Verisign Inc

NASDAQ:VRSN

Earnings Call Transcript 2022-Q2

[Operator]

Good day, everyone. Welcome to VeriSign’s Second Quarter 2022 Earnings Call. Today’s conference is being recorded. 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’s second quarter 2022 earnings call. Joining me are; Jim Bidzos, Executive Chairman and CEO; Todd Strubbe, 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 will 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 Form 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.

[James Bidzos, Chairman and Chief Executive Officer]

Thank you, David. Good afternoon to everyone and thank you for joining us. As global reliance on online services continues to increase, so does the importance of delivering uninterrupted and accurate DNS resolution. Last week we crossed a significant milestone by marking 25 years of uninterrupted uptime for the .com/.net domain name resolution system. Reaching this quarter century mark is a testament to the ongoing investments made in our platforms, processes and people.

During the second quarter we grew our revenues by 6.8% year-over-year and our EPS by 17% year-over-year. At the end of June the domain name base and .com and .net totaled 174.3 million domain names consisting of 161.1 million names for .com and 13.2 million names for .net with a year-over-year growth rate of 2.2% and a sequential decrease of 354,000 domain names.

The final renewal rate for the first quarter of 2022 was 75.9% compared to 76.0% for the same quarter of 2021. 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 2022 will be approximately 73.6%. This preliminary renewal rate compares to 75.4% achieved in the second quarter of 2021 and 75.9% last quarter. The decline in the second quarter of preliminary renewal rate is primarily related to the proportion of names renewing from China registered in the year ago quarter which weighed on first time renewal rates.

We do see continued strength in the renewal rates of previously renewed names. In the second quarter we processed 10.1 million new registrations compared to 10.2 million last quarter and 11.7 million in the year ago quarter. While there are many factors that drive demand for domain names, we have seen lower new units in the first half of this year as a result of the few factors that I will now mention.

These include a pandemic driven acceleration of domain name registrations in 2020 and 2021, which has subsided, recent global macroeconomic headwinds and relative weakness in 2022 registrations from China. While we're still early in Q3, we do see some signs with new registrations are stabilizing and we continue to see strong renewal rates. However, we agree with the consensus view that the current economic conditions are likely to prevail through 2022 and possibly beyond.

Therefore, we're adjusting our 2022 domain guidance and now expect a domain name base growth rate of between 0.5% and 1.5%. This range reflects our expectations that new registrations in Q3 and Q4 will be roughly similar to the levels we saw in the first half of 2022, and which are similar to pre-pandemic levels. This range also reflects our expectations for an improving renewal rate from the preliminary renewal rate we are seeing in Q2.

As announced in today's earnings release, we have given notice of a price increase of $0.90 to the annual wholesale price for .net domain names, which will raise the price from $9.2 to $90.92 effective February 1st, 2023. Our financial and liquidity position remained stable with $997 million in cash, cash equivalents and marketable securities at the end of the quarter. During the second quarter, we repurchase 2 million shares for $349 million. At quarter end $543 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.

Turning to .web as we noted in our last call, ICANN’s Board directed one of its standing committees to review the independent review process panel's final decision and provide the Board with its findings. The committee then asked the parties to submit written summaries of their claims by July 29th, that's tomorrow, and then to submit responses by August 29th. We expect that the committee will conduct its review based on these submissions and will then provide its findings to the ICANN Board.

Now I'd like to turn the call over to George. I will return when George has completed his financial report with closing remarks, including more about our areas of focus going forward. George?

[George Kilguss]

Thanks Jim and good afternoon everyone. For the quarter ended June 30, 2022, the company generated revenue of $352 million up 6.8% from the same quarter of 2021 and delivered operating income of $236 million up 10.8% from $213 million in the same quarter, a year ago. Operating expense totaled $116 million, down $6 million compared to last quarter and flat compared with the second quarter a year ago.

While we remain focused on driving profitable growth and optimizing our expenses, the sequential decrease in operating expense is primarily a result of the timing of expenses with slightly lower benefit and performance based compensation accruals in the quarter. The operating margin in the quarter was 67.1% compared to 64.7% for the same quarter a year ago.

Net income totaled $167 million compared to $148 million a year earlier, which produced diluted earnings per share of $1.54 for the second quarter of 2022, compared to $1.31 for the same quarter of 2021. Operating cash flow for the second quarter was $145 million and free cash flow was $139 million compared with $143 million and $125 million respectively for the second quarter of 2021.

I'll now discuss our updated full year 2022 guidance. Revenue is now expected to be in the range of $1.415 billion to $1.430 billion. This updated revenue range guidance reflects our domain name base growth rate expectation between 0.5% and 1.5% that Jim mentioned earlier. The operating margin is now expected to be between 65.25% and 66.25%. This increased range reflects our ongoing focus on expenses while recognizing that the second quarter operating expense run rate was lower than the run rate we are expecting for the second half of 2022.

Interest expense and non-operating income net, which includes interest income estimates is now expected to be an expense of between $62 million to $67 million. Capital expenditures are now expected to be between $30 million to $40 million. The GAAP effective tax rate is still expected to be between 22% and 25%. We expect the cash tax rate for 2022 to also be within this 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 2022.

