VeriSign Q1 2022 Earnings Report

VeriSign EPS Results

• Actual EPS: $1.43
• Consensus EPS: $1.39
• Beat/Miss: Beat by +$0.04
• One Year Ago EPS: $1.33

VeriSign Revenue Results

• Actual Revenue: $346.90 million
• Expected Revenue: $342.99 million
• Beat/Miss: Beat by +$3.91 million
• YoY Revenue Growth: +7.20%

VeriSign Announcement Details

• Quarter: Q1 2022
• Date: 4/28/2022
• Time: After Market Closes
• Conference Call Date: Thursday, April 28, 2022
• Conference Call Time: 12:41PM ET

VeriSign (NASDAQ:VRSN) (NASDAQ: VRSN) is an internet infrastructure company that operates critical components of the global Domain Name System (DNS) and provides cybersecurity-related services. The company is best known as the authoritative registry operator for the .com and .net top-level domains, maintaining the central databases and zone files that enable domain name resolution for millions of websites. VeriSign’s registry role is performed under contractual agreements with Internet Corporation for Assigned Names and Numbers (ICANN) and involves high-availability, highly secure operations to support continuous internet connectivity.

In addition to its registry business, VeriSign offers a suite of services designed to protect and accelerate DNS and internet traffic for enterprises and service providers. Its product offerings include managed DNS services, distributed denial-of-service (DDoS) mitigation and related security solutions, as well as analytics and threat intelligence capabilities that help customers detect and respond to internet-scale attacks. These services are positioned to complement the company’s registry expertise by addressing availability, performance and security requirements of organizations that depend on resilient online presence.

VeriSign serves a global customer base that includes domain name registrars, enterprise customers, web infrastructure providers and government entities. Its infrastructure and services are distributed and engineered for high reliability and scale, reflecting the need to support continuous resolution of domain names and protection against volumetric and application-layer attacks that can affect internet availability worldwide.

Founded in 1995 and headquartered in Reston, Virginia, VeriSign has evolved from early internet infrastructure roots into a company focused on registry operations and DNS-related security services. It is publicly traded on the NASDAQ under the ticker VRSN. The company’s operations and contractual obligations with internet governance bodies make it a foundational provider in the domain name ecosystem and a participant in broader efforts to safeguard and stabilize internet infrastructure.

VeriSign Q1 2022 Earnings Call Transcript

Key Takeaways

• VeriSign reported Q1 2022 revenues of $347 million (up 7.2% year-over-year) and diluted EPS of $1.43 (up 7.5%).
• The .com and .net domain name base grew by 1.23 million names in Q1, with a preliminary renewal rate of ~75.9%, and full-year 2022 domain base growth is now guided to 1.75%–3.5%.
• VeriSign ended Q1 with a strong liquidity position of $1.2 billion in cash, cash equivalents and marketable securities, repurchasing $196 million of shares and retaining $893 million in repurchase authorization.
• The company is awaiting ICANN’s Independent Review Process decision on the .web registry but remains committed to operating .web alongside .com and .net.
• Full-year 2022 guidance was narrowed to revenues of $1.420–1.435 billion, an operating margin of 64.5%–65.5%, interest expense of $65–$70 million, capex of $35–$45 million, and a GAAP tax rate of 22%–25%.

Presentation

[Operator]

Please stand by. Good day, everyone. Welcome to Verisign's first quarter 2022 earnings call. Today's conference is being recorded. Recording of this call is not permitted unless pre-authorized. 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 of Investor Relations and Corporate Treasurer at Verisign]

Thank you, operator. Welcome to Verisign's first 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.

[David Atchley, VP of Investor Relations and Corporate Treasurer at Verisign]

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 and CEO at Verisign]

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. Our focus remains on operating, protecting, and enhancing our critical internet infrastructure, and I thank all of our employees who continuously execute our complex mission. I'm pleased to report another solid quarter of financial and operational performance for Verisign. Revenues grew 7.2% year-over-year, while EPS grew 7.5% year-over-year. At the end of March, the domain name base in .com and .net totaled 174.7 million domain names, consisting of 161.3 million names for .com and 13.4 million names for .net, with a year-over-year growth rate of 4%.

