Verisign Inc

NASDAQ:VRSN

Earnings Call Transcript 2021-Q3

[Operator]

Good day, everyone. Welcome to the VeriSign's Third Quarter 2021 Earnings Call. Today's conference is being recorded. Recording of this call is not permitted unless preauthorized. Thank you.

At this time, I'd like to turn the conference over to Mr. David Atchley, Vice President of Investor Relations and Corporate Treasurer. Please go ahead, sir.

[David Atchley, VP, IR, Corporate Treasurer]

Thank you, operator. Welcome to VeriSign's Third Quarter 2021 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 lines 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 2 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, Chairman & CEO]

Thanks, David. And good afternoon, everyone. I'm pleased to report another solid quarter of operational and financial performance for VeriSign. During the quarter, we continued to deliver strong financial results while maintaining, investing in and evolving our critical internet infrastructure and complying with the high operational standards required by our ICANN agreements.

Our critical infrastructure enables us to reliably and accurately provide the domain name system navigation service, which people around the world depend on for commerce, education, healthcare and person-to-person connection.

During the third quarter, we processed 10.7 million new registrations. And the domain name base increased by 1.48 million names. At the end of September, the domain name base in .com and .net totaled 172.1 million, consisting of 158.6 million names for .com and 13.5 million names for .net with a year-over-year growth rate of 5.1%. Although 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 2021 will be approximately 75%.

This preliminary rate compares to 73.7% achieved in the third quarter of 2020 and 75.4% last quarter. For the full year 2021, we now expect a domain name base growth rate of between 4.7% and 5.5%. This narrower range reflects the current pace of new additions to the base and our outlook for the remainder of the year.

Our financial and liquidity position remained stable with $1.2 billion in cash, cash equivalents and marketable securities at the end of the quarter. Share repurchases during the third quarter totaled $172 million for 785,000 shares. At quarter end $565 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.

As it relates to .web, and as we stated last quarter, after the final IRP decision was issued in May Afilias' filed in June an application requesting that the IRP panel interpret and amend its final decision. The briefing on this application was completed in September. And the panel has now taken the matter under advisement without oral argument, which means we're just waiting for the IRP panel to respond.

VeriSign believes Afilias' application is without merit, and we continue to expect the panel to rule on it in the fourth quarter of 2021. As we have said before, we continue to look forward to becoming the .web registry operator and establishing it as an additional option for businesses and individual end users worldwide.

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

[George Kilguss, CFO]

Thanks, Jim. And good afternoon, everyone. For the quarter ended September 30, 2021 the company generated revenue of $334 million, up 5.1% from the same quarter in 2020. And delivered operating income of $221 million, up 7.1% from the $207 million in the same quarter a year ago.

Operating expense totaled $113 million compared to $116 million last quarter and $111 million in the third quarter last year. Operating margin in the quarter was 66.2% compared to 64.7% last quarter and 65% in the same quarter a year ago. Net income totaled $157 million compared to $171 million a year earlier, which produced diluted earnings per share of $1.40 in the third quarter this year compared to $1.49 for the same quarter last year.

As noted in our earnings release, net income for the third quarter of last year included previously unrecognized tax benefits of $24 million, which increased diluted earnings per share by $0.21. Operating cash flow for the third quarter was $260 million and free cash flow was $245 million compared with $140 million and $125 million, respectively for the third quarter of 2020.

Cash flow this quarter benefited from an increase of $45 million of deferred revenue, which was primarily related to early domain name renewal activity before the .com price increase went into effect. The main impact of these early renewals is the pulling forward of cash flow from future quarters into the third quarter of this year.

Additionally, comparing year-over-year third quarter cash flow, last year's third quarter cash flow was lower due to the permitted deferral of approximately $52 million of U.S. federal tax payments from the second quarter to the third quarter of 2020.

I'll now discuss our updated full year 2021 guidance. Revenue is now expected to be in the range of $1.325 billion to $1.330 billion. This narrowed revenue range reflects the updated domain name base growth rate expectation of between 4.7% and 5.5%, as Jim mentioned earlier. The operating margin is now expected to be between 64.8% and 65.3%. This range reflects our expectation of incremental spend on marketing programs and continued investment in our operational infrastructure and personnel during the fourth quarter.

Interest expense and non-operating income net is still expected to be an expense of between $83 million to $87 million. Capital expenditures are now expected to be between $55 million and $60 million. And 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 third quarter. And we look forward to continuing our focused execution.

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

[Jim Bidzos, Chairman & CEO]

Thank you, George. Before we open the call for your questions, I would like to touch on some other things that we continue to do here at VeriSign. I've updated you in previous earnings calls on our commitment to responsible corporate citizenship principally through our VeriSign Cares program. During the third quarter, we established 3 new partnerships under the VeriSign Cares workforce retraining initiative. This greatly increases both the number of individuals we can help and our geographical coverage.

