David Atchley - Corporate Treasurer D. James Bidzos - Founder, Executive Chairman, Chief Executive Officer and President George E.

Kilguss - Chief Financial Officer, Principal Accounting Officer and Senior Vice President Patrick S. Kane - Senior Vice President of Naming and Directory Services

Walter H. Pritchard - Citigroup Inc, Research Division Harris Heyer Steven M.

Ashley - Robert W. Baird & Co.

Incorporated, Research Division Gregg S. Moskowitz - Cowen and Company, LLC, Research Division Sterling P.

Auty - JP Morgan Chase & Co, Research Division Jaimin Soni - BofA Merrill Lynch, Research Division

Thank you, operator, and good afternoon, everyone. Welcome to VeriSign's Second Quarter 2013 Earnings Call.

I'm David Atchley, Director of Investor Relations and Corporate Treasurer. With me are Jim Bidzos, Executive Chairman, President and CEO; George Kilguss, Senior Vice President and CFO; and Pat Kane, Senior Vice President, Naming and Directory Services.

This call and our presentation are being webcast from the Investor Relations section of our website, www.verisigninc.com. There you will also find our second quarter 2013 earnings release.

At the end of this call, the presentation will be available on that site and within a few hours, the replay of this call will be posted. Financial results in our press 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 report on Forms 10-K and 10-Q and any applicable amendments, 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 to not 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 press 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 up the call for your questions.

Unauthorized recording of this call is not permitted. With that, I would like to turn the call over to Jim.

Thanks, David, and good afternoon, everyone. The second quarter demonstrates that we're on track with our plans for 2013.

We reported revenue of $239 million, which was 12% higher year-over-year and delivered strong financial performance, including $132 million in free cash flow. We processed 8.7 million new gross registrations during the second quarter and added 1.22 million net new names, bringing our name base to a total of 124.3 million .com and .net domain names.

Our balance sheet remains strong, with approximately $2 billion in cash, cash equivalents and marketable securities at the end of the quarter. We continue to see benefits from our focus and discipline in the execution of our strategic framework.

During the second quarter, we continued our share repurchase program by repurchasing 7.1 million shares for $334 million. On July 24, 2013, the Board of Directors increased the amount of VeriSign common stock authorized for repurchase by approximately $519 million to a total of $1 billion authorized and remaining with no expiration.

We continually evaluate the overall cash and investing needs of the business and consider the best uses for our cash, including potential share repurchases. Also today, we announced an increase in registry domain name fees for .net, per our agreement with ICANN.

As of February 1, 2014, the registry fee for .net domain names will increase from $5.62 to $6.18. I'll comment now on second quarter operating highlights.

At the end of June, the total base of registered domain names and common net was 124.3 million, consisting of 109.2 million for .com and 15.1 million names for .net. This represents an increase of 4.9% year-over-year.

In the second quarter, we added 1.22 million net names to the domain name base after processing 8.7 million new gross registrations. In the first quarter of 2013, the renewal rate was 73.2% compared with 73.9% for the first quarter of 2012.

While renewal rates are not fully measurable until 45 days after the end of the quarter, we believe that the renewal rate for the second quarter of 2013 will be approximately 72.4%. This rate compares to 72.9% for the second quarter of 2012.

In the last year, we've noted the ongoing effects of changes in search algorithms and macroeconomic headwinds on our renewal rates. These factors continue to have a more pronounced effect on first-time renewing rates.

Our base has been maturing, and the renewal rate for previously renewed names has stayed relatively consistent, which are positive trends for the overall renewal rate. However, the softer first-time renewal rate is an offsetting factor.

We cannot be certain of how long the renewal rate will be impacted by these factors. In light of these factors, we expect the third quarter net names for .com and .net added to the base will be between 1 million and 1.4 million names.

As noted in prior calls, updates to the zone are posted on our website at least once per day, allowing you to track how the zone is growing throughout the coming quarter. Now I'd like to turn the call over to George.

Thanks, Jim, and good afternoon, everyone. I'd like to begin with a discussion of our second quarter financial results.

During the quarter, we generated $239 million, up 12% year-over-year, and delivered GAAP operating income of $132 million, up 23% from $107 million in the second quarter of 2012. The GAAP operating margin in the quarter came to 55.2% compared to 50% in the same quarter a year ago.

GAAP net income totaled $87 million compared to $68 million a year earlier, which produced diluted GAAP earnings per share of $0.55 in the second quarter this year compared to $0.42 for the second quarter last year. As of June 30, 2013, the company maintained total assets of approximately $2.5 billion.

