Verisign Inc

NASDAQ:VRSN

Earnings Call Transcript 2022-Q3

[Operator]

Good day, everyone, and welcome to VeriSign's Third Quarter 2022 Earnings Call. Today's conference is being recorded. Recording of this call is not permitted unless pre-authorized.

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, executive]

Thank you, operator. Welcome to VeriSign's Third 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 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.

[D. Bidzos, executive]

Thanks, David. Good afternoon to everyone, and thank you for joining us.

Last quarter, we acknowledge the uncertainty that macroeconomic and other challenges presented, and we said that we would focus on what was within our ability to control. We also indicated what that meant. First, maintaining operating and investing in our critical infrastructure. Next, exercising careful expense control where appropriate. Additionally, it meant keeping our capital allocation activities focused on building and efficiently returning long-term shareholder value. During the third quarter, we extended our record of uninterrupted DNS availability for .com and .net to over 25 years.

Also during the third quarter. Sorry, we -- also during the third quarter, we grew our revenues by 6.8% year-over-year and our EPS by 12.9% year-over-year. Our financial and liquidity position remained stable with $980 million in cash, cash equivalents and marketable securities at the end of the quarter. During the third quarter, we repurchased 1.5 million shares for $275 million.

Effective today, the Board of Directors has increased the amount authorized for share repurchase of VeriSign common stock by approximately $803 million to a total of $1 billion authorized and available under the share repurchase program which has no expiration. At the end of September, the domain name base in .com and .net totaled 174.2 million domain names with a year-over-year growth rate of 1.2%.

In the third quarter, there were 9.9 million new registrations compared to 10.1 million last quarter and 10.7 million in the year ago quarter. And while there are many factors that drive demand for domain names, we have seen lower new registrations in the first 3 quarters of this year as a result of factors that I have already mentioned in prior calls. These include a pandemic-driven acceleration of new registrations in 2020 and 2021, which have subsided recent global macroeconomic headwinds and reduced new registrations from China.

We believe that the renewal rate for the third quarter of 2022 will be approximately 73.8%, same as the 73.8% final renewal rate last quarter, which compares to 75% a year ago. The renewal rate for previously renewed names has remained similar year-over-year and the first-time renewal rates, while similar to last quarter, are lower year-over-year, predominantly due to a greater proportion of names renewing from China that were registered last year.

We do see some signs that new registrations, while still slow, continue to stabilize towards pre-pandemic levels. That said, current global economic and geopolitical conditions continue to introduce uncertainty through the remainder of 2022. Because of this macro uncertainty, we are adjusting our 2022 domain name base guidance and now expect a domain name base growth rate of between 0.25% and 1%.

Turning to .web. The parties made their submissions to ICANN during Q3, and we are now waiting for ICANN to complete its process.

Now I'd like to turn the call over to George. I'll return when George has completed his financial report with closing remarks.

[George Kilguss, executive]

Thanks, Jim, and good afternoon, everyone.

For the quarter ended September 30, 2022, the company generated revenue of $357 million, up 6.8% and delivered operating income of $237 million, up 7% from the same quarter a year ago. For the first 9 months of 2022, revenue is up 6.9% and operating income is up 8.2% as compared with the first 9 months of 2021. Operating expense totaled $120 million compared to $113 million a year earlier.

For the first 9 months of 2022, operating expenses are up 4.5% as compared to the first 9 months of 2021. We continue to remain focused on optimizing our expenses and driving long-term profitable growth. Net income totaled $169 million compared to $157 million a year earlier, which produced diluted earnings per share of $1.58 for the third quarter of 2022 compared to $1.40 for the same quarter of 2021.

For the first 9 months of 2022, net income is up 8.7% as compared to the first 9 months of 2021. Operating cash flow for the third quarter was $262 million, and free cash flow was $255 million compared with $260 million and $245 million, respectively for the third quarter of 2021. As with Q3 last year, cash flow this quarter benefited from an increase in deferred revenue, which was primarily related to early domain name renewal activity before the dot-com price increase on September 1, 2022. The main impact of these early renewals is the pulling forward of cash flow from future quarters into the third quarter this year.

