David Atchley - VP, IR James Bidzos - President and Chief Executive Officer Todd Strubbe - EVP and Chief Operating Officer George Kilguss - EVP and Chief Financial Officer

Sterling Auty - JPMorgan Steve Ashley - Robert W. Baird Walter Pritchard - Citi

Good day everyone, welcome to VeriSign’s Third Quarter 2016 Earnings Call. Today’s conference is being recorded, and unauthorized recording of this call is not permitted. At this time, I would 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 third quarter 2016 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 our presentation are being webcast from the Investor Relations section of our VeriSign.com website. There you will also find our third quarter 2016 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 and 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 longstanding policy not to 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 earnings 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. With that, I would like to turn the call over to Jim.

Thanks, David, and good afternoon, everyone. I’m pleased to report another solid third for VeriSign. Third quarter results were in line with our objectives of offering security and stability to our customers, while generating profitable growth and providing long-term value to our shareholders. Before I get into the third quarter results I want to comment on two areas of focus for the Company. First, last week VeriSign issued an 8-K detailing the completion of the Root Zone Maintainer Service Agreement, or RZMA, and the .com Registry Agreement extension amendment. The RZMA between VeriSign and ICANN is now effective and VeriSign has been discharged from those responsibilities under the Cooperative Agreement. Additionally, NTIA approved the .com extension, which extends the .com Registry Agreement between VeriSign and ICANN until November 30, 2024 to coincide with the term of the RZMA. VeriSign agreed to cooperate with NTIA as it determines whether to exercise their right to extend the term of the Cooperative Agreement before it expires on November 30, 2018. Second, as we stated earlier this year, a significant part of our corporate strategy for 2016 was to evaluate for acquisition top-level domains that are currently in operation and those that have not yet been awarded. Consistent with this strategy, as announced in August, VeriSign entered into an agreement for the future assignment of the .web TLD. While there are still steps that need to occur before we become the registry operator for .web, we are excited about the .web opportunity as we believe that we are well-positioned to make it successful. I will comment now on third quarter operating highlights. We reported revenue of $288 million, up 8.2% year-over-year and we delivered strong financial performance, including $165 million in free cash flow. We ended the third quarter with 144.1 million .com and .net domain name registrations in the domain name base. Our financial position is strong with $1.8 billion in cash, cash equivalents and marketable securities at the end of the quarter. As a part of managing our business, during the third quarter we continued our share repurchase program 2.2 million shares for $177 million. We continually evaluate the overall cash and investing needs of the business and consider the best uses for our cash, including potential share repurchases. At the end of September the domain name base in .com and .net was 144.1 million consisting of 128.4 million .com registrations and 15.8 million .net registrations. This represents an increase of 6.6% year-over-year and a net increase of 0.9 million domain name registrations from the end of the second quarter. During the quarter we processed 8.3 million new registrations. In the second quarter of 2016 the renewal rate was 73.8% compared with 72.7% for the same quarter of 2015. While renewal rates are not fully measurable until 45 days after the end of the quarter, we believe that the renewal rate for the third quarter of 2016 will be approximately 72.3%. This preliminary rate compares favorably to 71.9% achieved in the third quarter of 2015. There are many factors that drive domain growth. These include but are not limited to Internet adoption, economic activity, eCommerce activity and registrar go-to-market strategies. During the second half of 2015 and the first quarter of 2016 we experienced an increased volume of new domain name registrations, primarily from our registrars in China. The volume of these new registrations has been inconsistent and periodic compared to prior periods and by the end of the first quarter of 2016 reverted back to a more normalized registration pace. Also, as discussed the last three quarters, we still expect the fourth quarter of 2016 to be somewhat unique as the value of domain name registrations up for renewal - the volume of domain name registrations up for renewal in the quarter will have a larger-than-normal percentage of first-time renewing registrations as a result of the strong performance during Q3 and Q4 of 2015. While it is difficult to assess what the renewal characteristics of these registrations will be, due to the large upcoming Q4 2016 expiring base we still expect fourth-quarter deletions to be elevated with many of these deletions occurring towards the end of the fourth quarter. Based on these and other factors, we expect the full-year 2016 domain name base growth range of between 1% and 2% despite a net decrease to the domain name base of between 1.5 million and 2.8 million registrations in the fourth quarter. Now I’d like to turn the call over to George.

