VeriSign Q4 2022 Earnings Call Transcript

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Provided by Quartr
February 9, 2023

Key Takeaways

  • FY22 financial results with revenue of $1.425 B (+7.3% y/y), operating income of $943 M (+8.8%) and free cash flow of $804 M.
  • Domain base growth slowed to 173.8 M names (+0.2% y/y), Q4 renewal rate fell to 73.2% and 2023 domain base growth is guided at 0%–2.5%.
  • .com price increase: the annual wholesale fee rises by $0.62 to $9.59 starting Sept 1, 2023, yet remains capped below $10.26 through 2026.
  • VeriSign exited the .TV registry contract after RFP terms misaligned, sacrificing about $19 M in annual revenue (≈$10 M in Q4).
  • Strong capital return and liquidity with $980 M in cash and securities, 5.5 M shares repurchased for $1 B in 2022 and $859 M remaining authorized.
AI Generated. May Contain Errors.
Earnings Conference Call
VeriSign Q4 2022
00:00 / 00:00

There are 6 speakers on the call.

Operator

Good day, everyone. Welcome to VeriSign's 4th Quarter and Full Year 2022 Earnings Call. Today's call is being recorded. Recording of this call is not permitted unless preauthorized. At this time, I'd like to turn the conference over to Mr.

Operator

David Atchley, Vice President of Investor Relations and Corporate Treasurer. Please go ahead, sir.

Speaker 1

Thank you, operator. Welcome to VeriSign's 4th quarter and full year 2022 earnings call. Joining me are Jim Bidzos, Executive Chairman and CEO Todd Strube, President and COO and George Kilgus, Executive Vice President and CFO. This call and presentation are being webcast 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 ks, VeriSign does not update financial performance or guidance during the quarter unless it is done through a public disclosure.

Speaker 1

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.

Speaker 2

Thank you, David. Good afternoon to everyone and thank you for joining us. I'm pleased to report another solid quarter of operational and financial performance for VeriSign. Throughout 2022, we delivered strong financial results While continuing to strengthen our critical Internet infrastructure, we complied with the high operational standards required by our ICANN agreements and extended our record of dotcomand.net DNS availability to over 25 years. I'd like to thank our team for their dedicated efforts, which enabled us to realize these results.

Speaker 2

During 2022, we acknowledged the uncertainty that macroeconomic and other challenges beyond our ability to influence presented, and And operating income by 8.8% year over year. Additionally, shares outstanding at the end of 2022 decreased by 4.8% from those outstanding at the end of 2021. Our financial and liquidity position remains stable with $980,000,000 in cash, Cash equivalents and marketable securities at the end of the year. During the full year of 2022, we repurchased 5,500,000 shares for $1,000,000,000 At year end, $859,000,000 remained available and authorized under the current share repurchase program, which has no expiration. At the end of 2022, the domain name basin.comand.net totaled 173,800,000 domain names with a year over year growth rate of 0.2%.

Speaker 2

In the Q4, there were 9,700,000 new registrations compared to $9,900,000 last quarter $10,600,000 in the year ago quarter. While there are many factors that drive demand for domain names, We saw lower new registrations during 2022 as a result of factors that I've already mentioned in prior calls. These include Pandemic driven acceleration of new registrations in 2020 2021, which has subsided global macroeconomic headwinds, Reduced new registrations from China and lower first time renewal rates. We believe that the renewal rate for the Q4 of 2022 Approximately 73.2 percent compared to the 73.7 percent final renewal rate last quarter And 74.8 percent a year ago. For the full year 2022, the renewal rate for previously renewed names remained similar year over year.

Speaker 2

However, first time renewal rates were lower year over year with the largest single driver being names renewing from China, which were registered during 2021. Looking to 2023, our expected 2023 domain name base growth rate is between 0% and 2.5%. This guidance reflects our knowledge about our domain name base, our channel and the broader macroeconomic backdrop. As announced in today's earnings release, we have given notice of a price increase of $0.62 to the annual wholesale price for dotcom domain names, which raises the price from $8.97 to $9.59 effective September 1, 2023. Even after this increase, we believe .com will remain highly competitive with other TLD choices.

Speaker 2

As a reminder, any of our domains may be for terms of up to 10 years at the current price. While we do not guide to pricing changes, I can say as I did last year That under the limited pricing flexibility we have, the wholesale price of a dotcom registration cannot exceed $10.26 until at least October of 2026. Turning to .web, the parties made their submissions to ICANN during Q3 And we are still waiting for ICANN to complete its process. And now I'd like to turn the call over to George. I will return when George has completed his financial report with closing remarks.

