VeriSign Q4 2021 Earnings Call Transcript

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Provided by Quartr
February 10, 2022

There are 6 speakers on the call.

Operator

Good day, everyone, and welcome to VeriSign's 4th Quarter and Full Year 2021 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.

Operator

Please go ahead, sir.

Speaker 1

Thank you, operator. Welcome to VeriSign's 4th quarter and full year 2021 earnings call. Joining me are Jim Bitzos, Executive Chairman and CEO Todd Strube, President and COO and George Kilgus, Executive Vice 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.

Speaker 1

Financial results in our earnings release are unaudited and our remarks include forward looking statements that are subject to the risks and uncertainties We discuss in detail on 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. 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 afterwards, we will open the call for your questions.

Speaker 1

With that, I

Speaker 2

would like to turn the call over to Chip. Thank you, David. Good afternoon to everyone and thank you for joining I'm pleased to report another solid quarter and full year of operational and financial performance for VeriSign. Throughout 2021, we delivered strong financial results while continuing to strengthen our critical Internet infrastructure. We complied with the high operational standards acquired by our iCAN agreements and extended our record of dotcomand.netdnsavailability to over 24 years.

Speaker 2

I would like to thank our team for their dedicated efforts and expertise, which enabled us to realize these results. The critical infrastructure we operate Provides the domain name system navigation service, which people around the world increasingly depend on for commerce, education, Healthcare and person to person connection. For the full year 2021, we processed $44,600,000 new registrations And delivered revenue of $1,328,000,000 while generating free cash flow of $754,000,000 During the full year of 2021, we repurchased 3,300,000 shares for $700,000,000 Effective today, The Board of Directors has increased the amount authorized for share repurchase of Vericelen common stock by approximately $705,000,000 to a total of 1,000,000,000 authorized and available under the share repurchase program, which has no expiration. Our financial and liquidity position remains stable With $1,200,000,000 in cash, cash equivalents and marketable securities at the end of the quarter. We continually evaluate the overall liquidity and investing needs the business and consider the best uses for our cash, including potential share repurchases.

Speaker 2

At the end of December, the domain name based in dot dotnet totaled 173,400,000 consisting of 160,000,000 names for dotcom And 13,400,000 names for dot net with a year over year growth rate of 5%. Looking at 4th quarter operational results, We processed 10,600,000 new registrations and the domain name base increased by 1,370,000 names. Although renewal rates are not fully measurable until 45 days after the end of the quarter, we believe that the renewal rate for the Q4 of 2021 Will be approximately 74.8 percent. This preliminary rate compares to 73.5% achieved in the Q4 of 2020 And 75% in the 3rd quarter. As we look to 2022, we expect the domain name to grow at a rate of between 2.5% 4.5%.

Speaker 2

As announced in today's earnings release, We have given notice of a price increase of $0.58 to the annual wholesale price for dotcom domain names, which raises the price from $8.39 to $8.97 effective September 1, 2022. I should point out that anyone can register a dotcom domain at any time before September 1 for up to 10 years and lock in that price for the full term of up to 10 years. Turning to DotWeb. We noted last time that affiliates had filed an application for reconsideration of the May 2021 final decision, Which, as a reminder, rejected their request to be awarded .web. Since we last spoke with you, the significant development in December Was that Affilius' application for reconsideration was also rejected.

Speaker 2

And further, Affilius was sanctioned for filing it because the arbitration panel found that it was frivolous. Since then, in mid January, Qiant's Board of Directors directed 1 of its standing committees to review the panel's final decision and provide the Board with its findings. With the rejection of Affilius' application and the reaffirmation of the panel's final decision, those roadblocks are now out of the way And IKM looks to be moving forward with making the decision on the delegation of .web and we will be monitoring their process. As we have said before, we continue to look forward to becoming the .web registry operator and establishing alongside.comand.net as an additional option for businesses and individual end users worldwide. And now I'd like to turn the call over to George.