Thanks, Jim, and good afternoon everyone. Revenue for the third quarter totaled $288 million up 8.2% year-over-year. During the quarter, 58% of our revenue was from customers in the U.S., and 42% was from international customers. GAAP operating income in the third quarter totaled $175 million, up 13.2% from $154 million in the third quarter of 2015. The GAAP operating margin in the quarter came to 60.8%, compared to 58.1% in the same quarter a year ago. GAAP net income totaled $114 million, compared to $92 million a year earlier, which produced diluted GAAP earnings per share of $0.90 in the third quarter this year, compared to $0.70 for the third quarter last year. As of September 30, 2016, the Company maintained total assets of $2.3 billion, and total liabilities of $3.5 billion. Assets included $1.8 billion of cash, cash equivalents and marketable securities, of which $421 million were held domestically, with the remainder held abroad. I’ll now review some additional third quarter metrics, which include non-GAAP operating margin, non-GAAP earnings per share, diluted share count, operating cash flow, and free cash flow. I will then discuss our 2016 full-year guidance. Third quarter non-GAAP operating expense, which excludes $13 million of stock-based compensation, totaled $100 million, as compared to $99 million in the second quarter of 2016, and $99 million in the same quarter a year ago. Non-GAAP operating margin for the third quarter was 65.3%, compared to 62.7% in the same quarter of 2015. Non-GAAP net income for the third quarter was $119 million, resulting in non-GAAP diluted earnings per share of $0.93, based on a weighted average diluted share count of 127.7 million shares. This compares to $0.78 in the third quarter of 2015, and $0.91 last quarter, based on 131.7 million and 130.6 million weighted average diluted shares respectively. Dilution related to the convertible debenture was 20.8 million shares, based on the average share price during the third quarter, compared with 18 million for the same quarter in 2015, and 21.9 million shares last quarter. The share count was reduced by the full effect of second quarter 2016 repurchase activity, and the weighted effect of the 2.2 million shares repurchased during the third quarter. Operating cash flow was $168 million and free cash flow was $165 million for the third quarter compared with $155 million and $157 million respectively for the third quarter last year. With respect to full-year 2016 guidance, revenue for 2016 is now expected to be in the range of $1.135 billion to $1.140 billion, representing an annual growth rate of approximately 7% to 7.5%. This revenue guidance is narrowed from the $1.130 billion to $1.140 billion range given on our last earnings call. Full-year 2016 non-GAAP operating margin is now expected to be between 63.5% and 64.5%, increased from the 62.5% to 64% range provided during the last call. Our non-GAAP interest expense and non-GAAP non-operating income net is still expected to be an expense of between $110 million and $116 million. Capital expenditures for the year are now expected to be between $30 million and $35 million, decreased from the $35 million and $45 million range given on our last call. Cash taxes for the year are still expected to be between $10 million and $20 million. Substantially all of the expected cash taxes in 2016 are international, primarily as a result of domestic tax attributes including cash tax benefits from our convertible debentures. In summary, the Company continued to demonstrate sound financial performance during the third quarter of 2016. Now, I will turn the call back to Jim for his closing remarks.

Thank you, George. In closing, during the third quarter we continued to protect, grow and manage the business while delivering value to our shareholders. We think that our focus on profitable growth and disciplined execution will extend the long-term lines of growth in our top and bottom line and allow us to continue our consistent track record of generating and returning value to our shareholders in the most efficient manner. We believe the two developments I speak of, the .com extension and our move to becoming the registry operator for the .web extension will result in security and stability for our customers and our business as well as long-term growth opportunities for the Company. We will now take your questions. Operator, we are ready for the first question.

[Operator Instructions] And we do have our first question from Sterling Auty with JPMorgan.

Yes. Thanks. Hi guys. Want to start with - can you help us really understand the net impacts from both the .com extension and the signing of the Root Zone Maintainer? It feels like there was a number of moving parts, but maybe summarize the net impacts of both of those on the business.

Sure, Sterling. Let me try to just, I guess, factually state what’s actually changed. First of all, the IANA transition was completed and the IANA contract between NTIA and ICANN was allowed to sunset. So ICANN is now accountable to the community under enhanced accountability mechanisms. Second, the term of VeriSign’s .com Registry Agreement with ICANN is now extended to November 30, 2024. So, the next renewal cycle for .com will be in 2024 not in 2018. Third, the Root Zone Maintainer portion of the transition is now complete, as VeriSign will continue the Root Zone maintenance function it has historically performed, but now under a new contract called the RZMA between VeriSign and ICANN. Fourth, there are two amendments to the Cooperative Agreement between VeriSign and NTIA. Amendment 33 discharges VeriSign from its Root Zone maintenance responsibilities and Amendment 34 approved the extension of the .com agreement to 2024 and gives NTIA the right to extend the Cooperative Agreement past its current expiration of 2018. It also allows NTIA to conduct a public interest review for purposes of making the extension decision. And also VeriSign still has the right, I would point out, under Amendment 32, to seek removal of the pricing restrictions in the .com Registry Agreement if we demonstrate to the Department that market conditions no longer warrant such restrictions. Those are the basic, factual changes in all of these various events of the last 30 days or so.

