Verisign Inc

NASDAQ:VRSN

Earnings Call Transcript 2021-Q2

[Operator]

Good day, everyone, and welcome to VeriSign Second Quarter 2021 Earnings Conference Call. Today's conference is being recording. Recording of this call is not permitted unless preauthorized.

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.

[David Atchley]

Thank you, operator. Welcome to VeriSign second quarter 2021 earnings call. Joining me are Jim Bidzos, Executive Chairman and CEO; Todd Struby, President and COO; and George Kilguss, Executive Vice President and CFO.

This call and presentation are being webcast from the Investor Relations website, which is available under About VeriSign on verisign.com. There you'll also find our 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 report on Forms 10-K.

VeriSign does not update 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 results and two non-GAAP measures used by VeriSign; adjusted EBITDA and free cash flow.

GAAP to non-GAAP reconciliation information is appended to the slide presentation, which can be found on the Investor Relations section of our website available after this call. 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.

[Jim Bidzos, Executive Chairman & Chief Executive Officer]

Thanks David and good afternoon everyone. I'm pleased to report another solid quarter of operational and financial performance for VeriSign. During the second quarter, we saw continued demand for our domain names, including year-over-year growth in new registrations from some of our foreign geographies.

During the second quarter, we processed 11.7 million new registrations and the domain name base increased by 2.59 million names. At the end of June, the domain name base in .com and .net totaled 170.6 million, consisting of 157 million names for .com and 13.6 million names for .net with a year-over-year growth rate of 5.2%.

Although 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 2021 will be approximately 75.3%. This preliminary rate compares to 72.8% achieved in the second quarter of 2020% and 76% last quarter.

As we look at full year 2021, we now expect the domain name base growth rate of between 4.7% and 6%. This range reflects the strength we continue to observe in new additions to the base and our outlook for the balance of the year.

During the quarter, we continued to deliver solid financial results while maintaining investing in an evolving our critical infrastructure and complying with the high operational standards required by our ICANN agreements.

Our critical infrastructure enables us to reliably and accurately provide the DNS navigation service which people around the world depend on for commerce, education, health care, and person-to-person connection.

Just last week we marked 24 years of uninterrupted availability of our .com and .net domain name resolution system. Our financial and liquidity position remain stable with $1.2 billion in cash, cash equivalents, and marketable securities at the end of the quarter. Share repurchases during the second quarter totaled $172 million for 797,000 shares.

At quarter end, $737 million remained available and authorized under the current share repurchase program, which has no expiration. We continually evaluate the overall liquidity and investing needs of the business and consider the best uses for our cash, including potential share repurchases.

Regarding .web, on May 20th, a final decision was issued in the Independent Review Process or IRP. The final decision rejected affiliates' petition to nullify the results of the .web auction and rejected affiliates' request to be awarded .web, also as we had requested, the final decision directed ICANN’s Board of Directors to review the objections, including objections as to affiliates' conduct and to make a determination on the delegation of .web.

After the final decision was issued, however, affiliate’s filed an application requesting that the IRP panel interpret and amend its final decision. We believe affiliates' application is without merit and expects the panel to -- we expect the panel to rule on it in the fourth quarter of 2021, thereafter, we expect ICANN’s Board will proceed consistent with the final decision, and it will make a determination on the delegation of .web. The updated guidance we are providing today does not include revenue, or expenses related to .web.

And now I'd like to turn the call over to George.

[George Kilguss]

Thanks, Jim, and good afternoon everyone. For the quarter ended June 30, 2021, the company generated revenue of $329 million, up 4% from the same quarter in 2020 and delivered operating income of $213 million, up 3% from $207 million in the same quarter a year ago. Operating expense totaled $116 million compared to $113 million last quarter and $108 million in the second quarter a year ago. The year-over-year increase in operating expense is primarily a result of incremental and continued investment in our operational infrastructure and personnel. The operating margin in the quarter was 64.7% compared to 65.8% for the same quarter a year ago.

Net income totaled $148 million compared to $152 million a year earlier, which produced diluted earnings per share of $1.31 in the second quarter this year compared to $1.32 for the same quarter of last year. During the quarter, the company redeemed and favorably refinanced its $750 million, 4.625% senior notes due in 2023 through the issuance of new $750 million, 2.7% senior notes, which mature in June 2031. We are pleased with the result of this refinancing, which will result in interest expense savings of over $14 million annually for the company.