Speaker 3

Thanks, Jim, and good afternoon, everyone. For the year ended December 31, 2022, The company generated revenue of $1,425,000,000 up 7.3 percent and delivered Operating income of $943,000,000 up 8.8 percent from 2021. Operating expense totaled $482,000,000 and was up 4.6% from the prior year compared to a similar 4.5% The full year 2022 operating margin was 66.2% And free cash flow was $804,000,000 For the quarter ended December 31, 2022, The company generated revenue of $369,000,000 up 8.5% from the same quarter of 2021 and delivered operating income of $245,000,000 up 10.5% from the same quarter a year ago. During the Q4 of 2022, we executed a transition of the Dot TV agreement to a new registry operator. As the proposed contract terms in the new T.

Speaker 3

TV request for proposal no longer aligned with our strategic framework, We decided not to participate in the RFP. Revenue related to this agreement during the full year of 2022 was approximately $19,000,000 of which approximately $10,000,000 was recorded in the 4th quarter. Operating expense in Q4 totaled $124,000,000 compared to $118,000,000 a year earlier. Net income in the 4th quarter totaled $179,000,000 compared to $330,000,000 a year earlier, which produced diluted earnings per share of $1.70 for the Q4 of 2022 compared to $2.97 for the same quarter of 2021. As a reminder, net income for the Q4 of 2021 Included the recognition of a deferred income tax benefit related to the transfer of certain non U.

Speaker 3

S. Intellectual properties between wholly owned subsidiaries, which increased net income by 165,500,000 And increased diluted earnings per share by $1.49 Operating cash flow for the Q4 of 2022 was $217,000,000 and free cash flow was $209,000,000 compared with $206,000,000 $193,000,000 respectively for the Q4 of 2021. I will now discuss our full year 2023 guidance. Revenue is expected to be in the range of $1,485,000,000 to 1,505,000,000 This revenue range reflects our expectation that the domain name base will grow at a rate between 0% and 2.5% that Jim mentioned and is also impacted by the transition of the Dot TV agreement at the end of 2022. Operating income is expected to be between 985,000,000 and $1,500,000,000 Interest expense and non operating income net, which includes interest income estimates, Is expected to be an expense of between $35,000,000 to $45,000,000 Capital Expenditures in 2023 are also expected to be in a range between $35,000,000 to 45,000,000 The GAAP effective tax rate is expected to be between 22% 25%.

Speaker 3

In summary, VeriSign continue to demonstrate sound financial performance during the Q4 and the full year of 2022, and we look forward to continuing our focused execution in 2023. Now I'll turn the call back to Jim for his closing remarks.

Speaker 2

Thank you, George. We believe our strategic focus and disciplined management served us well during 2022, allowing us to deliver solid financial results challenging environment as the economy struggled to recover from disruption caused by the pandemic. VeriSign's mission is about security and stability, Not only in the operation of our critical infrastructure, but financial stability is also important for our customers, employees and shareholders. Today, we reported profitable revenue growth for 2022 and we guided to profitable revenue growth for 2023. This was possible through modest domain name based growth, limited pricing flexibility and responsible expense management.

Speaker 2

We believe that the long term fundamentals of our business remain strong. As I said earlier, our strategy prioritizes reliable uninterrupted operation Our critical infrastructure along with long term value creation and its efficient return to shareholders with consistent efficient management. We believe this strategy will serve all of our constituents well for the long term and you can expect us to maintain this focus. Thanks for your attention today. This concludes our prepared remarks.

Speaker 2

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

Operator

Thank you. And our first question will come from Rob Oliver with Robert W. Baird.

Speaker 4

Great. Good afternoon. Can you guys hear me okay?

Speaker 2

Just fine.

Speaker 4

Okay, great. Hi, Jim. Thanks. Appreciate the opportunity to ask a question. First one for me is just around the macro, obviously, Second half of last year, you guys really focused on kind of what you can control operationally, A lot of moving parts in the macro and I think that approach really served you well.

Speaker 4

Looking out here into 2023, Also, obviously, tremendous amount of moving parts, layoffs, macro uncertainty on the other hand, China reopening. So just curious if you could add a few finer points to your thoughts relative to the outlook, having seen many cycles as well as To the domain guide that you guys offered of the 0 to 2.5? And then I had a quick follow-up.