One follow-up to it on that last point. So, if the Cooperative Agreement is allowed to expire, what does that mean for pricing? Do you automatically get the ability to raise prices? Will you seek a request from the DOJ? So what happens on the pricing front if the Cooperative Agreement does go away?

So, if NTIA decides - and it’s their process and their decision - but if they do decide to allow the Cooperative Agreement to sunset, as opposed to exercising their right to extend it - so, I don’t want to speculate on that process because that’s NTIA’s decision whether to sunset it or extend it beyond 2018. I can tell you that we agreed to work with NTIA as they go through their process and make the decision. However, I would point out one thing, which is that if there’s a change to, or a termination of, or expiration of the Cooperative Agreement, the .com Registry Agreement itself contains something called the Cooperation Clause that states that VeriSign and ICANN will negotiate in good faith to amend the terms of the Registry Agreement, the .com Registry Agreement, as necessary for consistency with changes to, or expiration of the Cooperative Agreement, if that helps.

It does, but kind of still leaves a little bit of ambiguity. So, if it goes away and you renegotiate with ICANN, I would imagine one of the things that, if I’m in your shoes you would be interested in is negotiating back the ability to raise prices. Or would you still be under a consent decree of the Department of Justice through 2024 to keep .com prices capped?

So, I think I can answer part of that. I’m just trying to avoid speculating. But in your scenario, if you are assuming that the Cooperative Agreement is allowed to sunset and there is no other contractual relationship or provision or restrictions - relationship between DOJ, DOC and VeriSign, then VeriSign would negotiate in good faith, as we are both required to under the agreement, with ICANN to effect whatever changes need to be effected as a result of the sunset of the Cooperative Agreement. So, that certainly would include pricing, but I don’t want to speculate what that would look like today.

Okay. Last item. So just to clarify then, really the cap on pricing that the DOJ effectively helped put into place is not like when a DOJ steps in and declares a company a monopoly and puts in a consent decree where they have direct oversight and capping. You are saying that the price agreement that the DOJ market power study helped is really just entirely encapsulated within the Cooperative Agreement?

I believe that’s correct. It’s a fact that the relationship that we have with NTIA is the mechanism by which the price caps are imposed on.com and that NTIA, where appropriate for its oversight through the Cooperative Agreement, consults with DOJ on issues of competitive issues, et cetera. So, if that went away there would be at that point - if that’s all that happened and the Cooperative Agreement sunset and there is no other contractual relationship that we have at this point. We don’t have that type of relationship that you described upfront in your question.

Makes sense. Thank you, guys.

Our next question comes from Steve Ashley with Robert W. Baird.

Great. Well, I’m going to just pick up right where Sterling left off and just keep drilling down. So, because it is something we are all very interested in, if the Cooperative Agreement sunsets, who will control pricing? And you talked Jim about you would negotiate with ICANN. Would ICANN have the authority to set pricing, veto pricing? What we are just trying to understand where authority for setting and enforcing pricing would reside if the Cooperative Agreement sunsets on November 18, 2018.

I don’t want to speculate on what that process in detail would look like and, therefore, it’s hard to say where it would come out. But it would, according to the language that’s in the documents today, it would be the result of a good-faith negotiation between VeriSign and ICANN. Essentially, the DOC is not in the picture if the Cooperative Agreement is allowed to sunset. So, having said that, I would say that trying to determine what that will yield I think would be speculating. But I would observe that ICANN’s policies at least are fairly consistent in how they’ve applied pricing across TLD, certainly since the new gTLD program. There are a number of legacy TLDs, of course like .com and .net and .org and others. But it’s just difficult to speculate on a process that only gets invoked under a set of circumstances that are two years away. I think the main point is that the pricing imposed on .com at least since 2006 has come directly from DOC, so that mechanism goes away. But in terms of what happens and who has the authority, it’s a good-faith negotiation between VeriSign and ICANN. That much is factual.

Great. And then I would just like to ask a question on deferred revenue. It declined sequentially from - not a lot, a little bit, for the second time consecutively. That hasn’t been kind of the norm over the past years. Is there any comment around the small sequential decline in deferred revenue we are seeing?