I'll now discuss our updated full year 2022 guidance. Revenue is now expected to be in the range of $1.418 billion to $1.426 billion. This updated revenue range guidance reflects our domain name base growth rate expectation of between 0.25% and 1% that Jim mentioned earlier.

The operating margin is now expected to be between 65.75% and 66.25%. Interest expense and nonoperating income net, which includes interest income estimates, is now expected to be an expense of between $60 million to $65 million. Capital expenditures are now expected to be between $30 million to $35 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 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 in 2022.

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

[D. Bidzos, executive]

Thanks, George.

As we said last quarter, while the global macroeconomic outlook remains complicated by geopolitics, inflation and risk of recession, we can, and we did focus on what is within our control: managing our business efficiently with the unconditional prioritization of delivering on our mission. This focus on what we can manage will continue to serve all of our constituents well for the long term. Those being our customers, relying parties, employees and shareholders, you can expect that focus to continue. We're confident that the long-term fundamentals of our business remain strong.

Thanks for your attention today. This concludes our prepared remarks, and now we'll open the call to your questions. Operator, we're ready for the first question.

[Operator]

[Operator Instructions] And we will go to Rob Oliver with Baird.

[Robert Oliver, analyst]

Great. Jim, thanks for the color. Yes, appreciate this is the second quarter in a row where you really kind of laid out the focus on kind of the things that are within your control versus the things that are not within your control. I'm just curious as you look at those things, if there's been any change since last quarter? And if you could remind us of what some of those things in particular are as you see them?

[D. Bidzos, executive]

Thanks for the question, Rob. Yes, I guess this is focusing on last quarter. What we did, the things, I think, are fairly simple, but a wise man once said that just because something is simple doesn't mean it's easy to do. But what we did, first and foremost, is sort of common sense and obvious focusing on what you can control. To us, it means not dwelling on these factors that we can't control beyond the need to do proper planning. Second is getting it right, meaning that managing expenses has to be done while continuing to make all the necessary investments in our infrastructure to keep up with an evolving cyber threat environment. And I think the third category is sort of being -- about being alert for opportunities to more effectively return value to our shareholders. Those are the things we focus on. We're going to continue to focus on.

I should add that in addition to that, I think you have to say that the domain names have an enduring value to users, and that's certainly a contribution of the fundamental strength of this business. It's what gives us confidence in the long-term fundamentals and the value of the business. And another thing we do, I mean, obviously, this is a quarterly focus. We report every quarter, but we also, at the same time, have to keep our eye on the long term. So we ask ourselves questions like, look, when this -- I've called it a bump in a road, everything that we're going through right now, COVID and all the other challenges, and it's certainly a longer bump than anybody would like. But we ask ourselves questions like years from now when we look back at getting through this, what will we wish we had done in order to improve the long-term health and fundamentals of our business. And I think that helps guide us through these things as well. So hopefully, that helps a little bit.

[Robert Oliver, analyst]

Great. That's helpful. You did make a comment, Jim, about some stabilization in the domain base. We've seen some of that in the numbers. You also talked about China. I just wanted to make sure I understood. Was that a general comment relative to domains? Or was that a China-specific comment? And then just going to ask about geographies. I can ask Todd that one as well, but just curious about that stabilization comment?

[D. Bidzos, executive]

Well, I think it was a general comment that I made. First of all, in general, we did indicate at the last quarterly report that we provided that we saw some indication of trends toward normalization. And we did see some of that. We see it again. I think it's a bit difficult to be precise in uncertain times. But I think that was a broad statement about general domain names. China is a bit different. China is always sort of a unique situation. Domains there and domain investors have their own particular qualities about them, how they buy domains and how they use them. China has regulations, of course, and China had some challenges from COVID.

We saw names that surged early on in China, having lower first-time renewal rates certainly contributed to some of the data that you saw. But we also saw that many of the pre-pandemic names provided renewal rates that are very similar to the long-term renewal rate. So much of what we got in a broader sense were high-quality names.

[Robert Oliver, analyst]

Got it. Okay. And Todd, question for you, sort of standard quarterly question, just around any geographic trends. I know Jim just talked a little bit about China, which I'd asked about if there was anything else to call out from a geographic perspective relative to renewals or trends?

