Good day, everyone. Welcome to VeriSign's Fourth Quarter and Full Year 2019 Earnings Call. Today's conference is being recorded. Recording of this call is not permitted unless preauthorized. 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 fourth quarter and full year 2019 earnings call. With me are Jim Bidzos, Executive Chairman, President and CEO; Todd Strubbe, Executive Vice President and COO; and George Kilguss, Executive Vice President and CFO. This call and presentation are being webcast from the Investor Relations Web site, which is available under About VeriSign on verisign.com. There you will also find our fourth quarter and full year 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 in our documents filed with the SEC, specifically the most recent reports on forms 10-K 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 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 in the Investor Relations section of our Web site. 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. Good afternoon, everyone. I’m pleased to report another solid quarter for VeriSign that caps off not only a solid year but also a strong decade in which we’ve focused on our core business, expanded the domain name base and returned value to our shareholders. In 2019, we marked more than 22 years of uninterrupted availability for the VeriSign DNS for .com and .net. 2019 was also a strong year for the .com and .net domain name base as we processed a record 40.3 million registrations and concluded the year with 158.8 million names. Finally, 2019 was characterized by solid financial performance with revenues of 1,232 million and free cash flow of 714 million. On January 3, VeriSign and ICANN announced a proposed agreement to amend the .com registry agreement and the new proposed framework for working together on initiatives related to the security, stability and resiliency of the domain name system in the form of a binding Letter of Intent between the two organizations. Together, these agreements fulfill commitments that ICANN and VeriSign made in 2016 when the .com registry agreement was previously amended. The new proposed amendment updates the .com registry agreement to reflect certain changes under amendment 35 to the cooperative agreement with the U.S. Department of Commerce, including the pricing changes. According to the terms of the proposed Letter of Intent, VeriSign will have a one-time commitment to provide $4 million per year over five years beginning on January 1, 2021 for ICANN to support activities to preserve and enhance the security, stability and resiliency of the DNS and the Internet. We believe that the activities funded by this commitment will benefit the entire Internet community. ICANN's public comment period for these two documents closes February 14. The steps that follow the comment periods closing…

Thanks, Jim, and good afternoon, everyone. For the year ended December 31, 2019, the company generated revenue of 1,242 million, up 1.4% from 2018 and delivered GAAP operating income of 806 million, up 5% from 767 million a year ago. As a reminder, revenue growth during 2019 was partially offset by lower revenue from our divested security services business as most customers’ contracts transition to the buyer during the year. For the full year 2019, revenue from U.S. customers was 63% of total with 37% coming from foreign customers. Fourth quarter revenue came to 311 million, up 1% year-over-year. GAAP operating expense totaled 112 million compared to 103 million last quarter and 113 million in the fourth quarter a year ago. The quarter-over-quarter increase in operating expense is primarily a result of increased investment in our business, including increased sales and marketing programs as well as investments in our operational infrastructure and security capabilities. Fourth quarter operating income totaled 199 million compared with 194 million in the same quarter of 2018. The operating margin in the quarter came to 63.9% compared to 63.1% in the same quarter a year ago. Net income totaled 148 million compared to 182 million a year earlier, which produced diluted earnings per share of $1.26 in the fourth quarter this year compared to $1.50 for the same quarter last year. For the year-over-year competitive results, remember that 2018 results included the gain on the sale of our security services business which increased fourth quarter 2018 GAAP net income by 52 million and earnings per share by $0.43. Related to non-GAAP results, fourth quarter 2019 non-GAAP operating expense, which excludes 12 million of stock-based compensation, totaled $100 million and was higher sequentially for the reasons I discussed earlier and slightly lower than fourth quarter 2018 levels.…

Thank you, George. The fourth quarter was another solid quarter for VeriSign capping a solid year for the company as further expansion of the domain name base and year-over-year revenue growth we generated and efficiently returned value to shareholders. We continue our work to protect, grow and manage the business while continuing our focus on providing long-term value to our shareholders. We will now take your questions. Operator, we're ready for the first question.

