Verisign Q4 & Full Year 2012 Earnings Conference Call. January 24, 2013

Transcription

1 Verisign Q4 & Full Year 2012 Earnings Conference Call January 24, 2013

2 Safe Harbor Disclosure Statements in this announcement other than historical data and information constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. These statements involve risks and uncertainties that could cause Verisign's actual results to differ materially from those stated or implied by such forward-looking statements. The potential risks and uncertainties include, among others, the uncertainty of whether the Department of Commerce will approve any exercise by the Company of its right to increase the price per.com domain name, under certain circumstances, and whether the Company will be able to demonstrate to the Department of Commerce that market conditions warrant removal of the pricing restrictions on.com domain names; the uncertainty of future revenue and profitability and potential fluctuations in quarterly operating results due to such factors as restrictions on increasing prices under the 2012.com Registry Agreement, increasing competition, pricing pressure from competing services offered at prices below our prices and changes in marketing and advertising practices, including those of third-party registrars; changes in search engine algorithms and advertising payment practices; challenging global economic conditions; challenges to ongoing privatization of Internet administration; the outcome of legal or other challenges resulting from our activities or the activities of registrars or registrants, or litigation generally; new or existing governmental laws and regulations; changes in customer behavior, Internet platforms and webbrowsing patterns; the uncertainty of whether Verisign will successfully develop and market new services; the uncertainty of whether our new services will achieve market acceptance or result in any revenues; system interruptions; security breaches; attacks on the Internet by hackers, viruses, or intentional acts of vandalism; whether Verisign will be able to continue to expand its infrastructure to meet demand; the uncertainty of the expense and timing of requests for indemnification, if any, relating to completed divestitures; and the impact of the introduction of new gtlds, any delays in their introduction and whether our gtld applications or the applicants' gtld applications for which we have contracted to provide back-end registry services will be successful. More information about potential factors that could affect the Company's business and financial results is included in Verisign's filings with the Securities and Exchange Commission, including in the Company's Annual Report on Form 10- K for the year ended December 31, 2011, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Verisign undertakes no obligation to update any of the forward-looking statements after the date of this announcement. 2

3 Agenda Introduction & Highlights Business Review Financial Performance/Guidance Closing / Q&A 3

4 Registry Services Highlights Domain Name Base at Million Names, Up 6.4% Y/Y (1) millions million.com names and 14.9 million.net names com/.net Domain Name Base (1) The Domain Name Base is a count of domain names in the.com and.net base, adjusted for domain name registrations cancelled during the grace period. 4

5 Registry Services Highlights 8.0 Million New Name Registrations, up 0.9% Y/Y + Q3 12 renewal rate 72.5% Renewal rate determined 45 days after end of quarter Q4 12 renewal rate expected to be approximately 72.9% (1)(2) vs. 73.5% in Q Net new additions for Q4 12 were 1.25M names M names expiring in Q1 13 vs. 25.2M in Q Millions New Name Registrations Renewal Rate + Domain Name Base for Q1 13 expected to add between 2.0M to 2.4M net names (2) 0 50% 100% 90% 80% 70% 60%.com/.net New Name Axis Registrations Title Renewal Rate (1) Renewal rates are not fully measurable until 45 days after the end of the quarter. (2) This guidance is based on historical seasonality and current market trends. 5

6 2012 Full Year Financial Highlights Revenue of $874M, up 13% y/y Operating Income: GAAP: $457M (1) Non-GAAP: $491M (1) Operating Margin (1) GAAP Operating Margin 52.4% (2) Non-GAAP Operating Margin 56.2% (2) Free Cash Flow of $503M (3) Excess tax benefit of $18.4m CapEx of $53M Strong Balance Sheet Cash balance of $1.56B (4) $283M domestic as of Dec. 31, 2012 (4) Deferred Revenue of $813M at end Q Total debt of $698M Comprised of $100M revolver and $598M present value of $1.25B convertible debenture (1) Please refer to Summary of Non-GAAP Measures for important information. (2) GAAP results for the fourth quarter of 2012 included non-recurring pre-tax benefits of $13.6 million, split $5.8 million and $7.8 million between continuing operations and discontinued operations, respectively, primarily related to reimbursements of previously incurred litigation and defense costs, received upon settlement with the selling shareholders of a previously acquired business. Additionally, results for the fourth quarter of 2012 include pre-tax benefits of $5.5 million related to a change in the estimated bonus payout. Together these items increased the fourth quarter GAAP operating margin by 4.9 percent. Non-GAAP results for the fourth quarter of 2012 included nonrecurring pre-tax benefits of $5.8 million recorded in continuing operations, primarily related to reimbursements of previously incurred litigation and defense costs, received upon settlement with the selling shareholders of a previously acquired business. Additionally, the non-gaap results for the fourth quarter of 2012 include pre-tax benefits of $5.5 million related to a change in the estimated bonus payout. Together these items increased the fourth quarter non-gaap operating margin by 4.9 percent. (3) Free cash flow is defined as cash flow from operations adjusted to include excess tax benefits from stock-based compensation, less capital expenditures. Please see Free Cash Flow Calculation in slide appendix for more detail. (4) Includes marketable securities. 6