[Todd Strubbe, executive]

Yes. Most of our regions from a new registrations' perspective, remained lower year-over-year. So while North America, Europe and China had year-over-year decreases in new registrations, we did see increases in new registrations from registrars in both APAC and Latin America.

[Robert Oliver, analyst]

Okay. Okay. That's great. Jim, a couple more for you, if I may. You mentioned that you guys had fulfilled the submission to ICANN on .web. It feels like one of many submissions you guys have made. Was there anything else other than you guys fulfilling the submission? Any other communication or anything else that would give an indication to you guys as to what a time frame might be or anything else you can share there?

[D. Bidzos, executive]

Sure. So first of all, let me just say, I think the submission was a little bit different in the sense that the many other submissions that we made were actually to an IRP panel, and this was a submission to ICANN who is now acting on the panel directing them to pursue this through their processes.

In fact, in March -- early in March, the ICANN Board adopted a resolution that instructed one of their board accountability mechanism committees to evaluate the claims relating to the 2 parties here. And those submissions were made directly to ICANN. So that's actually different than what we were doing over the past few years in litigation. I just wanted to offer that clarification.

So what the conclusion of the IRP did was basically put this back in ICANN's hands. So it's ICANN's process. We've made our submissions. They have our submissions. And so it's an ICANN process, and we're just waiting to hear what -- from them when they've concluded.

[Robert Oliver, analyst]

Got it. Okay. And then on .net, you guys announced last quarter that you were going to take a price increase in .net and just I know that's going to roll in here, but just wanted to get a sense of what, if any, feedback you could share in terms of what you've heard from channel partners or others there around the .net price increase.

[Todd Strubbe, executive]

Well, look, .net continues to be a strong, widely recognized brand and a very competitive global TLD and like .com, it faces strong competition around the world, and we continue to invest in it -- in the [ marketing ] Internet and work with our channel to ensure that it's widely recognized and available. So we're looking forward to continue to with our registrars and our channel on that.

[Robert Oliver, analyst]

Got it. Okay. Okay. Helpful. Jim, just one for you. I [ know ] we get this all the time and I just love to just surface it again to get it out there. Just questions around political risk to you guys if there is any at all, a lot of different political winds blowing in D.C. And can you just remind us, please, just what, if any political impact there's ever been for you guys on decisions around the Cooperative Agreement [ contract ] or your ability to continue to fulfill your obligations?

[D. Bidzos, executive]

Well, the last [ action ] was in October of 2018, which was Amendment 35 to the Cooperative Agreement -- and sorry, 36 -- 35. And that amendment provided some regulatory relief as part of a broader effort to transition global Internet governance to turn IT into a more global organization and to provide some sort of regulatory relief to VeriSign in .com that provided [ a priority ] approval for VeriSign to enter into agreements to renew .com with ICANN, where in the past, every 6 years, their specific approval was required. That's now been given [ a priority ]. And the Cooperative Agreement -- also that amendment to the Cooperative Agreement also provided for the limited pricing flexibility that we have and it also provided for different termination provisions, which are that the Commerce Department has the right to unilaterally sunset the agreement. We do not, they do. But also, it's a provision of Amendment 35 that the Cooperative Agreement cannot be amended without approval of both of the parties.

So I think you can certainly view that as a move towards sort of depoliticizing this component of the Internet. It came following the 2016 so-called transition of ICANN away from the regulation that it was governed by the U.S. government. So I think if you see it in that broader context, maybe it makes a little bit more sense. So the last thing that happened with that respect was a move to provide regulatory relief, which I think we certainly benefit from.

[Robert Oliver, analyst]

Got it. Okay. Yes, that's really helpful. I appreciate you running through that. And then George, just a quick one for you on just the impact of FX on dollar-denominated purchases. Can you just talk overall about the FX impact that you guys have within your business and anything you're seeing there?

[George Kilguss, executive]

Yes, sure, Rob. As you know, we bill all of our registrar customers in U.S. dollars. So we don't have a lot of FX exposure on the income statement. We have a small amount of FX exposure with regard to some expenses. We have employees around the world, and we obviously pay them in their local currency. But that's a relatively small amount for us there.

[Operator]

And at this time, I would like to turn the call back over to David Atchley for final comments.

[David Atchley, executive]

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]

And again, this concludes today's call. Thank you for your participation. You may now disconnect.