[Jim Bidzos, Executive Chairman and CEO at Verisign]

During the first quarter, we processed 10.2 million new registrations, and the domain name base increased by 1.23 million names. The final renewal rate for the fourth quarter of 2021 was 74.8% compared to 73.5% for the same quarter of 2020. Although renewal rates are not fully measurable until 45 days after the end of the quarter, we believe that the renewal rate for the first quarter of 2022 will be approximately 75.9%. This preliminary renewal rate compares to 76% achieved in the first quarter of 2021 and 74.8% last quarter. We continue to see growth in the domain name base and demand for our domain names.

[Jim Bidzos, Executive Chairman and CEO at Verisign]

While there are many factors that drive demand for domain names, we have seen lower new units in the first quarter as a result of a combination of factors. These include the component of growth attributable to the pandemic, which appears to have subsided, as well as recent global macroeconomic factors. For calendar 2022, we now expect a domain name base growth rate of between 1.75% and 3.5%. This updated range reflects the various trends we currently see in our business and our expectation for continued domain name base growth. Our financial and liquidity position remains stable, with $1.2 billion in cash equivalents and marketable securities at the end of the quarter. Share repurchases during the first quarter totaled $196 million for 895,000 shares.

[Jim Bidzos, Executive Chairman and CEO at Verisign]

At quarter end, $893 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 on our last call, ICANN's board directed one of its standing committees to review the independent review panel's final decision and provide the board with its findings. We understand that process is ongoing, and we don't have any additional information to provide at this time. As we have said before, we continue to look forward to becoming the .web registry operator and establishing it alongside .com and .net as an additional option for businesses and individual end users worldwide. Now I'd like to turn the call over to George.

[George Kilguss, EVP and CFO at Verisign]

Thanks, Jim, and good afternoon, everyone. For the quarter ended March 31st, 2022, the company generated revenue of $347 million, up 7.2% from the same quarter of 2021, and delivered operating income of $225 million, up 6.8% from $210 million in the same quarter a year ago. Operating expense totaled $122 million compared to $118 million last quarter and $113 million for the first quarter a year ago. The year-over-year increase in operating expense is primarily a result of continued investments in personnel and infrastructure. The operating margin in the quarter was 64.8% compared to 65% for the same quarter a year ago.

[George Kilguss, EVP and CFO at Verisign]

Net income totaled $158 million compared to $150 million a year earlier, which produced diluted earnings per share of $1.43 for the first quarter of 2022 compared to $1.33 for the same quarter of 2021. Operating cash flow for the first quarter was $207 million, and free cash flow was $200 million, compared with $198 million and $192 million, respectively, for the first quarter of 2021. I'll now discuss our updated full-year 2022 guidance. Revenue is now expected to be in the range of $1.42 billion-$1.435 billion.

[George Kilguss, EVP and CFO at Verisign]

This narrowed revenue range guidance reflects the updated domain name-based growth rate expectation of between 1.75% and 3.5% that Jim mentioned earlier. The operating margin is still expected to be between 64.5% and 65.5%. Interest expense and non-operating income net, which includes interest income estimates, is now expected to be an expense of between $65 million-$70 million. Capital expenditures are now expected to be between $35 million-$45 million, and the GAAP effective tax rate is now 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 first quarter, and we look forward to continuing our focused execution in 2022.

[George Kilguss, EVP and CFO at Verisign]

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

[Jim Bidzos, Executive Chairman and CEO at Verisign]

Thank you, George. During the first quarter, we continued our work to protect, grow, and manage the business while continuing our focus on providing long-term value to our shareholders. In closing, I want to acknowledge again the team here at Verisign for their hard work in maintaining and operating our critical internet infrastructure, even while facing the challenges of working under pandemic conditions. In particular, I want to acknowledge the group of employees who have worked on-site continually throughout the pandemic in order to continue our infrastructure functions. Now we'll open the call for your questions. Operator, we're ready for the first question.

[Operator]

Thank you. If you would like to signal with questions, please press star one on your touch tone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one if you would like to signal with questions, star one. We'll go ahead and take a question from Rob Oliver with Baird.