Liabilities totaled approximately $2.8 billion at the quarter end. The second quarter balance sheet reflects the April 2013 issuance of $715 million in senior secured notes due 2023 and the repayment of $100 million in borrowings under our credit facility.

During the second quarter, our stock price continued to exceed the subordinated convertible debenture conversion trigger of $44.68, which means the holder of the convertible debentures will continue to have the option of converting the debentures into common stock during the third quarter. Thus the balance sheet classification as current liabilities of these debentures remains the same, as recorded at the end of the first quarter.

We will provide updates if the balance sheet classification or the availability of the holder's option to convert the debentures change in the future, should the stock price trigger not be reached. I'll now review some of our key second quarter operating metrics, which are revenue, deferred revenue, non-GAAP operating margin, non-GAAP EPS, operating cash flow and free cash flow.

I will then discuss our 2013 full year guidance. As mentioned, revenue totaled $213 million for the second quarter.

Approximately 60% of our revenue was derived from customers in the U.S., and 40% was from foreign customers. Revenue from both international and domestic sources in the second quarter grew approximately 12% year-over-year.

Deferred revenue at quarter end totaled $856 million, a $44 million increase from the year-end 2012. Second quarter non-GAAP operating expense, which excludes $9 million of stock-based compensation, totaled $98 million compared with $96 million in the first quarter of 2013 and $99 million in the same quarter a year ago.

The quarter-over-quarter increase was primarily attributable to increased marketing expenses in the second quarter. Non-GAAP operating margin for the second quarter expanded to 58.9% compared to 54% in the same quarter of 2012.

Non-GAAP net income for the second quarter was $92 million, resulting in non-GAAP diluted earnings per share of $0.58 compared to $0.45 in the second quarter of 2012 and $0.58 last quarter. With respect to taxes, we continue to use a non-GAAP tax rate of 28% for our non-GAAP net income and non-GAAP EPS calculations.

In 2013, we still expect to pay cash taxes of approximately $35 million to $45 million. We had a weighted average diluted share count of 159 million shares in the second quarter compared to 161 million shares in the first quarter.

Dilution related to the convertible debenture was approximately 9.4 million shares based on the average share price during the second quarter, compared with 5.6 million for the same quarter in 2012. The share count was reduced by the full effect of first quarter repurchase activity and the weighted effect of the 7.1 million shares repurchased during the second quarter.

Operating cash flow was $147 million for the second quarter compared to $151 million in the first quarter of 2013 and $135 million for the second quarter last year. Second quarter free cash flow was $132 million.

Regarding our international cash balances and how they interrelate with our international tax structure, this work is progressing, but remains ongoing. We expect to compete our work before the end of the year, and we will update you when appropriate, including during our third quarter earnings call.

Of the $2 billion in cash, cash equivalents and marketable securities at the end of the quarter, approximately $630 million was domestic, with the remainder held internationally. The approximate $1.37 billion in international cash has not been taxed at the U.S.

level, and our assertion unchanged from prior quarters, is that this balance is indefinitely reinvested offshore. With respect to 2013, our full year guidance includes updates to our revenue and operating margin projections.

Revenue for 2013 is now expected to be in the range of $952 million to $962 million, representing an annual growth rate of 9% to 10%. This is an increase from the $945 million to $960 million or a growth rate of 8% to 10%, as given on our last earnings call.

Non-GAAP gross margin is still expected to be at least 80%. Full year 2013 non-GAAP operating margin is now expected to be between 58% and 59%.

This is an increase from the guidance of at least 57%, as given on our last earnings call. Our non-GAAP interest expense and non-GAAP non-operating income net is still expected to be an expense of between $60 million and $62 million for 2013.

Capital expenditures for the year are still expected to be between $60 million and $80 million. Our guidance is based on expectations about the outlook of our business, in addition to our financial projections for interest income and expense.

In summary, the company continues to demonstrate sound performance in the second quarter. We have grown non-GAAP operating income and net income as compared with Q2 2012.

We have maintained a strong balance sheet and expect strong operating cash flow generation to continue as a result of our financial model. Now, I will turn the call back to Jim for his closing remarks.

Thank you, George. During the second quarter, we continued our efforts to protect, grow and manage the business while delivering value.

We remain committed to offering the security and stability that are at the core of our business and provide value to our customers, employees and shareholders. We'll now take your questions.

Operator, we're ready for the first question.

Jim, I'm wondering if you could talk a bit about some of the new product areas that you're exploring. You've, in the past, talked about that and patents as potentially additional sources of revenue.