7 Q Financial Performance + Revenue of $230M Up 13% y/y + GAAP operating margin of 58.8% (1) ; GAAP EPS of $0.65 (1) Includes $13.6M of non-recurring pre-tax benefits and $5.5M change in estimated bonus payouts The above items increased GAAP operating margin by 4.9% and GAAP EPS by $ Non-GAAP operating margin of 62.0% (1,2) ; Non-GAAP EPS of $0.59 (1,2) Includes $5.8M of non-recurring pre-tax benefits and $5.5M change in estimated bonus payouts The above items increased non-gaap operating margin by 4.9% and non-gaap EPS by $ Operating Cash Flow of $171M + Free Cash Flow of $155M (3) + 1,096 Full-Time Employees at Dec. 31, 2012 (4) $M Revenue Revenue & Profitability Non-GAAP Operating Margin (1,2) Non-GAAP Operating Margin 60% 50% 40% 30% 20% 10% 0% (1) The non-gaap Operating margin for the second quarter of 2011 included a pre-tax $6 million accrued expense reversal, which is non-recurring in nature, which increased operating margin by 3.1 percent. GAAP results for the fourth quarter of 2012 included non-recurring pre-tax benefits of $13.6 million, split $5.8 million and $7.8 million between continuing operations and discontinued operations, respectively, primarily related to reimbursements of previously incurred litigation and defense costs, received upon settlement with the selling shareholders of a previously acquired business. Additionally, results for the fourth quarter of 2012 include pre-tax benefits of $5.5 million related to a change in the estimated bonus payout. Non-GAAP results for the fourth quarter of 2012 included non-recurring pre-tax benefits of $5.8 million recorded in continuing operations, primarily related to reimbursements of previously incurred litigation and defense costs, received upon settlement with the selling shareholders of a previously acquired businesses. Additionally, the non-gaap results for the fourth quarter of 2012 include pre-tax benefits of $5.5 million related to a change in the estimated bonus payout. (2) Please refer to Summary of Non-GAAP Measures for important information. (3) Free cash flow is defined as cash flow from operations adjusted to include excess tax benefits from stock-based compensation, less capital expenditures. Please see Free Cash Flow Calculation in slide appendix for more detail. (4) Net of interns (3). 7

8 Financial Guidance (1) 2013 Revenue $945-$960 million, 8%-10% growth 2013 Non-GAAP Gross Margin (2) At least 80% Full year 2013 Non-GAAP Operating Margin (3) At least 57% 2013 Non-GAAP Interest Expense and Non-GAAP Non-Operating Income, net (4) $40 million to $42 million expense 2013 Capital Expenditures $60 million to $80 million (1) This guidance is based on our current growth expectations and increased operating efficiencies in our business in addition to our financial projections for non-operating income and interest expense. Guidance for all non-gaap figures excludes the same items as we excluded in our Q non-gaap reconciliation, as follows: discontinued operations, stock-based compensation, amortization of other intangibles assets, impairments of goodwill and other intangible assets, restructuring charges, contingent interest payment to holders of our Convertible Debentures, unrealized gain/loss on contingent interest derivative on Convertible Debentures, and non-cash interest expense. (2) The most directly comparable GAAP measure to non-gaap gross margin is GAAP gross margin. Non-GAAP gross margin is defined as revenues minus cost of revenues adjusted for stockbased compensation the total of which is then divided by revenues. (3) The most directly comparable GAAP measure to non-gaap operating margin is GAAP operating margin. The figure for non-gaap operating margin excludes stock-based compensation, amortization of other intangible assets, impairments of goodwill and other intangible assets, if any, and restructuring charges, each of which is included in GAAP operating margin. (4) The most directly comparable GAAP measure to Non-GAAP Interest Expense is GAAP Interest Expense. Non-GAAP Interest Expense excludes contingent interest payment to holders of our Convertible Debentures, and non-cash interest expense, which are included in GAAP Interest Expense. The most directly comparable GAAP measure to Non-GAAP Non-Operating Income, net is GAAP Non-Operating Income, net. Non-GAAP Non-Operating Income, net excludes unrealized gain/loss on contingent interest derivative on Convertible Debentures which is included in GAAP Non-Operating Income, net. 8