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

[James Bidzos, Chairman and Chief Executive Officer]

Thanks George. There's little, if any disagreement in the statements made by many tech company leaders over the last few weeks on economic conditions. They expect the uncertainty they see today to continue for the foreseeable future. This macroeconomic uncertainty was a factor that influenced our revised domain base growth guidance.

While we can't do much to change the pace of economic recovery from the pandemic or the geopolitical and macroeconomic events and forces that contribute to the downturn, we can and we will focus on what is within our ability, managing our business with the unconditional prioritization of delivering on our mission.

This includes exercising careful and responsible expense management, some of which is evident in our Q2 results reported today, announcing as described earlier, a price increase for .net registrations, which we have held flat for five years, identifying and pursuing new growth opportunities such as .web, safely transitioning our teams to a new hybrid and flexible work environment which is currently underway, working to ensure VeriSign remains a company that will attract and retain top talent, and continually evaluating and optimizing our efforts to efficiently return value to our shareholders. This focus on what we can manage will continue to service well for the long-term success of the business.

In closing, we're confident that the long-term fundamentals of our business are unchanged and remain strong. Thanks for your attention today. This concludes our prepared remarks and now we'll open the call for your questions.

Operator, we’re ready for the first question.

[Operator]

Thank you, sir. [Operator Instructions] We will take the first question from Mr. Rob Oliver. Your line is open, please go ahead.

[Rob Oliver, Baird Equity Research]

Great. Hi, good afternoon guys. Thanks for taking my questions. So Jim, first one for you, just with domains decreasing here in Q2, can you talk a little bit about what that means for the business in a medium to longer term view? And then I want to dig in on some of the factors that have impacted that as well, that you cited.

[James Bidzos, Chairman and Chief Executive Officer]

Okay, thanks. Good question. Well first let me say that with respect to the sequential decrease while infrequent, this isn't the first time we've seen a sequential decrease in a domain name base after an acceleration of registrations in the prior year. The last time we saw it several years ago within a few quarters registrations have normalized. So we're keeping an eye on the current situation with that precedent in mind.

What we did see is an acceleration of the domain name base growth rate during the pandemic in 2020 and much of 2021. That acceleration demand has now subsided. I mentioned last quarter that one of the factors to consider is that in our Q1 earnings was the component of growth attributable to the pandemic had subsided. This is confirmation that that is what we are seeing in 2020 and 2021. The accelerated demand has now subsided. So we're seeing the year-over-year growth rate slow as a result.

However, if we look at the longer term trend, we're seeing that the current pace of new registrations look more similar to pre-pandemic levels. In addition, renewal rates are strong and remained strong. So while there's broad macroeconomic uncertainty, we don't see any change in the underlying fundamental long-term drivers that we think are positive for our business and there continues to be demand for domain names.

[Rob Oliver, Baird Equity Research]

And on that, on the renewal rates what is it that gives you guys the confidence that the renewal rates will remain strong? Is it something geographic, anything else you're seeing there would be helpful?

[James Bidzos, Chairman and Chief Executive Officer]

Yes, sure. So we have seen a slight decline in the first time renewal rates in the quarter, but that's due to a higher proportion of names renewing from China this quarter. So what we do see though, is a continued strong renewal rate for previously renewed names. The previously renewed rate has stayed in the mid 80% range and it's actually improved over time. And additionally, as a larger portion of the base becomes previously renewed, that trend helps the overall renewal rate.

We're also seeing the cohort of names related to the accelerated demand that I referred to during the pandemic, those names are renewing at strong rates. Those additional names have been positive for the business. So that's a strong point that underlines our confidence going forward in the core strength of the business renewal rates in particular.

[Rob Oliver, Baird Equity Research]

Got it, got it. And that cohort that you're talking about, Jim, is that a north American cohort, in other words, those that got domains for the first time now emerging from the pandemic are renewing?

[James Bidzos, Chairman and Chief Executive Officer]

Well, I think those are broad modular to use a math term that modular the Chinese names that we had from the year ago quarter, which tend to renew at a lower first time renewal rate. So the remaining are not limited to north America. No real geographic specificity there. I think those are geographically very broad and those renewal rates are strong, yes. So those are quality names.

[Rob Oliver, Baird Equity Research]

Got it. Okay, very helpful. And on the timing of the .net price increase, I just would love to hear your reasoning behind the timing. It comes at a bit of a curious time. On the one hand, you guys have not raised prices there, as you mentioned for five years on the other it hasn't been particularly strong and just wondering if you could walk us through understanding why now and help to get a better sense of that?

[James Bidzos, Chairman and Chief Executive Officer]

Well, we've as you know, back in 2020 in the early stages of the pandemic, we froze all of our TLDs, including .net. .net’s current level, unchanged level of pricing without price increases does go back five years. We study the market and we make those decisions. There's nothing specific to the current conditions that that that decision is based on. It's just a result of our studying the market. .net still represents lot of value. The other so-called legacy TLDs are all priced slightly above .net, so it's very competitive in a market. And as you noted, the price increase takes effect February 1st of next year.

