Good day, everyone. Welcome to VeriSign's Third 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 Q3 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 Q3 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 and 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 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 to 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, and good afternoon, everyone. I'm pleased to report another solid quarter for VeriSign. Our results are 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 September, the domain name base in dotcomandnettotaled157,400,000 consisting of 144,000,000 names for dotcom and 13,400,000 names for dot net with a year over year growth rate of 3.8%. During the Q3, we processed 9 point 9,000,000 new registrations and the domain name base increased by 1,270,000 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 Q3 of 2019 will be approximately 73.6%. This preliminary rate compares to 74.8 percent achieved in the Q3 of 2018. For 2019 full year, we now expect the domain name base growth rate to be between 3.2% and 3.7%. As noted during our recent earnings calls, we are engaged in a process with ICANN to incorporate the terms of Amendment 35 to the Cooperative Agreement, including the pricing terms into our dotcom Registry Agreement. For those not familiar with this, let me remind you that under the 2016 amendment to our com registry agreement with ICANN, which extended the term of the agreement, We and ICANN also agreed to negotiate in good faith to do 2 things.
First, we agreed to reflect changes to the Cooperative Agreement into the COM agreement, including pricing terms. 2nd, we agreed to amend the COM agreement to include terms to preserve and enhance the security and stability of the COM Registry or the Internet. We believe these discussions with ICANN are nearly complete. While it would be inappropriate this time to provide more details, I can say that we are satisfied with the results so far. As noted, this is an ICANN process and we expect that before long, ICANN will be publishing for public comment the documents we have been discussing.
During the Q3, we continued our share repurchase program by repurchasing 1,000,000 shares of common stock for $194,000,000 Our financial position remains strong with $1,230,000,000 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. And now I'd like to turn the call over to George.
Thank you, Jim, and good afternoon, everyone. 3rd quarter GAAP results produced revenue of $308,000,000 up 0.9% year over year. Operating expense totaled $103,000,000 compared to $105,000,000 last quarter and $111,000,000 in the Q3 a year ago. The small sequential quarter over quarter decrease in operating expenses is primarily a result of the timing of spend related to some sales and marketing programs. Year over year, the decrease in operating expenses is primarily due to lower expenses as a result of the sale of our Security Services business as well as the timing of spend related to periodic and planned changes to and investments in our infrastructure.
Operating income totaled $206,000,000 compared with $195,000,000 in the Q3 of 2018. The operating margin in the quarter came to 66.7% compared to 63.8% in the same quarter a year ago. Net income totaled $154,000,000 compared to $138,000,000 a year earlier, which produced diluted earnings per share of $1.30 in the Q3 this year compared to $1.13 for the same quarter last year. As of September 30, 2019, the company maintained total assets of $1,900,000,000 and total liabilities of $3,300,000,000 Assets included $1,200,000,000 of cash, cash equivalents and marketable securities, of which $511,000,000 were held domestically with the remainder held abroad. I'll now review some additional 3rd 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, 3rd quarter non GAAP operating expense, which excludes $13,000,000 of stock based compensation, totaled $90,000,000 compared to $91,000,000 last quarter $96,000,000 in the Q3 a year ago. Non GAAP operating margin for the 3rd quarter was 70.8% compared to 70.1% last quarter and 68.7% in the same quarter of 2018. Non GAAP net income for the 3rd quarter was $161,000,000 resulting in non GAAP diluted earnings per share of $1.36 based on a weighted average diluted share count of 118,600,000 shares. This compares to 1.33 dollars last quarter and $1.23 in the Q3 of 2018.
Operating cash flow for the Q3 was $208,000,000 and free cash flow was $197,000,000 compared with the $187,000,000 $177,000,000 respectively, for the Q3 last year. Beginning with the Q1 2020 earnings results, we plan to eliminate our discussion and presentation of non GAAP measures with the exception of free cash flow and adjusted EBITDA on which we will continue to report. As a result, our full year 2020 guidance, which we will provide on our next call, will only include GAAP metrics. This change is the culmination of the declining trend and influence of our non GAAP adjustments over the last several years and is consistent with the evolving trends and best practices in financial reporting. Now I'd like to provide updates to our full year 2019 guidance.