9 Q&A 9

10 Convertible Debenture Dilution Calculation Basic inputs (as of December 31, 2012) $1.25 billion notional shares per $1,000 is the current conversion ratio million shares issuable (based on conversion ratio) $ current conversion price Treasury stock method dilution calculation (1) (Average Share Price x Shares Issuable) Notional = Share Dilution Average Share Price Q4 calculation ($41.66 average share price during Q4 2012) ($41.66 x 36.37M shares) $1.25B = 6.4M shares $41.66 (1) Verisign uses the Treasury stock method to account for the dilutive effect of the convertible debenture. 10

11 Convertible Debenture Dilution Sensitivity Verisign $1.25 Billion Convertible Debenture (due 8/15/2037) Dilution Sensitivity Based on Average Quarterly Stock Price Quarterly share dilution under the Treasury stock method is calculated as follows: Share Dilution = (Average Quarterly Share Price x Shares Issuable) minus Notional Average Quarterly Share Price Inputs as of December 31, 2012 Notional Conversion Ratio Shares Issuable Conversion Price Q Average Quarterly Stock Price $1,250,000, ,371,000 $ $41.66 Hypothetical Quarterly Average Stock Price Matrix Average Quarterly Stock Price ($) Quarterly Dilutive Share Count Impact (shares) Less than $ $ ,714 $ ,648,778 Q Average Stock Price $ ,541,501 $ ,587,216 $ ,476,263 $ ,319,718 $ ,121,000 Q Average Stock Price $ ,635,814 $ ,883,195 Q Average Stock Price $ ,366,199 $ ,609,095 $ ,301,233 $ ,961,909 $ ,593,222 $ ,197,087 Q Average Stock Price $ ,232,485 $ ,775,255 $ ,329,333 $ ,860,796 $ ,371,000 $ ,861,196 $ ,332,538 $ ,786,094 $ ,222,852 $ ,643,727 $ ,049,571 $ ,441,175 $ ,819,276 $ ,184,559 $ ,537,667 Note: Verisign uses the Treasury stock method to calculate the dilutive effect of the convertible debenture. For further information see the notes to the consolidated financial statements, pages 88-89, on Form 10 K for the year ended December 31,

12 Summary of Non-GAAP Measures As of December 31, 2012, the Company s business consists of Naming Services, which includes Registry Services and Network Intelligence and Availability ( NIA ) Services. Non-GAAP measures exclude the following items: Discontinued operations Stock-based compensation Amortization of other intangible assets Impairments of goodwill and other intangible assets Restructuring charges Contingent interest payments to holders of Convertible Debentures Unrealized gain/loss on contingent interest derivative on Convertible Debentures Non-cash interest expense Non-GAAP financial information is also adjusted for a 28% tax rate starting from the third quarter of 2012, and 30 percent for the other periods presented herein, both of which differ from the GAAP tax rate Financial forecasts and guidance are forward looking statements and actual results may vary for a number of reasons including those mentioned in our most recent 10-K, 10-Q and 8-K filings with the SEC. 12

