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This is the #1 Stock to Buy for the AI Tidal Wave (Ad)
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VeriSign Q4 2021 Earnings Call Transcript


Listen to Conference Call

Participants

Corporate Executives

  • David Atchley
    Vice President, Treasury and Investor Relations
  • D. James Bidzos
    Chairman of the Board and Chief Executive Officer
  • George Kilguss III
    Executive Vice President and Chief Financial Officer

Presentation

Operator

Good day, everyone, and welcome to Verisign's Fourth Quarter and Full Year 2021 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
Vice President, Treasury and Investor Relations at VeriSign

Thank you, operator. Welcome to Verisign's Fourth Quarter and Full Year 2021 Earnings Call. Joining me are Jim Bidzos, Executive Chairman and Chief Executive Officer; Todd Strubbe, President and Chief Operating Officer; and George Kilguss, Executive Vice President and Chief Financial Officer. 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 on 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 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.

D. James Bidzos
Chairman of the Board and Chief Executive Officer at VeriSign

Thank you, David. Good afternoon to everyone, and thank you for joining us. 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 required by our ICANN agreements and extended our record of.com and.net DNS availability to over 24 years. 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, health care and person-to-person connection. For the full year 2021, we processed 44.6 million new registrations and delivered revenue of $1.328 billion, while generating free cash flow of $754 million.

During the full year of 2021, we repurchased 3.3 million shares for $700 million. Effective today, the Board of Directors has increased the amount authorized for share repurchase of Verisign common stock by approximately $705 million to a total of $1 billion, authorized and available under the share repurchase program, which has no expiration. Our financial and liquidity position remained stable with $1.2 billion in cash, cash equivalents and marketable securities at the end of the quarter. We continually evaluate the overall liquidity and investing needs of the business and consider the best uses for our cash, including potential share repurchases. At the end of December, the domain name base in.com and.net totaled 173.4 million, consisting of 160 million names for.com and 13.4 million names for.net, with a year-over-year growth rate of 5%. Looking at fourth quarter operational results. We processed 10.6 million new registrations, and the domain name base increased by 1.37 million 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 fourth quarter of 2021 will be approximately 74.8%. This preliminary rate compares to 73.5% achieved in the fourth quarter of 2020 and 75% in the third quarter. As we look to 2022, we expect the domain name base to grow at a rate of between 2.5% and 4.5%.

As announced in today's earnings release, we have given notice of a price increase of $0.58 to the annual wholesale price for.com 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.com domain at any time before September one for up to 10 years and lock in that price for the full term of up to 10 years. Turning to.web. We noted last time that Afilias 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 Afilias' application for reconsideration was also rejected, and further, Afilias was sanctioned for filing it because the arbitration panel found that it was "frivolous". Since then, in mid-January, ICANN's Board of Directors directed one of its standing committees to review the panel's final decision and provide the Board with its findings. With the rejection of Afilias' application and the reaffirmation of the panel's final decision, those roadblocks are now out of the way, and ICANN 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 yet alongside.com and.net 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 III
Executive Vice President and Chief Financial Officer at VeriSign

Thank you, Jim, and good afternoon, everyone. For the year ended December 31, 2021, the company generated revenue of $1.328 billion, up 4.9% and delivered operating income of $867 million, up 5.2% from 2020. Operating expense totaled $461 million and was up 4.5% from the prior year. The full year 2021 operating margin was 65.3%, and free cash flow was $754 million. For the fourth quarter, revenue came to $340 million, up 6.3% from the same quarter in 2020, with operating income of $222 million, up 8.6% from $205 million in the same quarter a year ago. Operating expense totaled $118 million for the fourth quarter of 2021 compared to $113 million in the third quarter and $116 million in the fourth quarter 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 third quarter and 63.9% for the same quarter of 2020. Net income totaled $330 million compared to $157 million a year earlier, which produced diluted earnings per share of $2.97 in the fourth quarter of 2021 compared to $1.38 for the same quarter of 2020.

As noted in our earnings release today, net income for the fourth quarter of 2021 included the recognition of a deferred income tax benefit related to a restructuring of two of our international subsidiaries, which involve the transfer of certain non-U.S. intellectual property between these subsidiaries. The recognition of this deferred income tax benefit increased net income by $165.5 million and increased diluted earnings per share by $1.49 in the quarter. Net income for the fourth quarter of 2020 included a recognition of $12.4 million of previously unrecognized tax benefits, which increased diluted earnings per share by $0.11. As we noted in the fourth quarter of 2020 earnings release, for 2022, we expect our GAAP effective tax rates to be between 21% and 24%. Operating cash flow for the fourth quarter was $206 million. Net free cash flow was $193 million compared with $195 million and $189 million, respectively, for the fourth quarter of 2020. Starting with our first quarter financial statements.

We will combine our sales and marketing and general and administrative operating expense lines into one SG and A line to better align with peer company reporting. In addition, any significant fluctuations in sales and marketing will 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 billion to $1.440 billion. This revenue range reflects the domain name base growth expectation of between 2.5% and 4.5%, as Jim mentioned earlier as well as the impact of the.com price increase announced today. The operating margin is expected to be between 64.5% and 65.5%. Interest expense and nonoperating income net is expected to be an expense of between $70 million to $75 million. Capital expenditures are expected to be between $40 million and $50 million. As mentioned, the GAAP effective tax rate is expected to be between 21% and 24%. We expect the cash tax rate for 2022 to also be within the same guidance range. In summary, Verisign continued to demonstrate solid financial performance during the fourth quarter and for the full year 2021, and we look forward to continuing our focused execution.