Speaker 3

Thank you, Jim, and good afternoon, everyone. For the year ended December 31, 2021. The company generated revenue of $1,328,000,000 up 4.9 percent And delivered operating income of $867,000,000 up 5.2 percent from 2020. Operating expense totaled $461,000,000 and was up 4.5% from the prior year. The full year 2021 Operating margin was 65.3 percent and free cash flow was 754,000,000 For the Q4, revenue came to $340,000,000 up 6.3% from the same quarter in 2020 With operating income of $222,000,000 up 8.6 percent from $205,000,000 in the same quarter a year ago.

Speaker 3

Operating expense totaled $118,000,000 for the Q4 of 2021 compared to $113,000,000 in the 3rd quarter And $116,000,000 in the Q4 of 2020. The sequential increase was primarily a result of increased marketing spend in the quarter. The operating margin in the quarter was 65.3% compared to 66.2% in the 3rd quarter And 63.9 percent for the same quarter of 2020. Net income totaled $330,000,000 compared to $157,000,000 a year earlier, which produced diluted earnings per share of $2.97 in the Q4 of 2021 compared to $1.38 for the same quarter of 2020. As noted in our earnings release today, net income for the Q4 of 2021 Included the recognition of a deferred income tax benefit related to a restructuring of 2 of our international subsidiaries, which involve the transfer of certain non U.

Speaker 3

S. Intellectual property between these subsidiaries. The recognition of this deferred income tax benefit Increased net income by $165,500,000 and increased diluted earnings per share by $1.49 in the quarter. Net income for the Q4 of 2020 included the recognition of $12,400,000 of previously unrecognized tax benefits, which increased diluted earnings per share by $0.11 As we noted in the Q4 of 2020 earnings release, For 2022, we expect our GAAP effective tax rates to be between 21% 24%. Operating cash flow for the Q4 was $206,000,000 and free cash flow was 193,000,000 compared with $195,000,000 $189,000,000 respectively for the Q4 of 2020.

Speaker 3

Starting with our Q1 financial statements, we will combine our sales and marketing and general administrative operating expense lines into 1 SG and A line to better align with peer company reporting. In addition, any significant fluctuations in sales and marketing We continue to be disclosed within our new SG and A section of our MD and A contained in our filings. I'll now discuss our full year 2022 guidance. Revenue is expected to be in the range of 1,420,000,000 to $1,440,000,000 This revenue range reflects the domain name based growth expectation of between 2.5% And 4.5% that Jim mentioned earlier, as well as the impact of the dotcom price increase announced today. The operating margin is expected to be between 64.5% 65.5%.

Speaker 3

Interest expense and non operating income net is expected to be an expense of between $70,000,000 to 75,000,000 Capital expenditures are expected to be between $40,000,000 $50,000,000 As mentioned, The GAAP effective tax rate is expected to be between 21% 24%. 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 Q4 and for the full year 2021, and we look forward to continuing our focused execution. Now I will turn the call back to Jim for his closing remarks.

Speaker 2

Thank you, George. Before we open the call for your questions, I'd like to update you as I've done in previous quarters on some of our activities in the field of corporate citizenship under our VeriSign Cares program, which aims to make a positive and lasting impact on the global Internet community and the communities in which we live and work. During the Q4, we once again joined forces with food banks in the areas where we have a footprint to help alleviate seasonal and COVID related food insecurity. We also renewed for a further year our partnership with Virginia Ready, the launch partner of our initiative to help those whose employment has been adversely affected by the COVID-nineteen pandemic to access retraining and other assistance to find new jobs in the growing technology sector. And finally, in Q4, we made a further contribution to the Equal Justice Initiative, recognizing that there remains much to be done in the important area of racial and social justice.

Speaker 2

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

Operator

Thank And we'll go to Sterling Auty of JPMorgan.

Speaker 4

Yes, thanks. Hi, guys. So, now that you've taken the second price increase, I know it's kind of a what have you done for me lately question, but How should we think about the final two price increases that you still have left? And probably just as important, what happens After the 6 year period of this contract?

Speaker 2

Okay. Thanks for that question, Sterling. For those of you on the call who may not be familiar with the structure referred to in the question, let me just briefly cover that if I might. So every 6 year period, we are allowed for price increases in the back 4 years that we are in the 1st 6 year period, Which began in October of 2018. And we are now at the point where we have today announced effective September 1 this year, 2nd of the 4 allowable price increases.