13 Non-GAAP Reconciliation VERISIGN, INC. STATEMENTS OF OPERATIONS RECONCILIATION (In thousands, except per share data) (Unaudited) Three Months Ended Three Months Ended Three Months Ended December 31, 2012 September 30, 2012 December 31, 2011 Operating Operating Operating Income Net Income Income Net Income Income Net Income GAAP as reported $ 135,355 $ 105,641 $ 116,062 $ 77,910 $ 92,873 $ 53,814 Discontinued operations (4,552) (1,091) (8,485) Adjustments: Stock-based compensation 6,971 6,971 9,807 9,807 7,165 7,165 Amortization of other intangible assets Restructuring charges (35) (35) 3,352 3,352 Unrealized (gain)loss on contingent interest derivative on Convertible Debentures (7,549) 3,167 1,625 Non-cash interest expense 1,961 1,916 1,555 Tax adjustment (7,085) (7,803) 4,593 Non-GAAP as adjusted $ 142,824 $ 95,885 $ 126,009 $ 84,046 $ 103,715 $ 63,944 Revenues $ 230,196 $ 223,528 $ 203,646 Non-GAAP operating margin 62.0% 56.4% 50.9% Diluted shares 162, , ,087 Per diluted share, non-gaap as adjusted $ 0.59 $ 0.50 $ 0.40 Verisign provides quarterly and annual financial statements that are prepared in accordance with generally accepted accounting principles (GAAP). Along with this information, we typically disclose and discuss certain non-gaap financial information in our quarterly earnings release, on investor conference calls and during investor conferences and related events. This non-gaap financial information does not include the following types of financial measures that are included in GAAP: discontinued operations, stock-based compensation, amortization of other intangible assets, impairments of goodwill and other intangible assets, restructuring charges, contingent interest payments to holders of our Convertible Debentures, unrealized gain/loss on contingent interest derivative on Convertible Debentures, and non-cash interest expense. Non-GAAP financial information is also adjusted for a 28 percent tax rate starting from the third quarter of 2012 and 30 percent for all other periods presented herein, both of which differ from the GAAP tax rate. All non-gaap figures for each period presented above have been conformed to exclude the foregoing items under GAAP. Management believes that this non-gaap financial data supplements our GAAP financial data by providing investors with additional information that allows them to have a clearer picture of the Company's operations. The presentation of this additional information is not meant to be considered in isolation nor as a substitute for results prepared in accordance with GAAP. We believe that the non-gaap information enhances the investors' overall understanding of our financial performance and the comparability of the company's operating results from period to period. Above, we have provided a reconciliation of the non-gaap financial information that we provide each quarter with the comparable financial information reported in accordance with GAAP for the given period. SUPPLEMENTAL FINANCIAL INFORMATION The following table presents the classification of stock-based compensation: Three Months Ended December 31, Three Months Ended September 30, Three Months Ended December 31, Cost of revenues $ 1,275 1,491 $ 1,376 Sales and marketing 1,045 1,697 1,206 Research and development 1,832 1, General and administrative 2,819 4,997 3,622 Total stock-based compensation expense $ 6,971 9,807 $ 7,165 13

14 Non-GAAP Reconciliation VERISIGN, INC. STATEMENTS OF OPERATIONS RECONCILIATION (In thousands, except per share data) (Unaudited) Year Ended Year Ended December 31, 2012 December 31, 2011 Operating Income Net Income Operating Income Net Income GAAP as reported $ 457,327 $ 320,032 $ 329,389 $ 142,891 Discontinued operations (7,547) (4,335) Adjustments: Stock-based compensation 33,362 33,362 37,571 37,571 Amortization of other intangible assets 1,321 1,321 1,293 1,293 Restructuring charges (765) (765) 15,512 15,512 Contingent interest payment to holders of Convertible Debentures 100,020 Unrealized (gain)loss on contingent interest derivative on Convertible Debentures (422) 1,125 Non-cash interest expense 7,370 6,540 Tax adjustment (30,860) (51,663) Non-GAAP as adjusted $ 491,245 $ 322,491 $ 383,765 $ 248,954 Revenues $ 873,592 $ 771,978 Non-GAAP operating margin 56.2% 49.7% Diluted shares 163, ,887 Per diluted share, non-gaap as adjusted $ 1.97 $ 1.49 Verisign provides quarterly and annual financial statements that are prepared in accordance with generally accepted accounting principles (GAAP). Along with this information, we typically disclose and discuss certain non-gaap financial information in our quarterly earnings release, on investor conference calls and during investor conferences and related events. This non-gaap financial information does not include the following types of financial measures that are included in GAAP: discontinued operations, stock-based compensation, amortization of other intangible assets, impairments of goodwill and other intangible assets, restructuring charges, contingent interest payments to holders of our Convertible Debentures, unrealized gain/loss on contingent interest derivative on Convertible Debentures, and non-cash interest expense. Non-GAAP financial information is also adjusted for a 28% tax rate starting from the third quarter of 2012, and 30 percent for the other periods presented herein, both of which differ from the GAAP tax rate. All non-gaap figures for each period presented above have been conformed to exclude the foregoing items under GAAP. Management believes that this non-gaap financial data supplements our GAAP financial data by providing investors with additional information that allows them to have a clearer picture of the Company's operations. The presentation of this additional information is not meant to be considered in isolation nor as a substitute for results prepared in accordance with GAAP. We believe that the non-gaap information enhances the investors overall understanding of our financial performance and the comparability of the company s operating results from period to period. Above, we have provided a reconciliation of the non-gaap financial information that we provide each quarter with the comparable financial information reported in accordance with GAAP for the given period. SUPPLEMENTAL FINANCIAL INFORMATION The following table presents the classification of stock-based compensation: Year Ended December 31, Cost of revenues $ 5,754 $ 6,655 Sales and marketing 6,091 6,062 Research and development 6,023 4,926 General and administrative 15,494 19,928 Restructuring charges 5,701 Total stock-based compensation expense $ 33,362 $ 43,272 14