As part of the refinancing, we wrote-off $2.1 million of unamortized debt issuance costs on the 2023 notes. Operating cash flow for the second quarter was $143 million and free cash flow was $125 million, compared with $215 million and $204 million, respectively for the second quarter of 2020. The year-over-year difference in operating cash flow, primarily relates to cash taxes from a combination of higher cash taxes this year, as well as last year's second quarter operating cash flow benefiting from lower cash flow tax payments due to the permitted deferral of approximately $52 million of US federal tax payments until the third quarter of 2020.

I will now discuss our updated full-year 2021 guidance. Revenue is now expected to be in the range of $1.322 billion to $1.331 billion. This narrowed and increased revenue range forecast, reflects the updated domain name base, growth rate expectation of between 4.7% and 6% that Jim mentioned earlier.

The operating margin is now expected to be between 64.25% and 65%. This guidance range reflects our expectation of incremental and continued investment in our operational infrastructure and personnel in 2021.

Interest expense and non-operating income net is now expected to be an expense of between $83 million to $87 million. This reflects lower interest expense following the refinancing that was completed during the second quarter. Capital expenditures are still expected to be between $55 million and $65 million. The GAAP effective tax rate is still expected to be between 20% and 23%. We expect the cash tax rate for 2021 to also be within the same guidance range. In summary, VeriSign continued to demonstrate sound financial performance during the second quarter and we look forward to continuing our focused execution in 2021.

Now, I'll turn the call back to Jim for his closing remarks.

[Jim Bidzos, Executive Chairman & Chief Executive Officer]

Thank you, George. We continued our work to protect grow and manage the business while continuing our focus on providing long-term value to our shareholders. Before we open the call for your questions, I'd like to touch on some other things we're doing at VeriSign.

I have updated you on previous earnings calls on our commitment to responsible corporate citizenship in particular under our VeriSign Cares program. In recent months, we've expanded our work to help those affected by the COVID-19 pandemic in a number of ways including; alleviating food and security caused by COVID-related economic hardship in areas where we have a footprint, providing medical and other relief in India, where the pandemic took a significant turn for the worse earlier this year and our ongoing and growing efforts to help those jobs or careers have been affected by COVID to retrain and pivot to new careers in the tech industry.

We've also kept our focus on the area of equity and justice both working with existing partners and adding new ones. You can read more about all of these initiatives in the new section we added to our investor website this quarter on our ESG work.

And now we'll open the call to your questions. Operator, we're ready for the first question.

[Operator]

[Operator Instructions] We'll take our first question from Rob Oliver from R.W. Baird. Please go ahead.

[Rob Oliver, R.W. Baird]

Great. Hi, good afternoon. Thank you, guys for taking my question. Jim, I would just start with you on very strong renewal rates. And obviously, you guys raising the domain growth guide again. You called out some foreign geographies, which saw I believe strong renewal trends. So just was wondering if we can get a little bit of color on kind of where you're seeing pockets globally of strength whether some of that surprised you, whether it's COVID recovery-related or any color around the foreign geography comment?

[Jim Bidzos, Executive Chairman & Chief Executive Officer]

Sure. I'll let George or Todd comment on that.

[George Kilguss]

Yes. Thanks, Jim. Rob, this is George. So with regard to domain demand, as we mentioned in our prepared remarks and as you alluded to, we had a very solid quarter from a domain perspective. New units were $11.7 million and that was up about 600,000 from the year ago period.

As far as regional preferences -- performance goes, I would say that US registrars performed similar to a year ago quarter, with a slight increase in demand coming from various international regions. As Jim mentioned, for example, both China and the EMEA regions were up year-over-year in new registrations.

As far as renewal rates, as Jim mentioned, our preliminary renewal rate is 75% and that's up from 78% a year ago. I would say, part of the improvement there relates to a combination of the mixture of first time and previously renewed names, with the previously renewed name cohorts getting a little larger as the base ages, as well as the geographic mix.

As you may recall, back in 2019, we had a higher proportion of new units coming out of China, out of that region, which came up for renewal in 2020 and contributed to a slightly lower average first-time renewal rate in 2020. We had more mature regions like the US and EMEA contribute to a larger portion of our new unit growth.

So those historically higher renewing rate regions have helped our first-time renewal rate a little bit this year. So a combination of those two factors, but our first-time renewal rates are in the 50% range and our previous renewal rates are slightly up, but they are still in the mid 80% range.