Combined, our partners now reach dollars in 17 states plus the District of Columbia with remote options accessible throughout the U.S. And our partner organizations have expansion plans of their own, which we're pleased to support. We're delighted to note that our launch partner for this initiative, Virginia Ready recently passed the milestone of 3,000 scholars who have graduated from their program. And as a reminder, the objective of the VeriSign Cares program is to address pressing economic and social needs in the communities in which we live and work.

We instituted this workforce retraining initiative in 2020 to provide individuals whose employment has been adversely affected by the COVID-19 pandemic with access to training and other assistance to help them pivot into the technology sector. You can learn more about these efforts on blog.verisign.com.

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

[Operator]

Thank you. [Operator Instructions] We'll take our first question from Rob Oliver with Baird. Please go ahead.

[Rob Oliver, Robert W. Baird]

Great. Thank you. Good evening, guys. A couple of questions for me. First, one for you, Jim. Just on the macro that you're seeing right now with business starts, I mean there's been some data this quarter. I think University of Michigan sentiment indicators rolling over a little bit. A lot of small, medium-sized business survey work we've seen expressing some concern. I think it's a mix of labor shortages as well as concerns heading into next year.

It seems that the reduction of the high end of the domain growth name is just really a function of the timing here into Q4. I mean you guys have had a strong year. But can you talk a little bit about what you're hearing and seeing in the market relative to the prospects for demand activity going forward and kind of what you're seeing?

[Jim Bidzos, Chairman & CEO]

Sure, Rob. I can say a few things about it. I don't know if I can map with any specificity activity in the domain name space, specifically with any quarterly economic activity. I can tell you that COVID has certainly been a factor. We've seen up and downs with COVID of course, from early 2020 on through where things improved a bit. Then we saw the Delta variant and things went in the wrong direction. Now they're improving again. I don't know exactly how the timing maps to that. But certainly, that does have some effect. And we can't tell you yet. We haven't studied it sufficiently to tell you exactly what that might do.

So certainly, all of those things are factored. Business starts are a factor. But essentially, COM is a strong brand. People are branding themselves. People are acquiring domain names. They're the preferred way to have their identity online. And I think you see that the long-term trend line is not only in the right direction, but I think generally consistent with our yearly performance and seasonality. There's just no doubt a COVID influence that we can't map with any precision for you right now.

[Rob Oliver, Robert W. Baird]

Got it. Got it. Okay. That's fair. Thank you. And then, George one for you. Just on the strong margin performance this quarter. And I know you guys have made a series of investments over the past year plus both in security timely ones as well as infrastructure and provisioning as well as people. I'm just curious about the margin expansion that we saw and sort of the durability of that? Or is it more of kind of a onetime benefit? Thank you.

[George Kilguss, CFO]

Thanks, Rob. So when you look at our operating expenses, clearly the sequential decrease is primarily due to a mix of the small decrease in G&A spending and some marketing activity in the quarter.

And as you mentioned, year-over-year we have a slight increase from our continued investment in our operational infrastructure and personnel. Again, I would say we are managing the total expenses of the business as best we can. And we continue to look at where we're spending money and making sure we're spending them in the right areas. And if we're not, we're redirecting that into the business. We provided guidance on our operating margin for the full year of 64.8 to 65.3. And we'll give you some additional guidance on our year-end call as to what we think next year is.

But we do have up and downs each quarter. But we continue to make the investments that we feel are appropriate for the business.

[Rob Oliver, Robert W. Baird]

Okay, great. Thank you.

[Operator]

[Operator Instructions] We'll take our next question from Nick Jones with Citi. Please go ahead.

[Nick Jones, Citi]

Great. Thanks for taking the question. I guess one on .web. I guess, could you maybe remind us on assuming the TLD is delegated to you, you can start registering it. What is kind of the timeframe from when you're able to register to when consumers can actually buy? Is that like a relatively quick turnaround? Or are we looking at a couple of quarters once you're able to when .web could start showing up?

[Jim Bidzos, Chairman & CEO]

Okay. Nick, if I understand your question correctly, you're not asking about the process we're in now with the IRP. You're saying if that should be resolved, handed to ICANN as the panel ruled before and this application fails in some point. .web is delegated to us, you're asking what the process is to actually start registering domain names. Do I understand your question correctly?

[Nick Jones, Citi]

Correct.

[Jim Bidzos, Chairman & CEO]

Okay. So it's more like I think you're the latter part of your assumption there. There are some couple of quarters because there are periods of activity that are mandated by the process. We have to run a sunrise period. We have to do some security things. We have to let people who have trademarks come in and get theirs first.

So it's a bit early to speculate exactly when. But the answer is closer to a couple of quarters. It's getting from delegation to actually beginning to register domain names. There's just some process work that's required to do for safety, security and respect for trademarks.