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

D. James Bidzos
Chairman of the Board and Chief Executive Officer at VeriSign

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 fourth quarter, we once again joined forces with food banks in the areas where we have a footprint to help alleviate seasonal and COVID-related food and security. 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-19 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.

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


Questions and Answers

Operator

[Operator Instructions] And we'll go to Sterling Auty of JPMorgan.

Sterling Auty
Analyst at JPMorgan Chase & Co.

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 six-year period of this contract?

D. James Bidzos
Chairman of the Board and Chief Executive Officer at VeriSign

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 six-year period, we are allowed for price increases in the back four years that we are in the first six-year period, which began in October of 2018. And we are now at the point where we have today announced, effective September one of this year, the second of the four allowable price increases. 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 second wholesale price increase for com since January of 2012. So if you look back over the last 10 years, that translates into a cost increase of only a 1.3% CAGR over the last 10.5 years actually. So I just wanted to point that out. For the second part of your question, so basically, in 2020, eight years from 2018 in -- sorry, six years from 2018 to 2024, we will start a second six-year period. This is a six-year period that's part of our cooperative agreement with the Commerce Department, which automatically renews every six years. And as you may or may not know or recall, the first two 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 take -- if we took all of the four price increases, meaning the remaining two in this six-year period as far out as until at least October of 2026, the price of a.com registration cannot exceed $10.26. And we believe com is and continues to be positioned competitively. So without guiding, we're in a six-year period in which we've taken the first two of 4, and then we'll start a second six-year period. And since the increases are only in the back four years, none can come on the first 2. So just to reiterate, com is -- currently, the current price increase that we've taken allows for two more. If we were to take those two more and exit the six-year period at $10.26, that price couldn't change until at least October of 2026. I know it's a long answer. Hopefully, that's helpful.

Sterling Auty
Analyst at JPMorgan Chase & Co.

Yes, it is helpful. I appreciate that. And then within the context of the initial guide you're giving here for '22 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 can give? Do you feel like the base is off to a slower-than-normal start for the year? And is there a timing of renewals or other things that investors should be thinking about? And how that factored into your guide?

D. James Bidzos
Chairman of the Board and Chief Executive Officer at VeriSign

Sure. George?

George Kilguss III
Executive Vice President and Chief Financial Officer at VeriSign

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 in the calendar. This year, in Q1, for example, the Chinese New Year is about two weeks earlier, started on February 1. Last year, it was February 12. And we tend to see new registrations from our Chinese registrars 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.

Sterling Auty
Analyst at JPMorgan Chase & Co.

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 '22?

D. James Bidzos
Chairman of the Board and Chief Executive Officer at VeriSign

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 second time and directed ICANN to move with this 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. 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 long-term marketing costs or any revenue for.web. We certainly like to be in the market if we could. But I think given all of those variables, it isn't helpful for me to speculate as to whether it is exactly when or even what time frame as you asked, web 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 could speculate.

Sterling Auty
Analyst at JPMorgan Chase & Co.

Makes sense. Thank you guys, appreciate it.

Operator

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

Rob Oliver
Analyst at Robert W. Baird

Great, thanks guys. Good afternoon. Sterling asked a lot of good questions. I'll just follow up on his. So just I'll start with.web 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'm fairly used] to saber-rattling about further legal actions. And I'm just wondering, from your perspective, what exactly that is? 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.

D. James Bidzos
Chairman of the Board and Chief Executive Officer at VeriSign

Okay. Well, I can't speak for Afilias. 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 in reiterating their earlier finding, which is to direct ICANN to proceed. In terms of how we monitor that, most of these actions that when ICANN'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 Afilias. They -- 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 Afilias' 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. What Afilias will do next, if anything, is up to them. But at this point, ICANN has taken some action, and we're monitoring that.

Rob Oliver
Analyst at Robert W. Baird

Got it. Okay. That's helpful, Jim. And then, George, just a couple quick ones for you. Just on the operating margin guide for '22, assuming, and I think you guys have, in the past, never included things in guides 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 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?

George Kilguss III
Executive Vice President and Chief Financial Officer at VeriSign

Yes. Rob, to the extent that when.web 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.

Rob Oliver
Analyst at Robert W. Baird

Got it. Okay. Helpful. And then just lastly, just you mentioned some of the kind of vagaries around global domain trends in 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 just 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 activity that you guys have seen in U.S. and EMEA and how that is trending and how that looks to you here as well.

George Kilguss III
Executive Vice President and Chief Financial Officer at VeriSign

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 the gains in the base, primarily from our U.S., EMEA and our Asia Pacific registrars. When you look at new units or gross adds, as Jim mentioned, we generated 44.6 million in 2021. That was up about two million units year-over-year. And that increase is similar to the two million new unit increase that we experienced in 2019 and the two million 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.

Rob Oliver
Analyst at Robert W. Baird

Great. We got to get a Super Bowl out. I mean we're going to be watching. That's what I'm going to be watching for the.com, right, now when hopefully, we get one of those this year. Thank you guys.

George Kilguss III
Executive Vice President and Chief Financial Officer at VeriSign

Thank you Rob.

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.

David Atchley
Vice President, Treasury and Investor Relations 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

[Operator Closing Remarks]

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