[Rob Oliver, Senior Research Analyst at Baird]

Great. Good afternoon, gentlemen. Thanks for taking my questions. So Jim, I'll start with just, you know, the obvious changes in the macro environment, which have caused you guys to make the adjustments that you've made here today relative to domain. Let me just first ask for, you know, just a bit more color around Q1. Obviously a lot has happened in a short period of time, would love to hear what you saw and how that was manifest in your decision to take down the range.

[Jim Bidzos, Executive Chairman and CEO at Verisign]

Sure. Thanks, Rob. Thanks for the question. First of all, there are a lot of factors that have influenced the changes here that we're seeing. We're still analyzing many of them, but we do believe that the underlying drivers of domain name demand remain positive for our business. As I stated earlier, we continue to see growth in the domain name base. We see demand for our domain names. While there are these many factors that drive demand, we have seen lower new units in the first quarter. That's a result of a combination of factors, which as I mentioned, in particular, include this component of growth that is attributable to the pandemic that appears to have subsided. There are recent global macroeconomic factors as well. Those obviously we're still analyzing.

[Jim Bidzos, Executive Chairman and CEO at Verisign]

We also have heard from some of our registrars that they're seeing the same thing we are, meaning that incremental demand for new registrations that grew during the pandemic appears to be subsiding. It's difficult to predict how the changes in these and other trends will impact demand for new registrations and growth in our domain name base. We do expect that new registrations in the second half of the year will be similar with the levels we saw during the second half of last year. Hopefully, that helps.

[Rob Oliver, Senior Research Analyst at Baird]

Yeah, that's helpful. You touched a little bit, I believe my follow-up was gonna be on sort of that geographic makeup of that comment as well. I know you did say that that played an element, meaning the war. I was in Europe this quarter, you know, marketing to investors, and it was, you know, the exposure to the war over there, you know, was noticeably more acute than here in the U.S. It just, you know. I know you said you're still analyzing those factors, but any color around sort of the geographic makeup of what you saw this quarter would be helpful.

[Jim Bidzos, Executive Chairman and CEO at Verisign]

Sure. Let me ask George to comment on that first, but let me directly address one specific part of your question. I mean, there are ICANN accredited registrars based in Russia, Ukraine, and Belarus, but the revenue from those three countries combined is not material to the company's financials. With that, I'll invite George to add any comments or color.

[George Kilguss, EVP and CFO at Verisign]

Oh, yes. Thanks, Jim.

[Rob Oliver, Senior Research Analyst at Baird]

I'll give you the other one, so thank you.

[George Kilguss, EVP and CFO at Verisign]

Yeah. Rob, you know, as Jim mentioned in his remarks, we continued to grow our domain name base in the first quarter. We were up about 4% year-over-year. Again, in the first quarter, we saw gains in the base, primarily from the U.S., EMEA, and Asia Pacific regions. From a new unit perspective, you know, we generated 10.2 million new units in the first quarter, and that compared to 10.6 in the fourth quarter and 11.6 in the first quarter a year ago. When you look sequentially, we saw continued growth in the U.S. and Asia Pacific regions with slowing growth in most other regions that we participate in.

[George Kilguss, EVP and CFO at Verisign]

Year-over-year, we saw more of a broad-based slowing of growth. As Jim mentioned, that's really a result of the incremental demand from the pandemic that appears to have subsided here. Additionally, as Jim mentioned, we also believe the global macroeconomic conditions has also impacted our growth rates here in 2022.

[Rob Oliver, Senior Research Analyst at Baird]

Got it. Okay. Yeah, that, George, that's helpful. Just in terms of the assumptions that went into that, to that estimate, you know, did you guys make any assumptions relative to, you know, kind of the state of the war or the state of the geopolitical environment? Or is it, you know, status quo assumed in, the forecast for the rest of the year?

[Jim Bidzos, Executive Chairman and CEO at Verisign]

Rob, I think it's kinda too early to say. We're studying all those things to the extent we'll be able to, in any sort of granular manner, factor them in to that level of specificity. We'll share with you when and if we do, but I think it's early at this point. You know, the guidance that we gave does plan for a certain amount of uncertainty, which I think is obvious every business is doing that these days. These are, you know, global geopolitical, economic events that are, you know, difficult to predict and obviously things that we can't control. So all I can tell you is that, you know, those are factored in based on the best information and analysis that we're able to make today.

