VeriSign Earnings Call Insights: Revenue Outperformance and Potential Capital Return

VeriSign (NASDAQ:VRSN) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Revenue Outperformance

Gregg Moskowitz – Cowen & Co.: Just to start off, it’s actually fairly unusual to see a 3% sequential revenue increase in a Q1, particularly given that net adds came in at a very low end of guidance. What drove the revenue outperformance in the quarter, was it NIA or some other factor?

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George Kilguss III – SVP and CFO: In December of this year or in the fourth quarter I should say, we actually changed our methodology of how we account for contra-revenue. So, contra-revenue is a — our marketing expenses we spend that are a deduct from revenue. We went to a GAAP convention, which recognizes that expense over the life of the customer contract that is entered into. So, we had lower contra-revenue in Q1. Going forward, the effects that we used to see from more of a seasonal factor in Q1 from contra will not be as a (indiscernible) it will be a more smooth, that’s why we are recognizing that expense over the contract life of the customer.

Gregg Moskowitz – Cowen & Co.: George, could you walk us through why you opted to delay that $5 million in marketing expenses in the first quarter? Also, do you expect to make most of that up in the second quarter or in future quarters?

George Kilguss III – SVP and CFO: So again, the marketing team constantly evaluates program, its effectiveness and programs that we have in the pipeline based on market activities going on. The team during the quarter made a determination that it wanted to delay some programs. They didn’t think that its effectiveness was going to reach its maximum potential, and chose to delay that for a few quarters. Right now, we’re expecting to see that still in the third and fourth quarter of this year. The team is regrouping on some of those programs and we’ll give more of an update on that on our next quarter call, but right now we’re expecting to continue to spend that in this fiscal year…

Gregg Moskowitz – Cowen & Co.: For Jim, last quarter I think you made the comment that you were seeing early signs of stabilization and improvement in renewal rates. And as you pointed out in your prepared remarks on a year-over-year basis, you’re obviously still working through some of the algo changes, but this represented some fairly nice improvement versus the prior period. I’m just wondering how you’re sort of thinking and looking at renewal rates at this point going forward?

D. James Bidzos – Chairman, President and CEO: We’re been looking I’d say, we’re cautiously optimistic about what’s happening, but we don’t guide to renewal rates of course, and first of all, I would say that we’re still, we’re in the fourth quarter of the algorithm, search algorithm changes, and so we’re still uncertain exactly how that’s going to play out. Those changes are ongoing and continuing. So I think we’re not in a position to say that those changes have been absorbed or they’ve ended they continue. Secondly, as I mentioned we still are feeling the effects of macroeconomic headwinds, particularly in Europe.

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George Kilguss III – SVP and CFO: Greg, let me give you a little more color on that. As we previously discussed, our zone metrics have been impacted by both the poor economic conditions here and abroad, as well as changes to algorithm, search algorithms. As it relates to Google, while they don’t provide that much information as it relates to past or future changes to their algorithm, what we do know is, and we’ve previously discussed they made two major algorithm changes called Panda and Penguin. But when you look at Panda, Panda started in 2011 and since its inception they made over 25% different updates to that particular algorithm change. Of the 25 updates, 14 of those updates happened in 2012, so 56% happened in 2012 and they’ve actually had two additional updates here in the first quarter. So those changes do continue to go on. As it relates to the Penguin change, as we discussed last year, the first time we saw Penguin change came out was in the first quarter of 2012. They made total three changes to their Penguin algorithm in 2012 that we haven’t seen any changes yet in 2013 I believe Matt Cutts from Google made some comments at a seminar that they believe they were going to make another change in 2013 to Penguin. But I guess my point here is that they made continued changes to the algorithm some impact is more than others. We don’t know the impact of the changes until after they make them. So, we are constantly monitoring those but they have made a significant amount of changes, especially in 2012 which have an effect in future periods for us. So we continue to monitor that. We take that information into the guidance that we provide you as one data input, but there are many changes that happened at least over the past year and the current quarter…

Gregg Moskowitz – Cowen & Co.: If I can just ask one final question since it is relevant for all of our models. I am just wondering to get a sense of how you are thinking about putting the incremental 650 million of debt to use from potential buyback standpoint?