Speaker 2

And so in this period, we don't Guide to pricing. So today's announcement is, of course, for an increase in com domain registrations that begins September 1, 2022. Beyond that announcement, we don't guide the future pricing or discuss the factors that go into those decisions. I will say this, this is the 2nd wholesale price increase for comps since January of 2012. So if you Look back over the last 10 years, that translates into a cost increase of only 1.3% CAGR, over the last 10.5 years actually.

Speaker 2

So I just wanted to point that out. For the second part of your question, so basically in 2020, 8 years from 2018 In sorry, 6 years from 2018 to 2024, we will start a second 6 year period. This is a 6 year period that's Part of our cooperative agreement with the Commerce Department, which automatically renews every 6 years. And as you may or may not know or recall, the first 2 years do not allow for price increases. So in fact, without guiding to what we'll do in the future, if you assume that we If we took all of the 4 price increases, meaning the remaining 2 in this 6 year period, as far out As until at least October of 2026, the price of a dotcom registration cannot exceed $10.26 And we believe Tom is and continues to be positioned competitively.

Speaker 2

So without guiding, we're in a 6 year period In which we've taken the first two of 4, and then we'll start a second 6 year period. And since the increases are only in the back 4 years, none can come in the first two. So just to reiterate, Tom, is Currently, the current price increase that we've taken allows for 2 more. If we were to take those 2 more and don't Exit the 6 year period at $10.26 that price couldn't change until at least October of 2026. That was a long answer.

Speaker 2

Hopefully, that's helpful.

Speaker 4

Yes, it is helpful. I appreciate that. And then within the context Of the initial guide you're giving here for 2022 for the domain name growth of the 2.5% to 4.5%, I think there's a lot of us that have watched the data year to date and granted we're just in the very beginning, but Any comments you give, do you feel like the base is off to a slower than normal start for the year? And is there timing of renewals or other things that Investors should be thinking about and how that factored into your guide?

Speaker 2

Sure. George?

Speaker 3

Yes, sure. Sure. Thanks, Jim. Yes, Sterling, this is George. So I would just remind you and others on the call that we do have some seasonality As it relates to certain holidays and how they fall on the calendar, this year in Q1, for example, the Chinese New Year is about 2 weeks earlier, Started on February 1, last year it was February 12.

Speaker 3

And we tend to see new registrations from our Chinese registrar slow down a few weeks before the actual holiday And then recover once the holiday is over. So that could be playing into some of the data that you see on our website. But overall, as you mentioned, we do expect continued growth in the domain name base. We have guided to 2.5% to 4.5%. And If you recall, that was a similar growth rate that we guided to last year at this time as well.

Speaker 4

Makes sense. And then very last one on .web. If all goes well with ICANN Board, Is it your anticipation that you would be in the market selling .web domains in 2022?

Speaker 2

Yes. Well, so first of all, the process that I mentioned that was directed by ICANN's Board, That is a process that's been held up for many years during litigation, which the panel has now Basically shut down for the 2nd time and directed ICANN to move with its process. So we're pleased to see ICANN doing it. That is ICANN's process, so I can't Speak quite for the duration that that will take. Obviously, we hope it's as brief as it can be, but that is an ICANN process.

Speaker 2

And secondly, I think you're aware there are some standard processes associated with the launch of any TLD. There's a period where some security issues are observed and addressed. There's a period where trademark holders are given the right to Make their registrations first. So putting all that together, it's really hard to speculate in a way that allows me to answer your question. I will say that We have not budgeted in 2022 any launch or marketing costs or any revenue For DotWeb, we'd certainly like to be in the market if we could.

Speaker 2

But I think given all of those variables, it It isn't helpful for me to speculate as to whether it is exactly when or even what time frame as you asked, Webb will come to market. We hope it does soon and We certainly intend to bring it to market and be successful with it. But beyond that, I don't think I can speculate.

Speaker 4

Makes sense. Thank you, guys. I appreciate it.

Speaker 2

Sure.

Operator

And we'll take our last question from Rob Oliver of Baird.

