Good day, everyone. Welcome to VeriSign's 4th 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 4th quarter and full year 2019 earnings call. With me are Jim Bidzos, Executive Chairman, President and CEO Todd Strube, Executive Vice President and COO and George Kilgus, 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 Q4 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 in the most recent reports on Form 10 ks 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 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 dotcomand.net. 2019 was also a strong year for the dotcom and.netdomainnamebase as we processed a record 40,300,000 registrations and concluded the year with 158,800,000 names.
Finally, 2019 was characterized by solid financial performance with revenues of $1,232,000,000 and free cash flow of $714,000,000 On January 3rd, VeriSign and ICANN announced a proposed agreement to amend the dotcom 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 iCAN and VeriSign made in 2016 when the dotcom Registry Agreement was previously amended. The new proposed amendment updates the dotcomregistryagreement 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 one time commitment to provide $4,000,000 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. Icahn's public comment period for these two documents closes February 14. The steps that follow the comment periods closing according to Icahn's website are that iCAN staff will prepare a report of the public comments by March 6, 2020 and then iCAN will submit the report to its Board of Directors. Now I'll discuss Q4 operational highlights.
At the end of December, the domain name base in .comand.net totaled 158,800,000 consisting of 145,400,000 names for dotcom and 13,400,000 names for dot net with a year over year growth rate of 3.9%. During the Q4, we processed 10,300,000 new registrations and the domain name base increased by 1,460,000 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 Q4 of 2019 will be approximately 73.7 percent. This preliminary rate compares to 74.3% achieved in the Q4 of 2018 and 72.2% in the Q4 of 2017. Looking forward to 2020, we expect a domain name base growth rate of between 2% and 4%.
During the Q4, we repurchased 1,000,000 shares of common stock for $195,000,000 During the full year 2019, we repurchased 3,900,000 shares for $738,000,000 Effective today, the Board of Directors increased the amount of VeriSign common stock authorized for share repurchase by approximately 743,000,000 dollars to a total of $1,000,000,000 authorized and available under the share repurchase program, which has no expiration. Our financial position remains strong with $1,218,000,000 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 $1,232,000,000 up 1.4 percent from 2018 and delivered GAAP operating income of $806,000,000 up 5% from $767,000,000 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 transition 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. 4th quarter revenue came to $311,000,000 up 1% year over year. GAAP operating expense totaled 112,000,000 dollars compared to $103,000,000 last quarter and $113,000,000 in the 4th 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. 4th quarter operating income totaled $199,000,000 compared with $194,000,000 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 $148,000,000 compared to $182,000,000 a year earlier, which produced diluted earnings per share of 1.2 $6 in the Q4 this year compared to $1.50 for the same quarter last year. For the year over year comparative results, remember that 2018 results include the gain of our on the sale of our Security Services business, which increased Q4 2018 GAAP net income by $52,000,000 and earnings per share by $0.43 Related to non GAAP results, 4th quarter 2019 non GAAP operating expense, which excludes $12,000,000 of stock based compensation, totaled $100,000,000 and was higher sequentially for the reasons I discussed earlier and slightly lower than Q4 2018 levels. Non GAAP operating margin for the 4th quarter was 67.9%. Non GAAP net income for the quarter was $154,000,000 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 Q1 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 $1,854,000,000 and total liabilities of 3,344,000,000 dollars Assets included $1,218,000,000 of cash, cash equivalents and marketable securities. Operating cash flow for the Q4 was $194,000,000 and free cash flow was $185,000,000 compared with $219,000,000 $211,000,000 respectively for the Q4 of last year. The year over year difference was primarily related to higher cash taxes in the Q4 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 $1,250,000,000 to 1,265,000,000 dollars This revenue range forecast reflects a growth rate slightly below the expected domain name based growth rate of between 2% 4% as 2020 revenue no longer reflects any residual revenue from the Security Services business, which in 2019 was about $10,000,000 GAAP operating margin, which includes stock based compensation, is expected to be between 64.5% 65.5%. This guidance range reflects our expectation of incremental investment in our operational infrastructure and security capabilities during 2020. Interest expense and non operating income net is expected to be an expense of between $68,000,000 $75,000,000 This range reflects both lower non operating income from the transition services agreement, which we'll cease during the Q1 and lower expected interest income on cash balances. Capital expenditures are expected to be between $45,000,000 $55,000,000 The GAAP effective tax rate is expected to be between 18% 21%. We expect the cash tax rate for 2020 to also be within the same range.
In summary, VeriSign continued 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. Q4 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. Thank
And we'll take our first question today from Rob Oliver with Baird.
Hey, great. Good afternoon, gentlemen, and thank you for taking my question. 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, I guess, 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 2020, obviously less meaningful, but just curious whether those were included in the guide?
And then I just had a quick follow-up. Thanks.
Yes, Rob. We don't guide the price increases, but I can tell you in our guidance there are no price increases in the guidance.
None of the
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? Thanks guys. I appreciate it.
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. What we're doing again, if you recall last year, we also had some seasonal increase in sales and marketing in the 4th 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.
Great. Thanks again.
Next we'll hear from Nick Jones with Citi.
Hi, thanks for taking my questions. 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, didn't catch the second part of the question?