[Rob Oliver, Baird Equity Research]

Got it. Got it, okay. And on .web, you, you touched on it and I'm not sure that there's more that you can say, but this labyrinthine and seemingly unending process is now in another phase. So I guess by your comments, we could, I guess, infer that you guys have filed or will be filing by tomorrow everything that was requested here in the quarter in terms of both parties having to like resubmit all of their material. Was there anything new that was asked of you guys and then any other comment around potential timing on .web would be helpful?

[James Bidzos, Chairman and Chief Executive Officer]

Okay. Let me parse that a little bit. So yes, we certainly will make our filing on time tomorrow, no doubt about that. And yes, you you're right, this is a slightly different part of the process. I think it might be fair to characterize everything that's gone up, gone on until now, basically a process that was held in front of the IRP panel, the Independent Review Process panel, which is sort of a close, close to arbitration, form of arbitration. That panel made its ruling and sent it back to ICANN and had ICANN make a decision.

ICANN took the step in a board meeting earlier this year to direct this existing committee to address the issue and follow the instructions of the panel, which is for ICANN to decide these issues. Their process, that committee that's assigned the task of resolving this issue asked for these filings, so of course will make ours.

So we are in a stage where ICANN has now at the direction of the panel after years of litigation, then given the responsibility to resolve these issues, these are, this is all tied to ICANN policies and procedures, and they're going about it in this manner. So we're hopeful that we're in a different phase and we're optimistic that there are some assigned timeframes here, we'll certainly comply with them.

As to any details of our filing or anything of that nature, that this is a pending legal process, so obviously we won't make any comments on that. But we've always said that we look forward to being the registry operator for .web. We see it as an opportunity to introduce a new TLD and offer our customers more choice. That is unchanged. I think at this point it's in ICANN’s hands and they have a process and we look very much forward to hearing from them.

[Rob Oliver, Baird Equity Research]

Okay, great. That's, that's helpful, Jim. George, I had one for you. You did mention that operating expenses were lower in the quarter, and that was due to the timing of certain expenses. Is that normal course timing or can you talk a little bit about what, if any of the expenses varied and I know you suggested or said that expenses would return back to the normal run rate in the back half of the year, but if you could just help us understand a little bit more about what went into that variability?

[George Kilguss]

Yes, sure Rob. We do have some programs that we try to execute in a year and sometimes those slip a little bit. I would say those were more of a minor case. The larger components really were related to lower benefit and performance based compensation accruals in the quarter. As you know, we're or maybe you don't know, we're self-insured for a number of benefits and our expenses related to some of our healthcare expenses came in lower in the quarter.

[Rob Oliver, Baird Equity Research]

Okay. Okay, that’s helpful. Last question, Jim, I'll just come back to you. I mean you've been through a lot of different cycles in your career and in some of your commentary and your prepared remarks certainly was at least relatively cautious about the macro. And, but just would love to hear a little bit more about what it is you're seeing, what data sets you're watching. I know you cited some of the commentary of other tech companies that gives you that, aside from the actual kind of numbers, what gives you that more cautious bent and how you think this might play out?

[James Bidzos, Chairman and Chief Executive Officer]

Yes, well, you're right. I referred to comments that other tech leaders have made just simply to point out that we're in sort of an unprecedented situation here economically. I mean, there's obviously a lot going on. I just wanted to separate that from things that we really can't directly impact the things that we can't control. I guess another way to look at it is to say again what I said last quarter that I don't want to trivialize the pandemic and there's absolutely no intent to do that, but we do see this as a bump in the road in the long-term effort to build this business. That's what our efforts are really about. We have our eye on the long-term and it's unchanged. There's certainly some uncertainty and we factored it in.

But to your question about the confidence we have or the guidance or other things that we said, well, first of all we have three months more data. We have a substantial amount of data. We track a tremendous amount of data, not just about the zone, but other things. But some of those other macroeconomic factors, I mean, obviously there's a bit of a slowdown in things like online advertising and ecommerce. And those are certainly factors that impact domain names. So there's consideration given to those factors that maybe we can't control, but we recognize them and we make some assessments about them.

But in terms of our own zone, we have a lot of data, and that certainly plays a huge role in putting our forecasts and guidance together. And I'll just reiterate again, that our confidence in the fundamentals of our business is strong. The business is strong, the renewal rates are strong. We see this, we see, we do expect that things will normalize at some point. We're just being cautious about when that will be, and we're focusing on what we control and that's what I really wanted to focus my final prepared comments on.

There are things we can control and we're going to focus on them. And, but we're going to run the business for the long-term. That's absolutely what we're here to do. We're undeterred by everything that's going on in that focus. So I think the intent there was to just make it clear what you can expect from us.

[Rob Oliver, Baird Equity Research]

Great, that's really helpful. Thank you guys very much. I appreciate it.

[James Bidzos, Chairman and Chief Executive Officer]

Thank you.

[Operator]

It appears that there is no further the question at this time. Mr. Speaker, I'd like to turn the conference back to you for any additional or closing remarks.

[James Bidzos, Chairman and Chief Executive Officer]

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]

This concludes today’s call. Thank you for your participation. You may now disconnect.