Verisign Q3 2012 Earnings Conference Call October 25, 2012
Safe Harbor Disclosure Statements in this announcement other than historical data and information constitute forwardlooking 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.com Registry Agreement renewal will occur on or before November 30, 2012, if at all, and if the.com Registry Agreement is renewed, whether it will be renewed on the terms previously approved by ICANN and Verisign s Board of Directors; the uncertainty of future revenue and profitability and potential fluctuations in quarterly operating results due to such factors as 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 web-browsing 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
Agenda Introduction & Highlights Business Review Financial Performance/Guidance Closing / Q&A 3
Registry Services Highlights Domain Name Base at 119.9 Million Names, Up 7.1% Y/Y (1) millions 105.0 million.com names and 14.9 million.net names 120 100 80 60 40 20 0.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
Registry Services Highlights 7.8 Million New Name Registrations, Down 1.1% Y/Y + Q2 12 renewal rate 72.9% Renewal rate determined 45 days after end of quarter Q3 12 renewal rate expected to be approximately 72.3% (1)(2) vs. 73.3% in Q3 11 + Net new additions for Q3 12 were 1.37M names + 24.0M names expiring in Q4 vs. 22.3M in Q4 11 10 Millions 8 6 4 2 New Name Registrations Renewal Rate + Domain Name Base for Q4 12 expected to add between 0.9M to 1.3M net names (2) 0 50% 100% 90% 80% 70% 60%.com/.net New Name Registrations 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
Q3 2012 Financial Performance + Revenue of $224M $M Revenue & Profitability Non-GAAP Operating Margin Up 13% y/y 225 60% + Deferred Revenue of $809M Up $80M from end 2011 200 50% Up $86M from Q3 11 + Non-GAAP operating margin of 56.4% (1) + Non-GAAP earnings per share of $0.50 (1) + Operating Cash Flow of $122M 175 150 125 100 40% 30% 20% + Free Cash Flow of $117M (2) 75 10% + 1,100 Full-Time Employees at Sept 30, 2012. (3) 50 0% (1) Please refer to Summary of Non-GAAP Measures for important information. (2) 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. (3) Net of interns (3). Revenue Non-GAAP Operating Margin 6
Financial Guidance (1) 2012 Revenue $870-$875 million, or 13% growth; changed from $870-$880 million, or 13%-14% growth 2012 Non-GAAP Gross Margin (2) At least 80%; unchanged Q4 12 Exit Non-GAAP Operating Margin (3) At least 55%; unchanged 2012 Non-GAAP Interest Expense and Non-GAAP Non-Operating Income, net (4) $39 million expense; unchanged 2012 Capital Expenditures 6%-7% of revenues; changed from 6%-8% (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 Q3 2012 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. 7
Q&A 8
Convertible Debenture Dilution Calculation Basic inputs (as of September 30, 2012) $1.25 billion notional 29.0968 shares per $1,000 is the current conversion ratio 36.37 million shares issuable (based on conversion ratio) $34.368 current conversion price Treasury stock method dilution calculation (1) (Average Share Price x Shares Issuable) Notional = Share Dilution Average Share Price Q3 calculation ($46.06 average share price during Q3 2012) ($46.06 x 36.37M shares) $1.25B = 9.2M shares $46.06 (1) Verisign uses the Treasury stock method to account for the dilutive effect of the convertible debenture. 9
Summary of Non-GAAP Measures As of September 30, 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. 10
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 September 30, 2012 June 30, 2012 September 30, 2011 Operating Income Net Income Operating Income Net Income Operating Income Net Income GAAP as reported $ 116,062 $ 77,910 $ 106,980 $ 68,472 $ 88,947 $ 58,916 Discontinued operations (1,091) (301) Adjustments: Stock-based compensation 9,807 9,807 8,454 8,454 6,370 6,370 Amortization of other intangible assets 140 140 325 325 323 323 Restructuring charges (182) (182) 2,971 2,971 Unrealized loss (gain) on contingent interest derivative on Convertible Debentures 3,167 3,147 (250) Non-cash interest expense 1,916 1,871 1,642 Tax adjustment (7,803) (7,944) (5,413) Non-GAAP as adjusted $ 126,009 $ 84,046 $ 115,577 $ 74,143 $ 98,611 $ 64,258 Revenues $ 223,528 $ 214,142 $ 196,965 Non-GAAP operating margin 56.4% 54.0% 50.1% Diluted shares 166,575 164,178 163,902 Per diluted share, non-gaap as adjusted $ 0.50 $ 0.45 $ 0.39 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: Three Months Ended September Three Months Ended June Three Months Ended September 30, 30, 30, 2012 2012 2011 Cost of revenues $ 1,491 1,451 $ 1,443 Sales and marketing 1,697 1,833 1,305 Research and development 1,622 1,327 1,094 General and administrative 4,997 3,843 2,528 Restructuring charges 723 Total stock-based compensation expense $ 9,807 8,454 $ 7,093 11
Non-GAAP Reconciliation VERISIGN, INC. STATEMENTS OF OPERATIONS RECONCILIATION (In thousands, except per share data) (Unaudited) Nine Months Ended Nine Months Ended September 30, 2012 September 30, 2011 Operating Income Net Income Operating Income Net Income GAAP as reported $ 321,972 $ 214,391 $ 236,516 $ 89,077 Discontinued operations (2,995) 4,150 Adjustments: Stock-based compensation 26,391 26,391 30,406 30,406 Amortization of other intangible assets 788 788 968 968 Restructuring charges (730) (730) 12,160 12,160 Contingent interest payment to holders of Convertible Debentures 100,020 Unrealized loss (gain) on contingent interest derivative on Convertible Debentures 7,127 (500) Non-cash interest expense 5,409 4,985 Tax adjustment (23,775) (56,256) Non-GAAP as adjusted $ 348,421 $ 226,606 $ 280,050 $ 185,010 Revenues $ 643,396 $ 568,332 Non-GAAP operating margin 54.2% 49.3% Diluted shares 164,540 169,176 Per diluted share, non-gaap as adjusted $ 1.38 $ 1.09 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: Nine Months Ended September 30, 2012 2011 Cost of revenues $ 4,479 $ 5,279 Sales and marketing 5,046 4,856 Research and development 4,191 3,965 General and administrative 12,675 16,306 Restructuring charges 5,701 Total stock-based compensation expense $ 26,391 $ 36,107 12
Free Cash Flow Calculation Reconciliation of Operating Cash Flow to Free Cash Flow (1) Free Cash Flow ($M) Q110 Q210 Q310 Q410 FY10 Q111 Q211 Q311 Q411 FY11 Q112 Q212 Q312 Cash Flow from Operating Activities 101.1 149.2 (81.8) 46.7 215.2 90.3 12.9 108.4 124.2 335.9 110.2 135.0 121.6 Excess Tax Benefits from Stock-Based Awards 8.1 4.4 154.7 (35.3) 131.9 3.6 (2.8) 1.0 11.6 13.4 3.6 8.0 9.1 Total 109.2 153.6 72.9 11.4 347.1 93.9 10.1 109.4 135.8 349.3 113.8 143.0 130.7 Acquisition of Property and Equipment, Net (19.9) (22.9) (25.8) (11.9) (80.5) (15.6) (13.9) (34.0) (129.2) (192.7) (12.9) (13.3) (13.6) Total Free Cash Flow 89.3 130.7 47.1 (0.5) 266.6 78.3 (3.8) 75.4 6.6 156.6 100.9 129.7 117.1 13 (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. 13