VeriSign Q1 2023 Earnings Call Transcript

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Provided by Quartr
April 27, 2023

There are 6 speakers on the call.

Operator

Day, everyone. Welcome to VeriSign's First Quarter 2023 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.

Operator

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

Speaker 1

Thank you, operator. Welcome to VeriSign's Q1 2023 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 from the Investor Relations website, which is available under About VeriSign on verisign.com. There you will also find our earnings release.

Speaker 1

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. 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.

Speaker 1

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. We delivered these results while continuing to strengthen our critical Internet infrastructure And complying with the high operational standards required by our ICANN agreements. For the Q1, revenues grew 5.1% year over year, While EPS grew 19% year over year.

Speaker 2

At the end of March, the domain name base in dotcomand.net totaled 174,800,000 domain names With a year over year growth rate of 0.1 percent, during the Q1, the domain name base increased by just over 1,000,000 domain names. From a new registration perspective, the Q1 delivered a modest year over year increase with 10,300,000 new registrations compared to $10,200,000 last year $9,700,000 last quarter. Our renewal rates remain stable. We believe that the renewal rate for the Q1 of 2023 will be approximately 75.6% Compared to the 73.3 percent final renewal rate last quarter and 75.9 percent a year ago. Having seen modest improvement in the registration trend during Q1, we now expect a domain name base growth rate of between 0.5% And 2.25 percent for the full year of 2023.

Speaker 2

This updated range reflects the current macroeconomic uncertainty and recent trends in our business. Our financial and liquidity position remains stable with $1,015,000,000 in cash, cash equivalents and marketable securities at the end of the quarter. Share repurchases during the Q1 totaled $220,000,000 for 1,100,000 shares. At quarter end, dollars 639,000,000 remained available net registry agreement with ICANN as the current term ends on June 30th. Consistent with ICANN's usual process, On April 13, Icahn posted the new dotnet registry agreement for public comment, which is open until May 25.

Speaker 2

The business terms of the agreement such as pricing, the fees paid to iCAN, our renewal rights and the 6 year term of the agreement are all unchanged. Regarding .web, on Monday, Icahn's website published a notice of a scheduled Board of Directors meeting to take place this Sunday. One of the Board's agenda items is to further consider the DotWeb IRP final declaration. I can then publish the minutes from 2 BAMC meetings, one held on January 31, which discussed the BAMC's consideration of certain recommendations related to DotWeb And also the minutes from a meeting on March 2, which state that the BAMC approved recommendations related to .web and requested that those recommendations be sent to the Board. We believe that this new information published this week means progress And now I'd like to turn the call over to George.

Speaker 2

I will return when George has completed his financial report with closing remarks.

Speaker 3

Thanks, Jim, and good afternoon, everyone. For the quarter ended March 31, 2023, the company generated revenue of $364,000,000 up 5.1% from the same quarter of 2022 and delivered operating income of $241,000,000 an increase of 7.3% from the same quarter a year ago. Operating expense in Q1 totaled $123,000,000 compared to $122,000,000 a year earlier. Net income for the Q1 totaled $179,000,000 compared to $158,000,000 a year earlier, which produced diluted earnings per share of $1.70 for Q1 2023 compared to $1.43 for the same quarter of 2022. Operating cash flow for the Q1 of 20 23 was $259,000,000 and free cash flow was $253,000,000 compared with $207,000,000 $200,000,000 respectively for the Q1 of 2022.

Speaker 3

I'll now discuss our updated full year 2023 guidance. Revenue is now expected to be in the range of $1,490,000,000 to 1,505,000,000 This updated revenue range reflects our expectation that the domain name base growth rate will be between 0.5% and 2.25% that Jim mentioned earlier. Operating income is now expected to be between $990,000,000 $1,500,000,000 Interest expense and non operating income net, which includes interest income estimates, is still expected to be an expense of between 35,000,000 And the GAAP effective tax rate is still expected to be between 22% 25%. In summary, VeriSign continued to demonstrate sound financial performance during the Q1 of 2023, and we look forward to continuing to deliver on our mission as well as our objectives throughout the year. Now I'll turn the call back to Jim for his closing remarks.

Speaker 2

Thank you, George. We strongly believe our strategic focus and disciplined management continue to serve us well, allowing us to deliver another solid quarter in which we provided want to thank our teams for their dedication and focus. While there is some continuing turbulence in the economy due to macroeconomic and geopolitical issues, We see signs of stability and modest growth in our business. We're also pleased that there is progress on a resolution of .web. Thanks for your attention today.