Thank you. [Operator Instructions]. We’ll take our first question today from Rob Oliver with Baird.

Great. Good afternoon, gentlemen, and thank you for taking my questions. A question for you, George, just on the full year guidance, just curious if you could help us understand what might be in there in terms of – I guess we’re expecting price increases to roll in starting later this year and if that’s been factored in? And additionally on .web, I know it’s tough to know exactly when that closes, but expecting that it would in '20 obviously less meaningful, but just curious whether those were included in the guide? And then I just had a quick follow up. Thanks.

Rob, we don’t guide the price increases but I can tell you in our guidance there are no price increases in the guidance.

And there’s no – none of the guidance that you’ve been given includes any revenue from .web at this point.

Okay, great; very helpful. And then just as a follow up, I know you also mentioned in your prepared remarks increasing sales and marketing and just was wondering if – and domain growth obviously was strong – coming in stronger than expected. Just wondering if that’s just kind of normal channel incentive activity or if there’s anything else structural going on in terms of driving increased sales and marketing and potential increase spend going forward? Thanks, guys. I appreciate it.

Rob, so from a marketing perspective, I would say in general the programs and types of programs that we ran this year were similar to last year. So there’s really not a huge change. What we’re doing again, if we recall last year, we also had some seasonal increase in sales and marketing in the fourth quarter and we articulated that in our 10-Q that we filed last quarter that we expected that to go up as a percent of sales as well.

Great. Thanks, again.

Next we’ll hear from Nick Jones with Citi.

Hi. Thanks for taking my questions. First, I guess, is there anything noteworthy as far as geographic mix goes? I know China has had an impact on renewal rates given kind of the coronavirus issue there. Is that creating any challenges with registrations in that region?

I’m sorry, I didn’t catch the second part of the question.

Just wondering if kind of healthcare issues in China is having an impact on registrations or renewals?

Okay. So, yes, in the fourth quarter – we had a very strong fourth quarter as Jim alluded to, 10.3 million new additions which was up from 9.5 million in the fourth quarter of '18. When we look at where that demand came from, it came from registrars based in the United States, Asia Pacific region and EMEA. So as far as renewal rates, again, they vary by geography. It’s something we keep an eye on. But as it relates to any virus over in China, we’re not seeing any impact to date but it’s something we’ll keep an eye on.

Got it. And then one more. The investment with ICANN, can you provide a little more color around kind of what needs improvement in preservation? Is it mostly ongoing CapEx or is there anything kind of bigger that you can call out?

So the question, Nick, that was about spend on the infrastructure. Was that the question?

Yes, the 4 million per year over five years.

I’m sorry. Can you just --

The question about the Letter of Intent, the 4 million over five years.

I’m just looking for a little more color on what exactly the money is going to be going towards and what needs to be improved, what needs to be preserved, is there any kind of additional color you can provide there?

It’s security and stability for both DNS and for the Internet. There’s a broad variety of areas where that funding will go. There’s things such as root governance which impacts everybody, every relying party on the global Internet. ICANN’s core mission is security and stability and that’s where this funding is going. You may have followed last year, for example, ICANN executed on something called the KSK rollover refreshing the critical part of the global security system for the Internet, there’s a broad variety of areas that need additional funding that everybody, including VeriSign, of the entire global Internet community will benefit from. And so the funding in the LOI is specifically targeted in that broad security, stability and resiliency area in ICANN core mission.

Got it. Thank you for taking my questions.

We will take our last question from Sterling Auty with JPMorgan.

Thanks. Hi, guys. I got a couple of questions. First one to revisit the renewal rate, I know you mentioned that renewal rate varies by geography. But given that it was down year-on-year, any more color that you can give? Is it just mix driven where the renewal rates in each of the geographies consistent with last year, or did you see any changes in any of the renewal rates in those geographies?