Speaker 2

Okay. Thanks for that question. Well, first for 2022, Looking back on that year, as soon as we recognize that the pandemic driven growth was subsiding, we began planning for what I've called Responsible Expense Control, meaning that 1st and foremost, we make all necessary investments in our infrastructure and then look everywhere for efficiencies. As far as layoffs, we did not, as many companies did, accelerate hiring during the pandemic driven growth period. And I would also point out that the average employee tenure at VeriSign is over 9 years.

Speaker 2

So we're fortunate to have a loyal, experienced and stable employee base. I should also point out we also try to take advantage of opportunities to return value to shareholders with more effect as we did in 2022, Retiring nearly 5% of our shares outstanding. These are all the parts of our business that we can control, so that's where we focused in 2022. Looking forward, we're hearing what you're hearing. Many economists and CEOs talking about 2023 say that the macroeconomic and Geopolitical factors suggest some continued uncertainty.

Speaker 2

I suppose it should be no surprise that the recovery from the pandemic and with All the global impact in 2020 2021 is going to take more than 1 year to fully recover. So it seems prudent to factor that uncertainty into our guidance 2020 3, which we did. And as far as strategy, what you can expect from us in 2023 is a continuation of our 2022 strategy. It's actually not that different from what we try to do every year.

Speaker 4

Okay, great. Thanks, Jim. And I've been on the road marketing for the last couple of weeks and particularly In the news now is ChatGPT and I just wanted to get your thoughts relative to that. It's Obviously, very early and we're in the hype stage around this new technology now. And we've seen and I've seen With you guys many times over the years where there have been calls for the demise of the domain, but I just wanted to get your preliminary thoughts relative to ChattGPT and Potential risks, it seems to direct people towards information rather than directing them towards Websites at least at the outset and just wanted to get your thoughts.

Speaker 4

Thanks.

Speaker 2

Okay. Well, that's an interesting question. Well, first of all, I'll say this, I mean, right now ChatGPT looks like a very interesting and potentially beneficial thing for us. We are actually looking at it quite closely. We have a product called Name Studio, which we use in some of our channel uses to help them when they go to register a domain name, if it's already taken by somebody else, which happens, ChatGPT, name studio will actually help you find a similar and equally good or maybe even better name.

Speaker 2

And we're looking Closely at the ChatGPT to see about using its capabilities to enhance what Name Studio does. So I see it As actually a benefit to those efforts, I would see chat GPT similar. I mean, I guess at one point a lot of people said, well, Voice assistants are going to replace the DNS. I just that one had me shaking my head. Voice assistants go out and collect data and report it to you.

Speaker 2

And the data that they collect is found by searching the Internet for the relevant data that they seek. And that's navigated using the DNS. So they're completely complementary.

Speaker 4

Got it. Okay. That's helpful. Thanks, Jim. I appreciate it.

Speaker 4

Thank you, guys.

Speaker 1

Sure. Great. Thanks, Rob.

Operator

And we'll take our last question from Yigal Aronian with Citi.

Speaker 5

Hey guys, good afternoon. Thanks for taking the question. Maybe just starting on China, you just mentioned it before a little bit, but Given the reopening there and some of the factors, now think about some of the puts and takes that are Kind of driving moving the needle there or impacting your expectations for next year?

Speaker 2

Well, I guess just well, first of all, just understanding I'm getting an echo there. Do you hear that?

Speaker 1

I do, yes.

Speaker 2

I don't know if the audience is hearing my echo, I'm hearing it. Seems to be gone now.

Speaker 5

Okay.

Operator

Yes. Please proceed. I just muted the participants line while you're responding. That's all.

Speaker 2

Okay. All right. Maybe there was some feedback there. So in 2022, we did see a lot of China names that We're registered in 2021, renewing with lower first time renewal rates. That was a factor In 2022 and also China, as you know, has treated the pandemic differently.

Speaker 2

It's somewhat unique in that sense. And Those are the factors that contributed to lockdowns, which are ongoing. There's 0 COVID policy, increased regulation, economic uncertainty, The proportion of names renewing from China that's higher. We mentioned last year that we did see some signs of returning. I think my comments about the what if there's any consensus about 2023, I think it's That uncertainty still exists and that the recovery is maybe a little bit slower than people thought.