[Rob Oliver, Senior Research Analyst at Baird]

Got it. Just a couple more from you guys. I appreciate it. You know, Jim, while I have you on the topic of, there's a lot of chatter about cyber war. I mean, you guys made some additional investments a couple of years ago around security, and you know, security is very much at the DNA of what you do, and you guys made those investments ahead of you know, that large, significant SUNBURST federal hack, which you know, kinda seemed prescient.

[Rob Oliver, Senior Research Analyst at Baird]

Just curious, you know, it looks, you know, while everybody's reporting now that the cyber war could be the next front of the war, if you could just refresh us on, you know, with the security and how prepared you guys are for that and if, in fact, you guys have seen anything to date that would be supportive of those assertions in the press.

[Jim Bidzos, Executive Chairman and CEO at Verisign]

That's a tough one for me to comment on with any specificity. We generally don't talk about these things. I can say in general that obviously we make certain assumptions about the cyber threat environment. We monitor it very, very closely. We think it varies, and we think it's in a higher state than it has been in the past. We have in the recent couple of years, and in particular in 2020 and 2021, made some investments in our infrastructure in cybersecurity in general. We continue to make those. That's obviously job one. We take nothing for granted. We generally err on the side of caution and precaution. We are prepared on assumptions that I don't wanna go into detail on.

[Jim Bidzos, Executive Chairman and CEO at Verisign]

Let's just say that we're continuing to make investments. We've made investments in providing equipment and protection for our teams that are working at home. We constantly make investments to protect, evolve, and strengthen our infrastructure and its resilience and reliability. That is job one. That's first and foremost. That takes a backseat to nothing at this company. That's probably all I can say about that. Hope that's helpful.

[Rob Oliver, Senior Research Analyst at Baird]

Yep, that is helpful, and I appreciate, yeah, you'd be limited on that. One or two other quick ones, and I appreciate the opportunity here to hold the floor. I know you mentioned, Jim, in your formal remarks that there is no update or official update on .web. You know, I know you also said in the last call that you guys would be, you know, monitoring the process. You know, I guess a bit of a nuanced question there.

[Rob Oliver, Senior Research Analyst at Baird]

You know, in the absence of any official update, was there anything that you guys picked up in the process, that you know that maybe was either not reported or, you know, from some of your sources that would either leave you to be more optimistic or more concerned or have a better sense of timing?

[Jim Bidzos, Executive Chairman and CEO at Verisign]

We have no other information than what you can get from ICANN's website. When we monitor, we're monitoring ICANN's public statements on its website. You've seen everything that we've seen. As I said, you know, they have assigned to one of their committees the task of executing on what the IRP assigned them to do, and that seems to be ongoing. You'll know something as soon as we do.

[Rob Oliver, Senior Research Analyst at Baird]

Great. That's helpful. Last one for me. Just George, for you, just on the SG&A this quarter, can you just remind us a little bit about some of the components in there? It was, you know, up a little bit and just wanted to get a sense for what was driving that.

[George Kilguss, EVP and CFO at Verisign]

Yeah, sure, Rob. Sequentially, you saw that our expenses were up about $3.8 million in total. That was really due to a combination of factors, primarily increased labor, as well as some of the flow-through costs from the investments in cybersecurity and infrastructure made last quarter that Jim mentioned. Also, in the first quarter, we tend to have higher employee payroll taxes and stock-based compensation, as our performance-based plans are really measured and awarded in the first quarter.

[Rob Oliver, Senior Research Analyst at Baird]

Got it. Great. Well, thank you guys very much. I appreciate it.

[Jim Bidzos, Executive Chairman and CEO at Verisign]

Thank you, Rob.

[Operator]

That does conclude the question and answer session. Mr. Atchley, I'll now turn the conference back over to you for any additional remarks.

[David Atchley, VP of Investor Relations and Corporate Treasurer at Verisign]

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 do thank you for your participation. Have an excellent day.

Participants

Analysts

• David Atchley, VP of Investor Relations and Corporate Treasurer at Verisign
• George Kilguss, EVP and CFO at Verisign
• Jim Bidzos, Executive Chairman and CEO at Verisign
• Rob Oliver, Senior Research Analyst at Baird