VeriSign Q1 2022 Earnings Call Transcript

Participants

Corporate Executives

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

Analysts

• Robert Cooney Oliver, Robert W. Baird

Presentation

[Operator]

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, Vice President, Treasury and Investor Relations 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. 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, Chief Executive Officer and Executive Chairman of the Board 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%. 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. 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 remained stable with $1.2 billion in cash, cash equivalents and marketable securities at the end of the quarter. Share repurchases during the first quarter totaled $196 million or 895,000 shares. 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 cater 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 E. Kilguss, Executive Vice President and Chief Financial Officer at VeriSign]

Thanks, Jim, and good afternoon, everyone. For the quarter ended March 31, 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. 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 to $1.435 billion. This narrowed revenue range guidance reflects the updated domain name base 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 nonoperating income net, which includes interest income estimates, is now expected to be an expense of between $65 million to $70 million. Capital expenditures are now expected to be between $35 million to $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. Now I'll turn the call back to Jim for his closing remarks.

[D. James Bidzos, Chief Executive Officer and Executive Chairman of the Board 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. 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 ahead and take a question from Rob Oliver with Baird.

[Robert Cooney Oliver, Analyst at Robert W. Baird]

Great. So Jim, I'll start with just 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. So let me just first ask for, just a bit more color around Q1. Obviously, a lot has happened in a short period of time. So I would love to hear what you saw and how that was manifest in your decision to take down the range?

[D. James Bidzos, Chief Executive Officer and Executive Chairman of the Board 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. And while there are these many factors that drive demand, we have seen lower new units in the first quarter. As 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. And there are recent global macroeconomic factors as well. Those, obviously, we're still analyzing. 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 group 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 in 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.

[Robert Cooney Oliver, Analyst at Robert W. Baird]

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

[D. James Bidzos, Chief Executive Officer and Executive Chairman of the Board 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. So with that, I'll invite George to add any comments or color.

[George E. Kilguss, Executive Vice President and Chief Financial Officer at VeriSign]

Yes. So Rob, as Jim mentioned in his remarks, we continue 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, we generated 10.2 million of new units in the first quarter, and that compared to 10.6 million in the fourth quarter and 11.6 million 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. Year-over-year, we saw more of a broad-based slowing of growth. And as Jim mentioned, that's really a result of the incremental demand from pandemic that appears to have subsided here. And additionally, as Jim mentioned, we also believe the global macroeconomic conditions has also impacted our growth rates here in 2022.

[Robert Cooney Oliver, Analyst at Robert W. Baird]

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

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

Rob, I think it's kind of 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 into that level of specificity. We'll share with you when and if we do, but I think it's early at this point. We do -- 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 global geopolitical macroeconomic events that are difficult to predict and obviously, things that we can't control. So all I can tell you is that those are factored in based on the best information and analysis that we're able to make today.

[Robert Cooney Oliver, Analyst at Robert W. Baird]

Got it. Got it. Okay. And just a couple more from you guys, I appreciate it. Jim, while I have you on the -- just 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 security is very much at the DNA of what you do. And you guys made those investments ahead of that large significant numbers federal hack, which kind of seems impression. But just curious, it looks, why everybody is reporting now that cyber war could be the next front of the war. And if you could just refresh us on 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?

[D. James Bidzos, Chief Executive Officer and Executive Chairman of the Board 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. But 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 are greatly on the side of caution and precaution. So we are prepared on assumptions that I don't want to go into detail on. I'm just -- 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. And again, that is job one. That's first and foremost. That takes a back seat to nothing at this company. It's probably all I can say about that. I hope that's helpful.

[Robert Cooney Oliver, Analyst at Robert W. Baird]

Yes. That is helpful. And I appreciate you'd be limited on that. One or two other quick ones, and I appreciate the opportunity here to hold the floor. Just -- and I know you mentioned, Jim, in your formal remarks that there is no update -- official update on.web. I know you also said in the last call that you guys would be monitoring the process. So I guess a bit of a nuance question there, but in the absence of any official update, was there anything that you guys picked up in the process? Is that maybe was either not reported? Or in -- from some of your sources that would either leave you to be more optimistic or more concerned or have a better sense of timing?

[D. James Bidzos, Chief Executive Officer and Executive Chairman of the Board 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. So you've seen everything that we've seen. And as I said, 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. And you'll know something as soon as we do.

[Robert Cooney Oliver, Analyst at Robert W. 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 up a little bit, and just wanted to get a sense for what was driving that.

[George E. Kilguss, Executive Vice President and Chief Financial Officer at VeriSign]

Yes, sure, Rob. So sequentially, you saw that our expenses were up about $3.8 million in total, and 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.

[Operator]

And 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, 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]