And I note that looks like your revenue this quarter was a bit above what we expected, modeling it off of the demand side and I'm wondering if any of these new product areas start to contribute in the quarter?

Okay, thanks. So in our new product area, first of all, I don't know if you're referring specifically to NIA, but we don't report that separately, but we're pleased with the growth of our NIA business.

Secondly, in the area of new products that are coming out of our R&D efforts, we're very pleased with the progress that we're making there. I've committed in earlier earnings calls to target a delivery of a new product or service during calendar 2013, and we still hope to be able to do that.

So as to contributions to the revenue, I think that, that was part of your question. Certainly, NIA makes contributions to part of our revenue.

But as I said, we don't report that separately.

This is Harris Heyer for Phil. I was hoping that you could provide us with an update on your IP strategy that you first mentioned late last year?

Yes, we mentioned last year that we would be reviewing our patent portfolio, and we continue to do that. We continue to add to our patent portfolio.

We mentioned that we had over 200 patent applications and patents issued here in the U.S., that progress continues. We've added to that since the last call.

We're currently in a review. We're not ready to say anything about where that review will take us, but we're conducting a review of how we can better utilize our intellectual property.

I just wanted to clarify on the renewal rate. Was it that the renewal rate on the new customers was lower?

Or was the mix or the percentage of new customers renewing in the period simply higher?

So Steve, this is George Kilguss. Thanks for the question.

So the overall renewal rate for the second quarter, which is a preliminary renewal rate, is not final until 45 days after, was 72.4%. That renewal rate, year-over-year, which I think is the best comparison to look at, is down from 72.9% to about 72.4%.

So we're a little under last year's renewal rate at this time. The renewal rate, sequentially, did decline, but the sequential decline is more a function of the fact that we have a lot more names coming up for renewal in the first and second quarter.

And so that's primarily the reason for the consolidated decline. We also mentioned on the call that we are seeing some softness in the first-time renewal names -- renewing names.

We had talked about this in our last quarter call as well, where the previously renewed name ratio is remaining relatively constant, but we're still seeing some pressure on the first-time renewing names.

Any speculations/theory on why that might be happening?

Well, I think it's really relates to a couple of factors. One, are primarily the factors that we've been talking about for several quarters now, which are changes in the algorithms, the search engine algorithms, as well as economic activities.

We did see our international or our international renewal rate on first-time renewing rates come down a little bit more than our domestic, so there's a little more pressure overseas. But it really relates back to those macro and SEO algorithm changes.

Great. And then my next question is on the marketing spend, are you spending currently to drive the current .com business, or have you started to spend to seed for some of the new gTLDs that you'll be introducing here in the future?

We're not -- the short and to your question is that most of the marketing efforts are the same as they have been throughout the beginning of the year, focused around .com and .net. We are preparing to roll out our IDNs that we've applied for.

Nothing has been delegated yet. We hope that will happen sometime this year.

There will be some, obviously, some marketing activities around those. But right now, it's mostly development activities.

Jim, wondering if you just could talk briefly about your decision to raise .net pricing. This time around involved a smaller duration or smaller window, I should say, between price increases than I think we've ever seen before so I just wanted to get your thoughts there?

I'm sorry, the part about the window, I didn't catch all of that.

The window between price increases for .net, Jim?

Yes, so basically, the contract with ICANN allows us to take an increase for .net on an annual basis with a 6-month notice period. And so under that provision of the Registry Agreement with ICANN for .net, we've taken that price increase.

Okay, and one thing I wanted to clarify on the renewal rate, and George, you had sort of talked about some that dynamic from a sequential basis, but I just wanted to make sure I understood, you were saying that the number of first-time renewals in Q2 was greater than Q1 and that's why there was a sequential change? Or was it something else?

No, I was saying that the total number -- in Q1 and Q2, we tend to have more expiring names in the base than we do, say in Q3 and Q4. And so as you have more names expiring, the renewal rate has a tendency to dip, at least in recent periods, with the larger amount of names renewing in the quarter.

But what I also said is some of the pressure is due to the first time renewing rate of first-time renewing names that is still under pressure.

And I guess, what I'm wondering, George, is if there's any dynamic that has changed between Q1 and Q2 when I was asking about sequential? And maybe a better way to ask it is, where there any meaningful search algorithm changes that were made more recently that might have had an effect on renewal rate?

Or was that not the case?

So there was one algorithm change in the quarter. So in mid to late May, Google made an algorithm change to their Penguin -- their Penguin algorithm.

It affected -- I think it affected about 2.3% of queries in general. That's probably a little less than what their first one came out a year ago, which affected about 3% of queries.