Sterling, as you know, renewal rates [indiscernible] period-to-period, but I think from a big picture perspective as we articulated last quarter, it really is – it seems to be a mixture of the names that we sold in the prior year coming up for renewal. We had more names being sold last year in the Asia Pacific and China region becoming a slightly large proportion of the base. And so they are having a slight impact there. But other than that, we’re not seeing huge variances. Again, I would just remind you if you look back over the last couple of years, the company’s renewal rate has been around 72% and has recently increased up into the 74% range. And while it is down year-over-year by about 60 basis points, it’s still in general improving as the base ages. So I would say remind folks that we had a pretty stable renewal rate within the company.

Okay. And then following up on the 10.3 million gross additions, you basically said there is growth out of U.S., Asia Pacific and EMEA. But can you peel that back a little bit more? So 10.3 is better than what we have been seeing. I think it’s the first time you’ve done over 10 million in quite some time. Which area contributed more than what you have been seeing? In other words, which geography generated incremental growth this quarter?

Well, as I said, those three were the largest contributors to the growth. Again, recall we’re a FIN registry, so what we’re reporting on is the registrations by our registrars where they are domicile to do business. So to some degree it may not be completely transparent to where the end users are. The registrars have that information not necessarily us. But our customers and registrars in the fourth quarter, the U.S. continued to remain strong as did Asia Pacific and EMEA. The only thing I’d just comment on is also what happens sometimes from year-to-year is we have new companies becoming registrars and they tend to pop up in new markets, and we have sometimes consolidation in the market where one registrar may acquire some business from another registrar. But those three regions performed well for us in the quarter.

Okay, got it. And I want to clarify. Jim, you mentioned in terms of the panel decision on .web, that’s just the final decision as to whether you can be a party to the process or what is that decision that you’re waiting for this month on?

Yes, Sterling, that’s the issue before the panel. They indicated that they could rule before the end of the year, but that didn’t happen. The indication now is that they hope to rule this month. But the issue before them that they will be ruling on is the active participation by VeriSign in this process.

Okay. And then back – operationally you mentioned the investments that you were making both in sales and marketing as well as some infrastructure investments. Can you kind of parse out where was the bigger portion of that investment, in which of those two areas?

We’re not prepared to talk about that level of detail. There are a lot of different components to the security infrastructure investments. As you know, Sterling, we’re very different than most other registries. Many of them are actually marketing registries rather than operating registries. We operate the common net infrastructure which requires stringent performance requirements. So we make investments that are I think far beyond what most others do. There are a lot of schedule investments that we make, but as you know the cyber security threat environment is dynamic and ever changing. If there are new threats, if there are new technologies, new products that strengthen our infrastructure and our core mission, we’re not going to hesitate to make those investments. We have all of the above in the quarter along with sales and marketing. But we haven’t and I don’t think we’re prepared now to break that out in any detail.

All right. Last question is one of the questions I get frequently from investors is what your appetite and what your view would be on acquisitions and being a consolidator in the market especially now that you’ve got the ability to be a vertically integrated company outside of .com? What’s your interest level in pursuing those opportunities?

I don’t think there’s any update we can provide you. There’s certainly no guidance for a particular interest. As you know, our focus is on .com and .net. We’ve actually made divestments in our VSS business. We are pursuing .web as a growth opportunity. We do have additional IDNs that we expect to deploy in the future. I think security and stability in our current growth plans that we’ve talked about are what we’re prepared to talk about. There’s not anything else that I would speculate about or guide to. I would just say that as you heard George and myself comment earlier, the guidance that we’ve given for 2020 does not include any provision for price increases, doesn’t include any revenue from .web. So we tend to be more conservative in those areas and that’s probably as much as I can tell you at this time.

Understood. Thank you.

That will conclude today’s question-and-answer session. I will now turn the conference over to Mr. David Atchley for any additional 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.

That does conclude today's conference. Thank you for your participation. You may now disconnect.