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 Q4, we had a very strong 4th quarter, as Jim alluded to, 10,300,000 new additions, which was up from 9,500,000 in the Q4 of 2018. 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 in preservation? Is it mostly ongoing CapEx? Or is there anything kind of bigger that you can call out?
So the question, Nick, that was about spend on the infrastructure, was that the question?
Yes, the $4,000,000 per year over 5 years.
Okay. Yes, I'm sorry, can you just
The question about the letter of intent, the $4,000,000 over 5 years.
I just want to give you a little more color on what exactly the money is going to be going and what needs to be improved, what needs to be preserved? Is there any kind of additional color you can provide there?
Well, it's security and stability for both the DNS and for the Internet. There's a broad variety of areas where that funding will go. There's things that such as route governance, which impacts everybody, every relying party on the global Internet. Icahn's core mission is security and stability, and that's where this funding is going that you may have followed last year, for example, ICANN executed on something called the KSK rollover, refreshing a critical part of the global security system for the Internet. There's a broad variety of areas that need additional funding that everybody, including VeriSign, but the entire global Internet community will benefit from.
And so the funding in the LOI is specifically targeted in that broad security stability and resiliency area in IKEA's core mission.
Got it. Thank you for taking my questions.
We will take our last question from Sterling Auty with JPMorgan.
Yes, thanks. Hi, guys. Got a couple of questions. First one to revisit the renewal rate. I know you mentioned that renewal rate varies by geography, but given that it was down year on year, any more color that you can give?
Is it just mix driven where the renewal rates in each of the geographies consistent with last year? Or did you see any changes in any of the renewal rates in those geographies?
Sterling, I mean, as you know, the renewal rates are back to late period to period. But I think from a big picture perspective, as we articulated last quarter, it really is it seems to be a mixture of the names that we sold in the prior year coming up for renewal. We had more names being sold last year in the Asia Pacific and China region. They're becoming a slightly large portion of the base. And so they are having a slight impact there.
But other than that, we're not seeing huge variances. Again, I would just remind you, if you look back over the last couple of years, the company's renewal rate has been around 72% and has recently increased up into the 74% range. And while it is down year over year by about 60 basis points, it's still in general improving as the base ages. So I would just remind folks that we have a pretty stable renewal rate within the company.
Okay. And then following up on the $10,300,000 gross additions, you basically said there's growth out of U. S, Asia Pacific and EMEA. But can you peel that back a little bit more? So $10,300,000 is better than what we have been seeing.
I think it's the first time you've done over $10,000,000 in quite some time. Which area contributed more than what you have been seeing? In other words, which geography generated incremental growth this quarter?
Well, as I said, those 3 were the largest contributors to the growth. Again, recall, we're a thin registry. So what we're reporting on is the registrations by our registrars, where they are domiciled to do business. So to some degree, it may not be completely transparent as to where the end users are. The registrars have that information, not necessarily us.
But our customers, the registrars in the Q4, the U. S. Continued to remain strong as did Asia Pacific and EMEA. The other thing I'll just comment on is also what happens sometimes from year to year is you have new companies becoming registrars and they tend to pop up in new markets And we have sometimes consolidation in the market where one registrar may acquire some business from another registrar. So but those three regions performed well for us in the quarter.
Okay, got it. And I want to clarify, Jim, you mentioned in terms of the panel decision on .web, that's just the final decision as to whether you can be a party to the process or what is that decision that you're waiting for this month on?
Yes, Sterling, that's the issue before the panel. They indicated that they could rule before the end of the year, but that didn't happen. The indication now is they hope to rule this month. But the issue before then that they will be ruling on is the active participation by VeriSign in this process.
Okay. And then back operationally, you mentioned the investments that you were making both in sales marketing as well as some infrastructure investments. Can you kind of parse out where was the bigger portion of that investment in which of those two areas? I
don't know if we're prepared to talk about that level of detail. There are a lot of different components to registries rather than operating registries. We operate the common net registries rather than operating registries. We operate the common net infrastructure, which requires that's a stringent performance requirement. So we make investments that are, I think, far beyond what most others do.
There are a lot of scheduled investments that we make, but as you know, the cybersecurity threat environment is dynamic and ever changing. If there are new threats, if there are new technologies, new products that strengthen our infrastructure and our core mission, we're not going to hesitate to make those investments. We had all of the above in the quarter along with sales and marketing, but we haven't and I don't think we're prepared now to break that out in any detail.
All right. Last question is, one of the questions I get frequently from investors is what your appetite and what your view would be on acquisitions and being a consolidator in the market, especially now that you've got the ability to be a vertically integrated company outside of dotcom. What's your interest level in pursuing those opportunities?
I don't think there's any update we can provide you. There's certainly no guidance or particular interest. As you know, our focus is on common net. We've actually made investments in our VSS business. We are pursuing .web as a growth opportunity.
We do have additional IDNs that we expect to deploy in the future. I think security and stability in our current growth plans that we've talked about are what we're prepared to talk about. There's not anything else that I would speculate about or guide to. I would just say that, as you heard George and myself comment earlier, the guidance that we've given for 2020 does not include any provision price increases, doesn't include any revenue from .web. So we tend to be more conservative in those areas and that's probably as much as I can tell you at this time.
Understood. Thank you.
That will conclude today's question and answer session. I now turn the conference over to Mr. David Atchley for any additional 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.