Speaker 2

So we're sort of just factoring that in. China is certainly part of it. But things are changing in China. I think it's too early to say exactly what that impact will be. But certainly, the economy seems to be moving in a Direction there with some of the COVID restrictions lifting.

Speaker 2

Maybe after a quarter next quarter, we'll be able to tell you more about what that's doing to the

Speaker 5

Okay, thanks. Hopefully, I'm not on mute anymore, but One more question. Can you guys hear me?

Speaker 2

Yes, we're hearing you. You're not on mute. Go ahead.

Speaker 5

Okay. So, one a couple of questions we get on domain. One is, I know the environment was different in the early part of the pandemic, but you got the question on countercyclicality. We're seeing a lot of Layouts in the tech world right now, and often that can lead to kind of new business formations, people starting projects. Are there any indications of that, that you're seeing that?

Speaker 5

Is that factored into your guidance at all? And then the other thing people Kind of ask us about regularly is how we think about normalized domain growth going forward, right? We've got some macro headwinds here, but Prior to the pandemic, remains were growing at about 4% plus 5%, Let's just call it 4%, growing around 4%. We've been well below that now for the duration of this year. Your guidance is well below that for next year.

Speaker 5

How do you guys think about Normalized growth rate for domains, is it just a return back to the levels of pre COVID or are there other factors to think about?

Speaker 2

Well, let's see. I think there's a couple of questions in there, but I guess, First of all, we want to answer directly part of your question. We have not tried to assess and factor And the impact that layoffs and new business starts might have, although that is a data point that we do track, I think you can map New business starts going back to 2020 with a fairly good sized jump then and some elevated activity in 2021 and then you see it declining in 2022. So that does tend to correlate a bit to the domain name Activity and registration activity that we saw, what that's going to mean for the future, I'm not sure. It's not a planned part of our guidance for 2023.

Speaker 2

I will just say and I'll invite George to comment as well, but We think that the fundamentals of our business and the long term prospects for the business are fundamentally strong. Domain names are Established to have tremendous utility and tremendous value and registrations, we think long term, It's a great business to be in. We think it will return to pre pandemic levels, but 2023 is a tricky year to predict. So We haven't gone as far as predicting a return at that point. So I do think one of the overriding sort of macro factors in all of this is just A complicated longer recovery from COVID than people thought.

Speaker 2

I think it's pretty clear that we're seeing that Some of the ups and downs and the bumps that we're encountering. George, you want to add anything to that?

Speaker 3

The only thing I'd add, Ygal, is that When you look at our business and what we've previously indicated, we look at factors such as Internet adoption, Internet penetration and the growth of e commerce influencing our business. And I think if you looked back during 2020 2021, clearly we saw A lot of those statistics increase significantly and while they've come down, there's still I think a longer Growing trend that I think bodes well for domain names.

Speaker 2

Yes. And I would just add one statistic, one trend is that even the names That we registered in 2020 2021 exclusive of some of the China names, that are now renewing, for the 2nd time or even the 3rd time Our renewing at the traditional previously renewed rate, which is in the mid-80s. So I think that's a good indicator about the long term strength of the business.

Speaker 5

Great. That's helpful. And I agree on the trends on e commerce and all that. Last question, The operating margins, if I'm looking at it correctly, since I've come in quite better than where the guidance applied for 4Q, Can you just talk about what is driving that and how that fits into the expense control stuff you're talking about or is it a separate thing? Thanks.

Speaker 3

Yes. Thanks, Yigal. I think a couple of things. As I mentioned in my prepared remarks, We did during the year, it was actually late in Q4 transition out of a Dot TV management at TLD. And in doing so, we as we completed all our obligations there, we did recognize about $8,400,000 of deferred revenue in the 4th quarter.

Speaker 3

Again, total revenue for that contract in 2021 was about $19,000,000 But as Jim mentioned, we in the beginning, I would say in the Q2, we started looking pretty closely at our expenses and did more responsible management of those expenses and we were able to get those Overall, our expenses grew by about 4.6% this year, which is similar to last year. As far as the Q4, we did do a little bit of seasonal marketing, more than we had done in the third quarter In the Q4 and so some of the increase there sequentially was a result of some of those marketing activities.

Speaker 5

Great. Thanks so much for the questions.

Speaker 4

Great. Thanks, Yigal. Thank you.

Operator

And that does conclude the question and answer session. I'll now turn the conference back over to Mr. David Atchley.

Speaker 1

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. And that does conclude today's

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