So there was an algo change. With that, it's difficult for us to see the direct correlation.

We do know that change happened, we keep on eye on it. Did that have a direct correlation?

I don't have quite that visibility of data to tell that but I do know that, that did happen in the quarter.

Okay, that's very helpful. Then just finally, Jim, on the new detailed e-front -- so there continues to be some back-and-forth between ICANN and constituents, but it also looks like there's been some real progress recently with the 2013 registry agreement recently signed.

And I think you talked about hopefully getting lift off on the IDN before the end of the year. What additional processes or potential obstacles, I guess, are we looking at between now and then?

Sure. ICANN just had their meeting last week in Durban, South Africa.

And they did sign 4 new Registry Agreements and a new gTLD program for IDNs. And as to whether what track or timing the program is on, I think, first of all, ICANN is dealing with couple of issues.

One is back in Beijing, at the prior meeting, in April, ICANN was given a communiqué from the Governmental Advisory Committee that I think had them sort of addressing a number of issues for new gTLDs. That continued in Durban, with further discussions between ICANN and its GAC, Governmental Advisory Committee, on the advice that they provided on productions around a broad category of applied 4 strings.

So I think that's a factor. There are some security instability issues that are being addressed.

ICANN hired a very competent, qualified contractor to do a security study that was presented in Durban, If you're interested in that, I'd point you to ICANN's website, where there's audio available of the presentation, of that report and a Q&A session that I think would help you understand that. And then -- so those things are affecting ICANN's rollout.

In Durban they also said that the earliest date for the first delegation, assuming all goes well, would be early in September. So that's basically the most recent status that we have.

So I wanted to start with growth decelerates in the second half as we lose some of the tailwind from the last .com price increase and I think there's a discussion that many of us are having about what is the long-term growth rate for VeriSign look like in absence of price increases on .com? So when you think about new gTLDs, you think about the adding of new products, et cetera, is there a sense that you can give us?

Do you think we see reacceleration off of what the growth rate at the back half looks like? And what kind of investment will be necessary to support that?

Meaning, what could we think about, just generally, would happen to margins?

Okay, let me sort of break that up into 2 questions and I'll address part of it and maybe George can address part of it. First of all, ICANN's new gTLD program, as we've mentioned before, offers us several growth opportunities.

First of all, there are the 14 applications that we've made ourselves, 12 of those are IDNs, foreign script variance for common net, so we think that's a growth opportunity for us. In addition, we have roughly 200 strings that are applied for in the new gTLD program, for which VeriSign will be the contracted back-end registry service provider, so we think that's a growth opportunity.

We have been very active and working very hard in new initiatives, including some work in a new laboratory that we started last year. We're pleased with the progress we're making there.

As I said, we hope to announce the first new product or service this year. And -- so that's one area, where I think we'll be able to introduce new growth.

We did, of course, just today announce a price increase for .net. With that price increase, I might add, at $6.18 for a .net name, that registration is still extremely competitive compared to other gTLDs that are out there today.

Even .com at $7.85 is below most of the existing or announced prices for existing gTLDs. So all of those offer us opportunities for growth.

Then there's the future rate of growth in the zone, which I think was a part of your question as well and I'll invite George to comment there.

Yes, sure. So, Sterling, as you're aware, we don't give guidance beyond just the current year.

When earlier in the year, when we gave our initial guidance, we talked about the zone growing between 4% to 6%. We're seeing now that the zone year-to-date has been about 4.9% year-over-year growth.

And so, we're looking to see the zone at least for '13 to be somewhere between 4% and 5%. That's where the zone is currently trending.

You talked about profitability. As we roll out some of these new initiatives, as we've talked previously, we look for certain quality of revenues.

So we're looking at business opportunities and new initiatives that have similar qualities of revenue as our existing business: stability, visibility, profitability. And so those are the characteristics we're looking for, for new investment in the business.

We've talked about the new gTLD program, the brand that we're looking to represent, as well as the new IDNs. And we've been making those or have made a lot of those investments already in the business and don't expect a significant amount of cost increase in taking those new opportunities on.

Now, it looks like some of those may be delayed a little bit longer than anticipated based on some of the comments coming out of ICANN, but we still look to participate in those initiatives, as well as looking at our patent portfolio and some new ideas coming out of the hive in subsequent years.

And I'm sorry, I will just add to that as well that all of the growth opportunities that I laid out, the IDNs, the back end Registry Services, new products and services that we might introduce, essentially, the cost of developing all of these new initiatives are baked into to the current business plan and all of the guidance that we provide, if that helps.