Speaker 2

This concludes our prepared remarks. And now we'll open the call for your questions. Operator, we're ready for the first question.

Operator

Your first question comes from Rob Oliver with Baird.

Speaker 4

Hi, great. Good afternoon, guys. Jim, a lot of the call here. So I guess just to kind of level set at the outset, Maybe you can give us a sense of kind of what you thought were kind of the biggest takeaways here for you guys and then I had a few other questions.

Speaker 2

Okay. Thanks. Thanks, Rob. I know this may sound simple like I'm trivializing, but what we do is anything but trivial. By the way, a wise man from Omaha said that just because something is simple doesn't mean it's easy to do and to do it consistently and over a sustained period Time is even more difficult.

Speaker 2

So I mentioned in my remarks that what we accomplished in the quarter is we reliably and securely operated our infrastructure. We added another 3 months to a 25 year uptime record. That's really significant. We responsibly and efficiently ran our business. That's always important.

Speaker 2

That's how we take care of our people. That's how we control expenses. That's how we focus on things that we can control. And number 3, we return value to our shareholders. We certainly have obligations there.

Speaker 2

So this is what our customers want. They want reliable and secure operation of our infrastructure. Of course, they want it to work. It needs to work. This is what our governing bodies, ICANN and the U.

Speaker 2

S. Government want. The contracts and the SLAs and the performance requirements make that clear and we believe that this is what our shareholders want. So I guess that's what I mean when I say that this was a solid quarter for us. That's what we that's consistently what we strive for every quarter.

Speaker 2

And I would say that, so those are the takeaways. I would just add that

Speaker 4

Okay. Thanks. There's been so much. We .web has been so long since we've had news. I guess just trying to read into here what you told us about this meeting this coming Sunday.

Speaker 4

It sounds To me like that could be an indication that there's some decision would be rendered imminently here. Just Curious to know if that's the way you think about it?

Speaker 2

Well, you're right, Rob. It has been a long time and we have always Decline to speculate on ICANN's process. It is ICANN's process. So I won't speculate as to what the Board may do. We're certainly pleased that there's been progress.

Speaker 2

This information about the meetings is good to see. I can add one thing, which is that When the ICANN Board, when it does pass resolutions in Board meetings, ICANN typically publishes them on their website within 2 days. So if there are resolutions that come out of the Sunday meeting, they should be public by Tuesday.

Speaker 4

Okay, really helpful. Thanks. If I could squeeze in one more, I appreciate it. But I know I'm not the only one anymore, so I want to be conscious of that, which is great. Just around the macro, I mean, you guys did tweak down the high end of the range a little bit.

Speaker 4

At the same time, Jim, you talked a little bit about The stability and kind of steady improvements, my language not yours necessarily, in the business. Can you talk about I think we've seen 13 of last 14 weeks or something with sequential improvement in domains. Can you talk about what you're seeing in the macro and specifically Around how China reopening impacted you guys and anything else relative to geographies that you would call out here?

Speaker 2

Well, I don't know that I can point to any specifics that would give any indication. I can tell you that our general view is 1st of all, the worst of COVID is certainly mostly behind us. And the long term effects, the recovery, there's Certainly, still some turbulence associated with that recovery supply chain issues, etcetera. There's certainly some economic turbulence interest rates We're up, they're down a little, they're up again. Employment data is good, not so good, it's good.

Speaker 2

So that's the kind of turbulence we're referring to. That long term that long trend line is a strong one that we watch, but we are seeing What I would call some stability in our business, the fundamental value of the services that we provide, the utility of domain names is unchanged. And so I think we're just sort of going through that turbulence and it's affecting us. But we have seen an improvement and we're happy with the quarter.

Speaker 4

Great. Okay. Thanks. I have a couple more, but I'll defer here and can hop back in the queue, but appreciate it. Thank you, guys.

Speaker 2

Thank you.

Operator

We will take our last question from Ygal Arounian with Citi. Go ahead.

Speaker 5

Hey, good afternoon guys and appreciate Rob saving some questions for me. Maybe I'll just start on just a follow-up on the macro and the domains. Yes. You guys gave the full year guide and you're raising the low end, you're lowering the high end. Can you Just talk about how you how 1Q came in versus where your expectations were?

