Everyone. Welcome to VeriSign's Second 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.
Operator, and good afternoon, everyone. Welcome to VeriSign's Q2 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 Q2 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 on our documents filed with the SEC, specifically the most recent reports on Forms 10 ks 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, and good afternoon, everyone. I am pleased to report another solid quarter for VeriSign. 2nd 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 June, the domain name base in dotcomand.net totaled 156,100,000 consisting of 142,500,000 names for dotcom and 13,600,000 names for dotnet with a year over year growth rate of 4.3%. During the Q2, we processed 10,300,000 new registrations and the domain name base increased by 1,340,000 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 Q2 of 2019 will be approximately 74%. This preliminary rate compares to 75% achieved in the Q2 of 2018. For 2019 full year, we expect the domain name base growth rate to be between 3% and 4.25%, narrowed from our previous range of 2.5% to 4.25%. As noted during our recent earnings calls, we are engaged in the process with ICANN to incorporate terms of Amendment 35 to the Cooperative Agreement, including the pricing terms into the dotcom registry agreement. For those not familiar with this, let me remind you that under the 2016 amendment to the dotcomregistryagreement with ICANN, which extended the term of the dotcomregistry agreement.
We and ICANN also agreed to negotiate in good faith to flow through any changes that would be made to the Cooperative Agreement, including the pricing terms and in addition to preserve and enhance the security and stability of the dotcom registry or the Internet. These discussions with ICANN are ongoing, and at this time, there are no further details to share. Of course, when appropriate, we will update you. During the Q2, we continued our share repurchase program by repurchasing 900,000 shares of common stock for 175,000,000 dollars Our financial position remains strong with $1,220,000,000 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.
Thanks, Jim, and good afternoon, everyone. 2nd quarter GAAP results produced revenue of $306,000,000 up 1.3 percent year over year. Operating expense totaled 105,000,000 compared to $106,000,000 last quarter and $109,000,000 in the Q2 a year ago. Operating income totaled $202,000,000 compared with $193,000,000 in the Q2 of 2018. The operating margin in the quarter came to 65.9% compared to 63.8% in the same quarter a year ago.
Net income totaled $148,000,000 compared to $128,000,000 a year earlier, which produced diluted earnings per share of $1.24 in the Q2 this year compared to $1.04 for the same quarter last year. As of June 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 $582,000,000 were held domestically with the remainder held abroad. I'll now review some additional 2nd 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, 2nd quarter non GAAP operating expense, which excludes $13,000,000 of stock based compensation, totaled $91,000,000 compared to $94,000,000 last quarter $96,000,000 in the 2nd quarter a year ago.
The slight year over year decrease in operating expenses is primarily a result of 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. Non GAAP operating margin for the 2nd quarter was 70.1% compared to 69.4% last quarter and 68.2% in the same quarter of 2018. Non GAAP net income for the 2nd quarter was $159,000,000 resulting in non GAAP diluted earnings per share of $1.33 based on a weighted average diluted share count of 119,400,000 shares. This compares to $1.31 last quarter $1.18 in the Q2 of 2018. Operating cash flow for the Q2 was $165,000,000 and free cash flow was $154,000,000 dollars compared with $202,000,000 $191,000,000 respectively for the Q2 last year.
The year over year decline was a result of the timing of cash tax payments, which were predominantly made in Q1 last year versus occurring in the Q2 this year. Now I'd like to provide updates to our full year 2019 guidance. Revenue is now expected to be in the range of $1,225,000,000 to 1,235,000,000 dollars narrowed from the $1,220,000,000 to $1,235,000,000 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 3% and 4.25%. Our non GAAP operating margin is expected to be between 68% 69%, increased from the 67.5% to 68.5% range provided on our last call and will continue to include certain immaterial operating costs associated with providing transition services for security service customers.
Our interest expense and non operating income net is still expected to be an expense of between 42,000,000 dollars $49,000,000 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 $45,000,000 $55,000,000 Cash taxes are now expected to be between $85,000,000 $100,000,000 narrowed from the $85,000,000 to $105,000,000 range provided previously. In summary, the company continued to demonstrate sound financial performance during the Q2 of 2019. Now I'll turn the call back to Jim for his closing remarks.
Thanks, George. The 2nd 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 shareholders. We continued our work to protect Gro and manage the business while continuing our focus on providing long term value to our shareholders.
Last week, the company marked 22 years of 100 percent availability in the dotcomand.netdomaining system. This achievement is a result of the dedication and expertise of our team and our specialized infrastructure. We'll now take your questions. Operator, we're ready for the first question.
Thank you. We'll hear first today from Sterling Auty with JPMorgan.
Yes, thanks. Hi, guys. Maybe to kick off, Jim, can you give us an update on where things stand with the .web arbitration and situation?
Hi, Sterling. Thanks. Sure. Since we last spoke to you, there has been some movement in the process. ICANN has filed a response to Afilias' complaint, which is a public response and it's posted on ICANN's website.
So there is some movement, but beyond that, we don't have any update. As a reminder, one of the losing bidders in the .web auction, Affilius, one of our competitors, filed this arbitration in November of 2018 against ICANN, trying to continue to delay the process. We're not a party to that arbitration, but we are continuing to seek to participate in the proceedings.
All right, great. And then you noticed noted the initial renewal rate, 74% is down. Anything in particular in terms of either the types of names that didn't renew at same rate or mix of 1st year renewals versus multi second time or more renewal names? Anything that you kind of call out that drove that trend?
Sure, Sterling. This is George. So as far as our renewal rates, as you know, our preliminary renewal rate is estimated at 74%, which is down about 1% year over year. I'd say one of the prime contributors is a slightly lower first time renewal rate, which is being driven by a higher proportion of names coming up for renewal from our Chinese registrars. As we've talked before, historically, China, like other emerging domain name markets, have lower renewal rates, more than same mature markets like the U.