George Kilguss III – SVP and CFO: We have historically not guided to buybacks in any particular quarter. I think if you look at the Company’s track record, it’s had a very consistent track record in the first quarter. We did a $132 million of repurchases. As Jim mentioned, we always look at our strategic framework. We look at the cash flow from what do we need to invest in the business to protect the assets. What level of liquidity do we need to maintain on hand. What cash do we need to invest to generate positive IR return to propagate growth and innovation and then to the extent that each quarter, we feel we have cash that we deem is excess, we then make decisions on what cash we believe we should be returning to shareholders. So, we don’t guide – we haven’t guided to that, but I think if you look at our record, it’s been relatively consistent in our results in return on capital to shareholders when appropriate.

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D. James Bidzos – Chairman, President and CEO: I would just add as well that George talked in his remarks about our capital structure; part of that obviously, is debt leverage ratios. We have talked in the past often about the fact that the Company did not have as much debt as it could have. We’d have as much as that absolutely could have. We said no, the number will be somewhere in between. I think now you’ve seen that. And clearly, as you saw from the announcements earlier when we closed on the debt offering, it was under very attractive terms for the Company. We see that as a permanent part of our capital structure under attractive terms and we’ve been very clear about the stated purpose for that general – corporate purposes, potential acquisitions and potential share repurchases among other things, and I think our position on acquisitions, mergers and acquisitions has been very clear consistent there is no change whatsoever on that. As George mentioned, we don’t guide on buybacks, but I think if you look at how we’ve dealt with our use of cash issues, which we determine from quarter-to-quarter. Certainly, you can look back and see that share repurchase has under these market conditions over the last couple of years in an attractive way for us to return value to shareholders.

Potential Capital Return

Sterling Auty – JPMorgan Chase: Just a follow on that last point Jim. Is buybacks really the main focal point or how within that strategic framework would you characterize buybacks versus special dividend versus regular dividend as potential capital return?

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D. James Bidzos – Chairman, President and CEO: We don’t guide to any of those obviously and we do evaluate our cash situation or cash needs and our deployment of our cash on a quarterly basis. I think looking back extraordinary dividends during the divestiture period when we did have divestiture proceeds certainly we’re one way that we deployed cash share buyback has been a more consistent method for us, but again obviously we don’t guide. So at this point, I’d say based on very dynamic conditions in the last few quarters, over the course of 2012 and over the first quarter of 2013, clearly you’ve seen that our share repurchase has been our preferred method of cash deployment, that’s based on current conditions. There is no change in our strategy as I mentioned with respect to M&A or other uses of cash, it’s just determined every quarter.

Sterling Auty – JPMorgan Chase: George, could you quantify the impact on the first quarter from that change in accounting contra-revenue and did you say that it’s bigger in the first quarter as you adopted the plan and starts to fade, I missed what you – how you were explaining that?

George Kilguss III – SVP and CFO: So contra is, I would say for all tax and purposes now going to be more consistent in each quarterly number. It was relatively flat quarter-over-quarter from fourth quarter to first quarter. First quarter 2012, had probably about $4 million more contra depressing Q1 in 2012, but Q4 to Q1 were very consistent in the amounts.

Sterling Auty – JPMorgan Chase: Last question on the repatriation announces that you are doing. Would like to determine you mentioned before the end of the year you need a ruling by a tax authority or what else can we be looking from the outside to gauge where you are at in the process?

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George Kilguss III – SVP and CFO: So, as you can imagine we’ve been evaluating the strategic alternatives related to our international tax and related liquidity. As you can appreciate that looks as very complex, it is ongoing, we had hope to have an update for you now but as mentioned that work continues. There are number of complexities we have, the number of dependencies as well and we will give you an update as soon as we can but it is ongoing. At the end of the day as you might expect we need to understand the full cause and risk of any potential changes to our structure before we consider any decision to potential changes and it is just a very complex area, we do have some dependencies that we are looking at and we will provide you an update clearly on Q2 and Q3, if not before, but we think that work should be completed by year end.

A Closer Look: VeriSign Earnings Cheat Sheet>>