Speaker 5

Are trends stronger to start the year than you thought? And What needs to happen to get to the high end of the range versus the low end of the range in terms of domain registrations as we work our way through the year?

Speaker 3

Yes. Hi, Gal. It's George. Sorry, there's a little echo there. But in any event, as Jim mentioned, we had modest gains here in Q1 with the domain name base Growing about a 1000000 names here in the Q1.

Speaker 3

When we look around our various regions, we did see The domain name base grow in pretty much all of our major regions with the exception of our China registrars. That segment was lower year over year. And when we look at our new units, we also saw Some modest gains in new registrations as Jim mentioned year over year. The U. S.

Speaker 3

Was a little bit Tepid are flat here in Q1 relative to the prior year ago quarter. We did see some improvements in EMEA And the rest of the world, again excluding China, China's new registrations were also lower year over year. And As Rob alluded to and as you're inquiring, as far as China and the reopening, I would just say it's a little early days For us, we haven't yet seen any meaningful impact there, but we are keeping an eye out for it. And I think to the extent That reopening happens sooner than later. That clearly can help us get to the higher end of our domain name base range.

Speaker 5

And that's helpful. If I may, if I may Sure.

Speaker 2

Go ahead. I'm sorry.

Speaker 5

Earl, please jump in.

Speaker 2

Okay. Go ahead, please. You have another question.

Speaker 5

Okay, sure. So I was going to follow-up on the renewal rates, which had a nice bump from 4Q and really the past couple of quarters to 1Q, is there? Is that more typical seasonality in 1Q? Or are you seeing that kind of trend line improve from where we've been in the past few quarters?

Speaker 3

Yes. So as you point out, renewal rates were relatively stable year over year, 70 5.6% versus the 75.9% in the Q1. We did see an improvement from Q4. I'd I'd say when you look at renewal rates in a big picture, our domestic renewal rates are relatively stable and where we see fluctuations is more In the international markets and we look a little deeper there, it's more in the first time renewal rates there with international markets. And We've seen the improvement here sequentially year over year and I think renewal rates are pretty stable Right now where

Speaker 5

we see them. Got it. A, on the .web, I just want to see if you guys can expand on, so I can't post the agreement for public comments until May 25. All the factors of the contract are the same, nothing's really changing. What is the process from here to renewal?

Speaker 5

What is the public comment piece? What are the things that might change or stand in the way? Or do you kind of expect it to just kind of Works through it pretty seamlessly.

Speaker 2

Well, typically in this process, comments will be collected And Icahn will address the comments and respond. So I think until we see that, I can't really totally answer your question, but The process of engaging with ICANN and coming up with a contract that was proposed negotiated and then proposed and put out for comment with its Consistent features as you point out, that part is done and of course the public comment as you mentioned. So until it's done And the comments are assessed and reported on by ICANN, then the next step concludes.

Speaker 5

Okay, thanks. And then I'll ask one more and then if Pablo has some, I'll let him I'll take some for him too. So on the DotWeb, hopefully one step closer here, can you help us understand What happens, let's say, let's just assume that it goes through and It's all said and done. What are the steps from there? What happens?

Speaker 5

How long does it take For this to become meaningful or for .web registrations to start opening up, maybe just help us, help them just think about the timeline for What happens if we just assume that this part of the process finishes? Thank you.

Speaker 2

Sure. I can give you some information that I think will be helpful to your question. One is That there are, 1st of all, there is nothing in our 2023 guidance that we provided that includes any revenue or expense for .web. And I think, I don't want to speculate about what's going to happen at the Board meeting Sunday, and so I certainly don't want to speculate beyond that. But there are Processes that are required to be followed.

Speaker 2

There are a number of things that have to be done. There are a number of security periods where certain things have to be done. And then there are some other Trademark holder protection periods where they're exclusively allowed to come in and acquire their protected domain names. So There are certainly a number of cycles that are all roughly collectively at some number of months. But I think at this point, whenever anything Happens if it does that there will be no change in what I just said about the revenue or expense in 2023.

Speaker 5

Great. Thanks for taking my questions.

Speaker 2

Sure.

Operator

This concludes today's question and answer session. I will now turn the call back over to David Atchley

Speaker 1

for final comments. Thank you, operator. Please call the Investor Relations department with any follow-up questions from this call. Thank you for your participation.

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