S. And Europe. And so accordingly, what we're seeing is that the first time renewal rate is being impacted by this weighted average effect of more Chinese names coming up for renewal.
And is that also impacting the 10,300,000 new names processed is towards the upper end of what we typically see. Is that also being impacted by China? Or what other influences did you see there?
Yes. I think the short answer is yes. As we've talked about in previous quarters, some of the big drivers are registrars operating both in China and the U. S. But we're seeing a lot of registrars perform well in Q2, but yes, China continues to perform well for us.
Okay.
And then just last question. Given the results on the operating income, operating margin line for the first half, to get down to the full year guidance would suggest some compression in operating margins in the back half of the year. What are going to be some of the investments or things that we should look for that would cause that to happen?
Yes. Sure, Sterling. So maybe the best way to answer that is just to talk about some of the variances year over year, and then I can give you some color as to the rest of the year. But year over year, our expenses are down by about $4,700,000 91,400,000 were end of the quarter. And the 2 big costs there of being down year over year, one is about $2,500,000 of costs associated with BSS.
We again sold that business last year. And then the remaining $2,000,000 of that variance is really related to the timing of investments in telco and networking in our network. I mentioned that in my prepared remarks. As we go forward here, we and as we say in our Q that's filed this afternoon, we expect that we will have slight increases as a percent of revenue for both sales and marketing, for cost of goods sold and for G and A as well. But we continue to invest in our network.
We'll probably still spend some more money in sales and marketing next year, and we'll continue to invest in our cyber activities throughout the year, which falls into G and A.
All right, perfect. Thank you so much, guys.
Thank you.
We'll hear next from Nick Jones with Citi.
Hi. Thanks for taking the question. I saw some headlines that iCAN uncapped.org's pricing rate increases. Do you have any comments on kind of what ICANN's move may mean for the broader industry? Does that have any kind future implications for dotcomor.net?
Is it possible these get uncapped in the future? Or is there any kind of color or commentary you guys have around that?
Sure. Well, these new agreements that I can't negotiate are more like the new generic TLD program agreements in that they no longer have price caps, but they do have to practice uniform pricing and provide the customary advance notices of any changes to pricing. So implementing the pricing features of Amendment 35 to the Cooperative Agreement for us simply restores the pricing flexibility that formerly existed for comm domains from 2006 to 2012, the ability to unilaterally increase prices by up to 7% 4 times during the 6 year term of the registry agreement. So the ICANN registry agreements for Horganfo and Biz, by the way, were renewed late June, and they completely lifted their price gap. So we can't speculate if a similar approach will be used for the next renewal of dot net.
And as you know, the pricing for .com is regulated by the Cooperative Agreement. So that's really a different animal in that process.
Got it. So is there maybe a tilt for ICANN to take a more hands off approach and have to be less involved? Is that a trend maybe you're seeing? Or is it kind of that or it seems kind of more like a one off?
Well, I can't speak before I can, but I can tell you that the that they did, as I mentioned, these agreements are now more like the generic PLD agreements and they do have roughly 1,000 of those and those are somewhat standardized and they don't have price caps.
Got it. Thank you for taking my questions.
Sure.
Our final question will be from Rob Oliver with Baird.
Great. Thanks. It's Matt Lemenager on for Rob tonight. I had a question on the Jim wanted to ask about now your ability to vertically integrate. I think on the last call, you said it was something you guys would think about internally, but no update at that time.
Just wanted to see if anything changed? Is there any discussion on what that might look like or what you could look like if you chose to vertically integrate there?
Yes. No, nothing to update since the last time we talked about that. Really nothing specific at this point. If that changes, we'll
certainly let you know.
But again, that's only for the non comp TLDs. Comm is not part of that, of course. I think you're aware of that. Yes. We yes.
But nothing to update at this point, sorry.
Okay. And then just one thing on
the do you think there's any
it sounds like it's mostly in China and the U. S. I'm just looking at the 10,300,000 gross new names and that accelerated 2nd quarter in a row it accelerated. Do you expect I mean, ahead of the late October timeframe next year when prices are going to be increasing, do you think there's any, I guess, rush of people to come and buy names ahead of those price increases? Or are the price increases maybe not substantial enough that people it may not matter and it may not drive business ahead of that?
I really couldn't speculate on the price increase. I mean, we see demand in markets drive from continued penetration of the Internet, continued growth of e commerce sales and people getting online. And we see those trends continuing. We think domain names in general benefit from that. And we're trying to compete in the market against other TLDs in the market internationally, ccTLDs and new gTLDs for that matter.
So we just see continued demand in markets where e commerce is flourishing and we think domains are a part of that.
Okay, got it. And then I guess just my last one, the process on the dotcom pricing with ICANN, is that something that's maybe taking longer than you thought to get that amendment? Or is this about the timeframe that you thought nothing outside of the timeframe that you expected to get that kind of stamp of approval from the ICANN RA amendment?
So we're actively engaged in this process, as I said, and we won't be able to comment and don't comment on any details of discussions. But like I said in my prepared remarks, we're going through a process to incorporate the terms approved in Amendment 35, including pricing terms into the comm agreement with ICANN. So but also as part of the 2016 amendment, VeriSign and ICANN a 2016 amendment that we made back then to extend the comm agreement. Versailles and ICANN agreed to negotiate in good faith to flow through those changes, including pricing, but in addition to preserve and enhance the security and stability of the comm registry of the Internet. So no updates beyond that.
Okay. All right. Thanks, Jim. Thanks, George.
Thank you.
And at this time, I'd like to turn things back to David Atchley for 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.