Revenue is now expected to be in the range of $1,228,000,000 to $1,233,000,000 narrowed from the $1,225,000,000 to $1,235,000,000 range provided on our last call. This revenue range is based on our expectation for continued growth of our domain name base for the full year 2019 of between 3.2% and 3.7%. Our non GAAP operating margin is expected to be between 69.5 percent 70%, increased and narrowed from the 68% to 69% range provided on our last call. Our interest expense and non operating income net is now expected to be an expense of between $44,000,000 to $49,000,000 narrowed from the $42,000,000 to $49,000,000 range provided on our last call. Capital expenditures in 2019 are now expected to be between $40,000,000 $50,000,000 decreased from the $45,000,000 to $55,000,000 range provided on our last call.
Cash taxes are now expected to be between $85,000,000 $95,000,000 narrowed from the $85,000,000 to $100,000,000 range provided previously. To recap, VeriSign continued to demonstrate sound financial performance during the Q3 of 2019. Now I'll turn the call back to Jim for his closing remarks.
Thanks, George. The 3rd quarter was another solid quarter for VeriSign. There was further expansion of the domain name base and year over year revenue growth we generated and efficiently returned value to our 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.
Good afternoon. It's Matt Lemenager on for Rob. Jim, appreciate the comments around the ICANN registry agreement negotiation. So when as we look forward, could you remind us once the public comment period would open up, what does the timeline look like after that? I believe you have to give a 6 month notification period before you can make any formal changes in pricing.
So I assume that entire review period with iCAN would be complete by kind of the April 2020, which can be the timeframe that it would need to be completed by. But could you just remind us what the timeline looks like after the public comment period opens?
Sure, Matt. Yes, let me explain how what we expect in the public comment period with the caveat that this is an ICANN process. So I can't speak with certainty and I don't speak for ICANN, but I kind of tell you what the expectation is and what they typically do. As I mentioned, we will expect them to shortly publish these documents for comment period. Icahn's comment periods are typically about 40 days.
There is typically a short period where they review the comments and then after that it's normally expected that some action would be taken an approval on that process. Again, it's ICANN process, so I can't tell you with certainty, but that's typically what they do and that's We need to finalize this ICAM process first. So, we don't guide the pricing. We need to finalize this ICANN process first. So, can't offer you any details on that.
But hopefully that answered your question.
Yes, that's helpful. And then I think another one on kind of the newer initiatives I suppose. Is there any update to .web and the process there?
Yes, actually there is some new information since we spoke to you last quarter on .web. Just for the benefit, I guess, of everybody else on the call for context, there was an auction for .web and one of the losing bidders, a company called Affilius, a competitor of ours filed what is a form of an arbitration proceeding called an IRP in November of 2018. That's against ICANN. And as a reminder, ICANN filed a response to the complaint. We're not a party to that arbitration, but we have filed a request asking to participate in that arbitration as an interested party, which is allowed by ICANN's rules.
So the update is that since last quarter, kind of a significant update, I guess, is that an arbitration panel has been appointed, convened. It actually held a hearing just very recently, a couple of weeks ago, on our request to participate. That hearing was held, and we expect a ruling on that issue of our participation before the end of the year.
Okay, got it. And then lastly, just on the sales and marketing expense, it was down 28% year over year. I think it's a couple of quarters in a row that's declined. I mean, do you is there any expectation, would that go just trying to think about how to model that out into 2020? It seems like would that level off at some point as we kind of do .web and put marketing dollars behind that or anything that you could give any color around the sales and marketing expense?
Yes, sure, Matt. This is George. So as mentioned in my prepared remarks, the big change in expense year over year really is a result of the sale of our VSS business. As it relates to sales and marketing, there was most of that expense came out of sales and marketing year over year. So that's primarily the year over year decline.
As far as where sales and marketing is going in the future, we'll provide we don't provide guidance on the individual segments, but we will give you an idea of our expectation for next year on our call in February.
Okay, got it. Thanks guys.
Our next question will come from Sterling Auty with JPMorgan.
Yes, thanks. Hi, guys. Let's start with the renewal rate in the quarter down year over year. Can you give us some context or color? Is there any particular region or factor that led to that decline?
Sure, Sterling. This is George. Regarding renewal rates, our Q3 preliminary renewal rate is expected to be down about 1.2% or 73.6% year over year when you consider the 2 major components of our renewal rates, our previous renewed rate has held consistent in the mid-eighty percent range, both year over year and sequentially. However, we've seen a slight decrease in our first time renewal rate in the quarter. And while there's a variety of factors that can influence that, for us, it's really been a geographic mix in the quarter.
As we previously mentioned, China registrar's first time renewal rate as well as what we call the emerging markets at historically lower first time renewal rates than, let's say, more mature markets like the U. S. And Europe. And as China has continued to grow for us in 2018 and again in 2019, it's really this change in geographic mix, which is causing a little bit of downward pressure on the first time renewal rate.
