to be an expense of between $42 million and $49 million and consists primarily of net interest expense, partially offset by income recognized as part of the aforementioned transition services agreement.
Capital expenditures in 2019 are still expected to be between $45 million to $55 million and cash taxes are now expected to be between $85 million and $105 million lowered from the $95 million to $115 million range provided on our last call. In summary, the company continued to demonstrate sound financial performance during the first quarter of 2019.
Now I would like to turn the call back to Jim for his closing remarks.
Thanks George. The first quarter was another solid quarter for VeriSign. There was further expansion of the domain name base and year-over-year revenue growth. And we generated an efficiently returned value to shareholders.
We continue to work, 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. And operator we're ready for the first question.
Thank you. [Operator Instructions] And our first question comes from Sterling Auty with JPMorgan.
Q – Sterling Auty
Yeah. Thanks. Hi guys. I wondered if we could start with -- I didn't hear an update on .web, anything that you can share with us there?
A – Jim Bidzos
There are no updates from .web at this point. The process continues
Q – Sterling Auty
Okay. And then, you mentioned that there is no update yet in terms of the Registry Agreement. Is there a formal process that you're going through? Or is just the discussion and negotiation? And can you at least say whether or not there’s active discussions' going on?
A – Jim Bidzos
Well, we are engaged in the process. The process as we described it is under the 2016 amendment that extended the term of the com agreement.
We've agreed to negotiate in good faith the flow-through changes that come from the Cooperative Agreement that includes, the pricing terms and also to preserve and enhance the security and stability of .com and the Internet.
We're renegotiating those items now. Updates when appropriate, but I don't want to get into any particulars of the negotiation of course.
Q – Sterling Auty
Yeah. No, no. I just didn't know if there was particularly, publicly available information in terms of, if there is milestones that we should be looking for other than just a full update here as to the new agreement. I just wanted to make sure that we're covering our bases.
Yeah, I understand. We'll update you as appropriate.
Okay. Sounds good. Two more. Just one any commentary in terms of the geographic when in terms of the name base and the gross registrations. What did you see geographically domestic/international? And specifically within international, any color that you can provide in terms of what you saw out of the various regions?
Yes. Sterling, this is George. I would say consistent with the recent quarters we continue to see both the U.S. market and the Chinese registrars perform quite well and they've been a lot of the driver for the past couple of quarters and they continue to be good markets for us.
And within that Chinese portion obviously going back we have the speculative nature. Do you feel like the names being added today are healthier growth meaning that they're being driven by more fundamental reasons that will make them stickier names?
I can just tell you in the data that I look at from a renewal rate perspective. I haven't seen any change in the normal renewal rates that we historically see from Chinese registrars. So obviously it was a 45-days lag, but I don't see any deviation at least year-to-date in those numbers.
Okay. And then last question around the TSA post the sale of those contracts, how long is that TSA? And within other income, is there a little bit of color in terms of the magnitude of that TSA?
Yeah, sure. It's a 12-month agreement. It expires in December of this year. Having said that the parties do have the ability to extend that should they desire to do so. We recognized about $4 million of income in the quarter. It's in our non -- our other income. And so it's about $1.3 million a month is the income associated with that contract.
All right. Perfect. Thank you.
Yeah. Sterling, it's Jim. Just -- you asked me about .web and I said that there is no update. But I just feel I should remind everyone that one of the losing bidders in the .web auction Afilias one of our competitors, they filed an arbitration against ICANN as you probably know trying to continue to delay the process. We're not parties to that arbitration, yet but we are actively seeking to participate in it.
Great. Thank you.
And our next question comes from Nick Jones with Citi.
Hi. Thanks for taking my questions. Is there any kind of broader trends in nTLDs or country code TLDs that you could call out that maybe is impacting .com demand internationally?
I think that, look the TLD market is a competitive market both .com and .net receive compensation from ccTLDs primarily in international markets. But new gTLD and legacy TLDs also provide competition. But we'll continue to compete effectively with those TLDs. You can see the zone they grow about 4.4% this quarter. New registrations were up about 2.1% year-over-year. So we're still competing effectively in the markets that we're in, but it is a competitive market out there.
Thanks. And one follow-up on I guess the .web arbitration. What – how long or what would the process look like for VeriSign to join that arbitration and kind of get involved?
Well, I hate to make this sound like a stock line but it is. I mean, we don't comment on any detailed aspects of any pending litigation, but it's – right now it's an arbitration between Afilias and ICANN and we're seeking as you pointed out to participate. Beyond that, I just don't have any update to provide. But as soon as we do, we'll let you know.
Okay. Thank you for taking the question.
And we'll take our last question from Rob Oliver with Baird.
Great. Hey. Thanks guys for taking my question. Jim, sorry not to go back to .web but I think you guys had indicated on the last call that that process could take a few months. Is that something that might take longer in your experience now since it's been a few months now since Afilias had filed that arbitration? Or is there just kind of no way for us to know and there's a process? Just any color would be helpful there. Thanks.
Well, I think it's the latter. I mean, having been involved in a number of arbitrations, you obviously can't predict at what rate the wheels of justice will turn. But well, they may turn they are turning. So as soon as we have updates we'll certainly share them.
Great. Thanks. And it's come up a bit lately with clients as well as on some of your calls about the idea of kind of vertically integrating on the registrar and registry side again. I just wanted to kind of see, if I can pump you guys for your thoughts on that here quickly.
Yeah. Nothing specific to say at this point, it's just there's nothing to add to what we've already said.
Okay. That's it for me. Thank you guys very much.
And I'll now turn the conference back over to Mr. David Atchley for final comments.
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.
Thank you. That does conclude today's conference. We do thank you for your participation. Have a wonderful day.