Absolutely. You mentioned, Jim, the -- a couple of approvals of new registries for IDNs.

Has anybody given any sense as to what we might expect in terms of pricing on any of the new IDNs or new gTLDs?

I think the short answer to that is no. I would add that while ICANN did sign 4 contracts for IDNs, I believe that there are some conditions associated with those.

I think if you got to the website, you'll see that there were some exhibits that the applicants signed in addition to the contracts that essentially say that governmental advisory committee advice and security and stability issues could introduce changes that will change that contract. And so, even though those contracts resigned, there were side agreements attached to them that are on ICANN's website that you can look at that point out that they're subject to changes in a very fluid situation.

But I'll let Pat comment -- but I'm not aware of anybody who's announced any pricing at this point.

No, all the applications that were submitted has financials, which were redacted from when the applications were published, so we have no visibility into that.

Okay, and last question. Jim, you mentioned NIA.

I know you don't break it out specifically, but qualitatively, can you talk about maybe which areas outperformed in the quarter?

Go ahead, George, I'm sorry.

I mean, Sterling, I would say it continues to meet our expectation. It's performing well year-over-year.

We still see growth in all of the products that we offer for sale in that mainly DDoS, as well as MDNS and our iDefense business. We continue to see good growth of that in our business performing line with our expectations.

A question for George, first. If I'd look at the second half of the year, George, can you just help me understand a little bit about how you expect renewal rates to trend?

And when you're looking at the new domains that are coming in, can you give a rough estimation of how many are international versus U.S.?

So on your last point, the U.S. versus international, as I mentioned in the script, about 60% of our business is domestic and about 40% is international from a revenue perspective, and that flows pretty much down to the domains, as you might imagine, from a break out perspective.

So that has been relatively consistent over the past several quarters, so I don't see a significant change in that mix for the rest of this year. As far as the renewal rate trends, again, that's something we're looking at.

We've given the preliminary renewal rate here to second quarter of 2013 of 72.4%, and that's something we're keeping an eye on, the renewal rates. There is a little bit of seasonality if you go back and look at the quarterly renewal rate, it does bounce around depending on the amount of names that are coming up for renewal in a particular quarter.

What I can tell you is the amount of expiring names in Q3 is 24.9 million names that are expiring in the quarter and will come up for renewal.

Got it, okay. And one quick one for Jim.

It seems like the IDN opportunity is to move to a near term of when it comes to the new domain name side of things. Is it possible to just give some parameters on how we can think about the sizing of the TAM here?

Are you talking specifically about VeriSign's own applications for IDNs?

Yes.

Well we've made applications for 12 strings that are IDNs for variations of .com and .net and essentially the largest market opportunities, China, India, Japan, Korea and a handful of others. We haven't -- I think it's early for us to say until we actually start marketing and get approval for the IDNs what the potential for that would be.

We've not finalized and issued any pricing associated with that. We did send a letter to ICANN clarifying a little bit about our marketing strategy, which I think is reasonable to define as sort of a brand extension strategy, I'll bypass the comments on that as well, but I'm afraid there's really, at this point, it's hard -- it's too early to project the size of the opportunity, but in places like China and India, where there are very large populations of Internet users, who are not English speakers, I certainly think there is an opportunity, but I'll let Pat comment as well.

So .com, .C-O-M, really has great brand awareness around the globe and some of the issues that we will -- that we're about to contend with is the penetration we have with our own brands and the adoption rate of what the local transliterations will look like. And the second piece is, that we talked about this in the past, IDNs are still not completely ubiquitous in terms of their capabilities within desktop and mobile software.

So there's still some challenges in that particular area right now. So the growth is kind of -- we're excited about it, but in terms of what the total opportunity looks like, there's still some challenges that define that.

There's some infrastructure development that still has to occur before they are fully functional in all of the applications. But there's a tremendous amount of interest, there is growing support.

A lot of application developers have committed to support IDNs. There's a lot of activity in developing standards for interoperability between applications to support IDNs.

And as I mentioned, I think that for brands that market in those geographies where you have a large population of Internet users who are native -- not English speakers, I think there's certainly an opportunity for them to market to those folks through IDN. So we think it's a good opportunity, but unfortunately, at this time, it's a bit early to try to size the market and since we haven't -- we don't have approval yet for the IDNs.

They're not delegated and we haven't published pricing. It's just a bit early to really go farther than that.

Thank you, operator. Please call the Investor Relations Department with any follow-up questions from this call.

Thank you for your participation and continued support. This concludes our call.

Thank you and good evening.