[Rob Oliver, R.W. Baird]

Got it. Okay. George, that's really helpful. And then, just one follow-up. Jim, just I want to make sure that I understand the potential timeline on .web. So with affiliates now having filed the motion, I guess, that now has to be ruled upon by the board, that then happens before the final ruling by ICANN.

So I think you said Q4 2021 on the newer motion that was filed by affiliates. So if that's right, what then would be your expectation for timing, assuming you guys were then to win .web since, maybe, if the folks filing the motion aren’t even in the business anymore, assuming you guys win, what would be the timing of it?

[Jim Bidzos, Executive Chairman & Chief Executive Officer]

Well, that will be dependent on ICANN’s timeframe for picking up what the IRP panel instructed them to do, which is to complete their process on .web and get it delegated. So I can't speak for that ICANN process, but that's what would occur following a ruling on that latest motion. ICANN would then basically do what the panel instructed.

It was essentially remanded back to ICANN. So there is this delay with this current motion, but then it will go back to ICANN and they would conduct their process and determine the delegation of the TLDs. So, hopefully, that won't take too long, but I can't speak for ICANN.

[Rob Oliver, R.W. Baird]

Great. Okay, guys, thank you very much. Appreciate it.

[Jim Bidzos, Executive Chairman & Chief Executive Officer]

Thank you.

[Operator]

Thank you. Thank you. We'll take our next question from Nick Jones from Citi.

[Nick Jones, Citi]

Great. Thanks for taking the questions. Maybe another one on geographic trends and I think, as APAC still has pretty low internet penetration relative to kind of North America and Western Europe, is there any sense of .com’s popularity in those regions as, I guess, more people come online? And does that -- is that kind of a tailwind in the region for VeriSign or .com over time? And then I have a second question.

[Jim Bidzos, Executive Chairman & Chief Executive Officer]

All right. George or Todd.

[George Kilguss]

All right. Yes. So, Nick, this is George. I mean, I would just say that, look at comments of global brand. And we obviously try to continue to market our brand to be a very high-quality reliable brand across the world. As far as China is concerned as I mentioned last year, China was a little bit quieter while the pandemic was going on. And we've seen some of our registrars there had some increased demand and are doing well. So China is picking up.

I do think China is a little bit of a different of a market though. I think China is much more of a platform and mobile-driven market. While domain names are still very relevant there and important they are driven more in these platforms. But as I mentioned China has performed better year-over-year in the second quarter here. And we'll see how they continue to perform, but they're still quite active over there.

[Nick Jones, Citi]

Great. Thanks. Then maybe just taking a step back looking at the line about 100% availability for 24 years and as the Internet has evolved quite a bit and maybe the velocity of usage and I guess what's weighing the overall system, I guess increases over time what's the impact on availability in the future? You got cryptominers you got just more and more people using the Internet for more and more things. I guess what impact does that have kind of from here, or how are you thinking about it from here versus kind of the last 24 years?

[Jim Bidzos, Executive Chairman & Chief Executive Officer]

Well that's a natural and good question given the expanded use of the Internet and particularly during COVID so many people working from home additional load etcetera, etcetera. I'll just say that the design of our network besides resiliency is there's also a design element of capacity and it's always been designed with overcapacity as part of the resiliency sort of formula.

And I'll just say that the volume of traffic anticipated we're still meeting all of our obligations including specific performance and response time obligations. We have no difficulty meeting those with the demand. It's essentially part of all the planning that we get. It always has been from the beginning. So, it's not a new consideration in that sense. We've planned for it.

[Nick Jones, Citi]

Great. Thanks for taking the question.

[Jim Bidzos, Executive Chairman & Chief Executive Officer]

Thank you.

[Operator]

We'll take our last question from Sterling Auty from JPMorgan.

[Unidentified Analyst]

Hi. This is Drew on for Sterling. I was wondering if you could provide some more color on what you're expecting for renewal rates in the second half of the year as we lap the surge in new businesses from 2020?

[George Kilguss]

Yes. So Drew this is George. We don't guide to renewal rates, but we do guide to the domain name base. And obviously our guide is up from last quarter. Last quarter we were guiding 4% to 5.5%. Obviously now we've increased that guidance to 4.7% to 6%. So, we're still expecting growth in domain name base but we don't guide to specific quarters.

[Unidentified Analyst]

Okay, got it. Thank you.

[Operator]

Thank you. That does conclude today's question-and-answer session. I'd like to turn the conference back over to Mr. Atchley for any additional or closing remarks.

[David Atchley]

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.

[Operator]

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