15 Non-GAAP Reconciliation Reconciliation of Non-GAAP Interest Expense and Non-GAAP Non-Operating Income, net (1) (in thousands) FY12 GAAP Interest expense $50,196 GAAP Non-operating income, net (5,564) GAAP total 44,632 Unrealized gain on contingent interest derivative on Convertible Debentures 422 Non-cash interest expense (7,370) Non-GAAP total $37, (1) The most directly comparable GAAP measure to Non-GAAP Interest Expense is GAAP Interest Expense. Non-GAAP Interest Expense excludes contingent interest payment to holders of our Convertible Debentures, and non-cash interest expense, which are included in GAAP Interest Expense. The most directly comparable GAAP measure to Non-GAAP Non-Operating Income, net is GAAP Non-Operating Income, net. Non-GAAP Non- Operating Income, net excludes unrealized gain/loss on contingent interest derivative on Convertible Debentures which is included in GAAP Non- Operating Income, net. 15

16 Free Cash Flow Calculation Reconciliation of Operating Cash Flow to Free Cash Flow (1) Free Cash Flow ($M) Q111 Q211 Q311 Q411 FY11 Q112 Q212 Q312 Q412 FY12 Cash Flow from Operating Activities Excess Tax Benefits from Stock-Based Awards 3.6 (2.8) (2.3) 18.4 Total Acquisition of Property and Equipment, Net (15.6) (13.9) (34.0) (129.2) (192.7) (12.9) (13.3) (13.6) (13.2) (53.0) Total Free Cash Flow 78.3 (3.8) (1) Free Cash Flow is a non-gaap financial measure defined as cash flow from operating activities (adjusted to include excess tax benefits from stock-based compensation), less net capital expenditures. The excess tax benefits from stock-based compensation, as reported on the statements of cash flows in cash flows from financing activities, represent the reduction in income taxes otherwise payable during the period, attributable to the actual gross tax benefits in excess of the expected tax benefits for options exercised/awards released in current and prior periods. 16

17 Historical Naming Metrics Naming Metrics (1)(2) Q1 Q2 Q3 Q4 Full Year Q1 Q2 Q3 Q4 Full Year Q1 Q2 Q3 Q4 Full Year Q1 Q2 Q3 Q4 Full Year New Name Registrations (M's) Net New Additions (M s) Domain Base at End of Period (M's) Overall Renewal Rate (3) 71.0% 69.6% 70.4% 71.2% 70.5% 72.2% 73.2% 72.8% 72.7% 72.7% 73.8% 73.1% 73.3% 73.5% 73.4% 73.9% 72.9% 72.5% - - (1) The domain name base is a count of domain names in the.com and.net base, adjusted for domain names registrations cancelled during the grace period. (2) Figures may differ slightly from figures reported elsewhere due to rounding. (3) Renewal rates are not fully measurable until 45 days after the end of the quarter. 17