Nothing other than it typically does slow down as the year progresses. Typically, at least historically we used to have very large registrations in the first quarter, so we’d get a bump in deferred revenue and it would decline sequentially over the years. More recently that bump in Q1 has gotten less and so some of the changes year-over-year have rolled through, but nothing material that I am aware of, Steve.

Thank you.

[Operator Instructions] And our next question comes from Walter Pritchard with Citi.

Hi. Thanks. Two questions. One on - you’ve been pretty clear on the Q4 trajectory given what happened last year. Can you talk about how you look at that into Q1?

So, Walter this is George. We’ll give you Q1 guidance on our fourth quarter call. But, again, the reason for the large range that we put in place this particular quarter is the fact that it was a fairly large amount of names that came up for renewal, or will come up for renewal in this quarter. And the cohort, or the type of names that they are, they are related to a Chinese investment community, we really don’t have a tremendous amount of data around that. And so we are really waiting to take a look at those names as they come up for renewal in the middle of November and early December we will get a better look at that, and once we have a better look at that it will give us a little more clarity into Q1. But we have always said, the Q4 is a relatively unique event. There’s over 4 million names that are really coming up for renewal as a result of the demand that happened last year. And so we are really waiting to take a look at that before we provide guidance to Q1.

And then, George, just on the expenses, you had a very good I guess, the expenses very low, declining year-over-year by about 3% in the quarter. Can you talk about the sustainability, I guess, first the source of the expense decline year-over-year and then the sustainability of that trajectory as you look into Q4 and beyond?

Yes. I would say, as you have commented on, I think we’ve done a pretty good job of trying to keep expenses level. When you talk about year-over-year you are looking at the third quarter. And I think it’s probably more appropriate to look at the nine months because things can move from quarter-to-quarter. And when I look at the nine months on a non-GAAP basis, expenses in total are down a little bit. You are correct there. But we are seeing some movement between the groups. So, we’ve seen an increase in our cost of goods sold. We’ve got more labor going on there. Sales and marketing, we’ve talked about that. It’s been lower, but we do have an intention to put more money to work there and I would think that’s really more of a timing function. R&D is down. We have reduced labor there. As we talked about last quarter, I believe we did close our Indian Development Corporation over there last year and so we are getting some benefits from a labor perspective through the P&L at the present time. And then G&A is up a little bit. We do have some slightly higher labor and we’ve incurred some higher legal costs this quarter. As far as your questions to the sustainability, we really try to manage the total expense of the Company, the entire $400 million number on an annual basis. And we try to allocate those dollars to where they are. Clearly, we try to gain efficiencies, but at the same time we are not starving the business. And as you know, our business is relatively dynamic. As the cyber environment continues to evolve we absolutely want to make sure we put enough resources into maintaining the security and stability of the business. So, we will continue to be vigilant on that, but to date we’ve done a good job of keeping them in the range where they’ve been historically.

Great. Thank you.

We are taking a follow-up question from Sterling Auty with JPMorgan. That’s also our final question.

Yes, just a housekeeping follow-up question. Can you remind us what the total number of names that are up for renewal in the fourth quarter and if you are willing to give it for the first quarter, so March actually, are?

Yes, a couple of data points. The names that were up for renewal this quarter was 28.7 million and the names that are up for Q4 are going to be 32 million names that are up for renewal.

All right. Great. And how about March 2017, or is it too early to give that?

I would say it’s too early for that at this point.

And actually - and maybe one other we didn’t touch upon. So, early here in the quarter, so you’ve got the guidance for the decline in the base, but there was a pop, actually, in the Zone file of like 350,000 names the one-week, including a pretty healthy pop in .net. Anything that you can ascribe the jump to?

Yes, we ran some marketing activities in the quarter around .net and they were actually relatively successful. And so the team is evaluating programs to see if we want to run some more of those. But we had a marketing program basically, and those numbers are roughly right, about 300 names came in from those marketing programs.

And when you talk about those marketing programs, are these different than - I think about in the past that you ran marketing programs with registrars at the end market to spur demand, but are these those types of things, or are these incentives where maybe you are giving discount on registry fees on .net above certain thresholds, or anything like that?

The programs vary from program to program. This was more of a program we were looking to see if we were in a short-term program what would be the effect of. Sometimes we run programs throughout the year, much longer-term programs and we are questioning the effectiveness of those compared to some shorter-rate programs, shorter-term programs, and this one was a relatively short program. We just want to understand the duration of programs and get some feedback as we think about 2017.

Got it. Thank you much.

That does conclude our question-and-answer session. I’d like to turn the call over to David Atchley for 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.

Once again that does conclude today’s call. We appreciate your participation.