[Nick Jones, Citi]

Got it. And then I guess a follow-up to that is when you think about brands maybe trying to protect their trademarks, do you have any proxy as to whether people are buying like .shops or other TLDs and at which rate? Is it common for people to kind of protect their trademarks by buying all the TLDs? Or are there just certain ones? Any color or visibility you have into how brands behave?

[Jim Bidzos, Chairman & CEO]

Yeah, it varies a lot. I don't think there's any general single rule you can make. It's certainly true that people buy what are called defensive registrations to protect their marks. Many of them buy variants of them. Lots of them buy multiple registrations in com, net and other TLDs in order to protect things that are even similar to their mark.

So that occurs in other TLDs not all of them. It just varies. I would refer you to our domain name industry briefs. And I think you can get some sense just looking at the lay of the land, so to speak, the landscape of TLDs. I think that would give you some insights and help you understand that.

[Nick Jones, Citi]

Got it. Great. Thanks for taking questions.

[Jim Bidzos, Chairman & CEO]

Sure.

[Operator]

We'll take our final question from Sterling Auty with JPMorgan. Please go ahead.

[Sterling Auty, JPMorgan]

Thanks. Hi, guys. So maybe we could start with the 10.7 million new names that were processed in the quarter. Can you give us some color as to what you saw on a geographic basis? Where was the strongest growth? And where perhaps were there areas of softness?

[George Kilguss, CFO]

Sterling, this is George. So as you mentioned, we had 10.7 million of new registrations in the third quarter. And that was pretty similar to what we did in the third quarter a year ago. So still a healthy level of registrations for the company.

As far as regional performance goes, we saw year-over-year new registration strength from registrars in areas such as EMEA, APAC and China during the quarter and North American registrars as new registrations were a bit lower during the third quarter compared to the year ago quarter.

[Sterling Auty, JPMorgan]

Okay. And then when you look at the base that was up for renewal, how is the mix of names that were up for renewal for the first time as a percentage of the total as compared to what you experienced in the other quarters of the year?

[George Kilguss, CFO]

Again, when you talk about renewal rates we had a total renewal rate of about 75% in the third quarter. And that was similar to the first and second quarter. They were both in the mid-70% range.

What I think you're alluding to is a year ago our renewal rate was 73.7%. And so when you look at the year-over-year improvement a lot of that does come from the mix of the names coming up for renewal. And I think as we talked about last quarter if you look back at 2019, we had a lot of higher percentage of names coming out of registrars from China and other areas that typically have lower first time renewal rates in 2020. We had more demand coming out of more mature markets like the U.S. and EMEA which had higher renewal rates.

And so those names, obviously, last year are the ones that are renewing this year. And so you're seeing a slightly higher renewal rate trend this year compared to last year. Because the first time and the previous renewed rates are increasing because of the mix. And that's been consistent both in the first quarter and the second quarter of this year.

[Sterling Auty, JPMorgan]

And when you look at the renewal rate for means renewing for the first time, other than kind of China, which typically has lower rates. Has anything changed in those kind of first time renewal rates?

[George Kilguss, CFO]

Again, they vary by country. Our first time renewal rates are still around 50% and our previous renewed rate is still around the mid-80s, 85%-86% range.

[Sterling Auty, JPMorgan]

All right. Great. And then finally, when we talked about hypothetically if you were to go live with .web post that process, the timing to revenue. How should we think about when either technology investment or any type of incremental infrastructure or any marketing programs would actually go into effect under that scenario?

[Jim Bidzos, Chairman & CEO]

So Sterling, I guess, it's a bit early to speculate specifically. I know you hadn't asked specifically about revenue. But what I can say to you is that, first of all, .web is, of course, different from .com and net and that it's not a price controlled TLD. And I think at this point, it's just really too early to speculate how revenue would roll in or what it would look like. But we do have flexibility with it that we don't have - we would have flexibility with it that we don't have with other TLDs, and premiums are available. Other sorts of options are available.

The infrastructure that we have is in a sense since we operate multiple TLDs.web is in a sense another TLD. But there certainly will be some sort of marketing launch that will occur, but I just think it's too early to really talk about what that would look like and what the expense impact will be. But we certainly intend to market and promote .web. Our plan, our desire, as we've stated - and I'll say again, is to offer our customers more choice and to make .web a very successful TLD.

[Sterling Auty, JPMorgan]

Make sense. Thank you, guys.

[Jim Bidzos, Chairman & CEO]

Sure.

[Operator]

Ladies and gentlemen, this concludes today's question-and-answer session. At this time, I would like to turn the conference back to David Atchley for any additional or closing remarks.

[David Atchley, VP, IR, Corporate Treasurer]

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]

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation. You may now disconnect.