So that makes sense. So maybe a follow-up is the 9,900,000 new names processed in the quarter, can you give us maybe a little bit more granularity as to what the geographic makeup of that looks like and how that has trended over the last year?
Well, you point to the $9,900,000 gross adds and that's a good stat for us. I mean gross adds were up 3.5% year over year in Q3, which actually was a record gross add 3rd quarter for us. So continued good demand for the product in the Q3 here. As far as the regions of gross adds, they tend to change quarter to quarter depending on where registrars are fulfilling demand. But again, China has done well for us in the Q3.
Q3, we saw EMEA do pretty well for us and Asia Pacific was doing pretty well for us as well in the Q3.
Got it. Moving over to the negotiation with ICANN, I think there's a number of investors that just felt like, well, why isn't this just a slam dunk quick put in item 35 and you're done. I think from some of the comments that you've made in the earnings calls, it does seem to be more of a negotiation and negotiation usually means both sides want something. There has been some question that I get from investors as to whether the Icahn fee would go up or what other elements we might actually see. Is there any just high level color that you can give even prior to seeing the public comment documents?
So, your question is specifically about when in terms of the publication for public comment? I'm not sure you kind of lost me right at the end there.
No. So the
I'm just not sure exactly what the question is.
Yes. To be very specific, the question is since it's a negotiation, should we expect that not only would we see changes to pricing coming into the registry agreement from the item 35, but will there be other changes to the registry agreement since it is a negotiation?
Well, there is so I think I said that we can't provide any details, but I can reiterate and tell you that there is an obligation to move the changes from the cooperative agreement, which is the pricing, and we are satisfied with that process. And that is the Amendment 35 pricing. There is also an obligation resulting from the 2016 extension to provide the security and stability. So I can tell you that in that process, we're satisfied as well with that process, with the discussions that we've had, including security and stability. And that in that process, any obligations or expenses that arise from it, that's also an area where we're satisfied with the progress and also the Amendment 35 pricing obviously.
So hopefully that answers your question.
Yes, that makes sense. Thank you, Jim. And then last question, George, just back as we think about the new guidance for the 3.2% to 3.7% growth in the domain overall, Should we think that this would be a continuation of the trend in the renewal rate that gets us to that level for the full year? Or is there any other factors that kind of weighed on it?
Sterling, as normal, there is seasonality we have in the Q4, I. E. There are quite a few holidays in the Q4 in the U. S. And abroad.
And so it's obviously a combination of ads and renewal rates, but our guidance fully reflects our expectations for the full year performance. Thank you, guys.
We will take our last question from Nick Jones with Citi.
Hi, thank you for taking my question. I guess, thinking a little bit longer term, is there any discernible differences in kind of the number of people who are parking domains today than maybe were during the last recession? And is there kind of any difference in the business today or the profile of the registrants that you could add some color around that are different today?
I think that's a very tough question to get into any specifics on. But generally, I can tell you that this business has shifted steadily over the years. I mean you probably remember a few years ago when Google was making changes to its search algorithm that affected well. People buy domains for different purposes in different geographies. So it's there are many purposes, obviously, from branding yourself and building businesses, people buy domains for defensive registration purposes.
There are lots of different reasons to buy them. They vary over time, other external factors that influence them, geographies. So it's kind of hard to generalize. I can't think of any standout change or shift that I can point to that indicates any specific change or aspect of our business. As George said, this was a record Q3 with 9,900,000 gross adds and so demand is good for the product.
Whatever the mix, maybe that's a subject for publication of some date in the future, we might look at that. That's a good question, but it's really hard to sort of give you a detailed sort of granular answer to that. There's just so much activity and so many different reasons that people buy domains and so many different types of monetization as well.
And as a reminder, Nick, we're a thick registry. So we really excuse me, a thin registry. So we don't
We don't see the registrar. We don't see the registrar. Registrars provide that. So we don't have quite as much information, but we certainly study these trends. And there's a diverse set of reasons that people buy domains.
Got it. Got it. Appreciate it. One more with the kind of upcoming political cycle and the growing scrutiny on kind of big tech, is there any kind of increased regulatory risk to VeriSign as you guys try to implement Amendment 35 as we get into 2020 or how should we think about that?
We've read what you read about that. That's all we know. I haven't read anything lately. We've read what you've read.
Okay. Well, I appreciate taking my questions.
Sure. That will conclude today's question and answer session. At this time, I will turn the conference 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.
That does conclude today's conference call. Thank you for your participation. You may now disconnect.