Speaker 5

Great. Thanks, guys. Good afternoon. Sterling asked a lot of good questions. I'll just follow-up on his.

Speaker 5

So just I'll start with Dotweb since, Jim, that's where you left off. You did mention in your prepared remarks that you're going to be monitoring the process at ICANN. I just wanted to understand what's the vehicle for actually doing that? How you monitor that? And then, I feel like it's a saber rattling about further legal actions.

Speaker 5

And I'm just wondering, from your perspective, what exactly That is. So like what avenues they have left, they've been able to stretch this out for so long. And then I had a follow-up for George as well. Thanks.

Speaker 2

Okay. While I can't speak for affiliates, I can only tell you that the result of their last application was Sanctions and a use of the word frivolous in the panel's Answer to their application and reiterating their earlier finding, which is to direct ICANN to proceed. In terms of how we monitor that, Most of these actions that when Icahn's Board takes these actions, that information is publicized and so you can follow some of that On ICANN's website, for example, the results that I mentioned, the direction that ICANN gave to one of their standing committees Was in fact publicly available information. So what we'll be monitoring, you can certainly monitor yourself on ICANN's website as The Board proceeds. So I think beyond that, again, I can't really speak for Affilius.

Speaker 2

We've blogged about this. You can find our blogs and you can see our position. We've been firm from the beginning that We believe that Affilius' claims and demands were without merit. Thus far, the panel has reaffirmed What we expected would happen that ICANN would be directed to proceed with its process and determine the delegation of .web. That's where we are now.

Speaker 2

What affiliates will do next, if anything, is up to them. But at this point, ICANN has taken some action and we're monitoring that.

Speaker 5

Got it. Okay. That's helpful, Jim. Thank you. And then George, just a couple of quick ones for you.

Speaker 5

Just On the operating margin guide for 2022, assuming and I think you guys have It's in the past never included things in guide that weren't set. So assuming that guide does not include .web And assuming you got .web, there would be some expenses associated with that. I'm not asking you to speculate on exactly what those expenses would be, as Jim already I said that you guys won't, but instead could we understand that the initial operating margin guide may then have to be adjusted at some point if we were you guys were to Then get .web and proceed with some of the expenses around ramping .web?

Speaker 3

Yes, Rob. To the extent that when DotWeb comes to us and clearly we've got our plan and our launch in place, We'll clearly provide updated guidance to the extent that those expenses and or revenue are going to impact the current year.

Speaker 5

Got it. Okay, helpful. And then just lastly, just you mentioned some of the kind of vagaries around global Domain trends and Chinese New Year, of course. And just was wondering for about any sort of geographic color and again a follow-up on Sterling's question It's about kind of what you're seeing here early in the year. And I know renewal rates have been higher because of Some of the activities that you guys have seen in U.

Speaker 5

S. And EMEA and how that is trending and how that looks to you here as well? Thanks.

Speaker 3

Yes, sure, Rob. So as we mentioned in our prepared remarks, we had a solid year of growth in the domain name base. It was up 5% year over year. And in 2021, we saw gains in the base primarily from our U. S, EMEA and our Asia Pacific registrars.

Speaker 3

When you look at new units or gross adds, Jim mentioned we generated $44,600,000 in 2021. That was up about 2,000,000 units year over year, and that increase is similar to the 2,000,000 new unit increase that we experienced in 2019 And the 2,000,000 unit increase we also experienced in 2020. So we've had pretty good consistent demand growth over the last few years. From a new unit perspective, we saw gains in 2021 from registrars in EMEA, Asia Pacific and China. And we'll provide more color as we come out of here in 2021 as to the trends that we're seeing in the regions at that time.

Speaker 5

Great. We're going to get a Super Bowl ad? I mean, we're going to be watching. That's what I'm going to be watching for the dotcom ad, right? Hopefully, we get one of those this year.

Speaker 5

Thank you, guys.

Speaker 3

Thank you, Robert.

Operator

And so that concludes the question and answer session. I will now turn the call back over to David Atchley for any final comments.

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

Again, that does conclude today's call. Thank you for your participation. You may now disconnect.

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VeriSign Q4 2021
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