VeriSign Q2 2023 Earnings Call Transcript

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Provided by Quartr
July 27, 2023

There are 6 speakers on the call.

Operator

Good day, everyone. Welcome to VeriSign's Second 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 2nd quarter 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 and 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. We delivered another successful quarter by focusing on our mission as a critical infrastructure operator. The quarter included the renewal of the dot net registry agreement and solid financial results. Additionally, last week, we marked 26 years of 100 percent availability in the dotcom.netdomainnameresolutionsystem.

Speaker 2

Throughout the various global challenges over the past 26 years, from the pandemic to natural disasters to evolving cyber threats, Our purpose built network has kept billions of people worldwide continuously connected to what matters most. The work we do to operate, protect and evolve key Internet Reaching its mark is a testament to the ongoing investments made in our platforms, processes and people. On June 30, we announced the renewal of the dot net registry agreement with ICANN, as expected given the presumptive right of renewal in our agreement. The business terms of the agreement such as pricing, the fees paid to ICANN, our renewal rights and the 6 year term of the agreement are unchanged. The next renewal for the dot net registry agreement will be June of 2029.

Speaker 2

In addition to delivering on our mission during the Q2, I'm pleased with the financial results, which show the continued strength of our business during this uncertain macroeconomic period. For the Q2, revenues grew 5 0.7% year over year, while EPS grew 16.2% year over year. At the end of June, the domain name base in.comand.net totaled 174,400,000 domain names, up from 174,300,000 in Q2 2022 and up from 173,800,000 names at the end of 2022. During the Q2, the domain name base decreased by 300,000 domain names offsetting some of the 1,000,000 names we added during the Q1. From a new registration perspective, the second quarter delivered a 1.5% year over year increase with 10,200,000 new registrations compared to 10,100,000 last year.

Speaker 2

We believe that the renewal rate for the Q2 of 2023 will be approximately 73.4% compared to 73.8% a year ago. While there are many factors that drive demand for domain names, the core value proposition for domain names remains strong and we're seeing broad based engagement from our registrar channel. However, with these fundamentals intact, low demand from China remains the primary source of drag on the overall domain name based growth. With this current trend, we now expect a domain name based growth rate of between 0% and 1% for the full year of 2023. This updated range reflects continued uncertainty, especially the weakness we continue to see related to China.

Speaker 2

Our financial and liquidity position remains stable with 9 $136,000,000 in cash, cash equivalents and marketable securities at the end of the quarter. During the Q3, we repurchased 1,000,000 shares for 220,000,000 Effective today, the Board of Directors has increased the amount authorized for share repurchase of VeriSign common stock by $1,140,000,000 to a total of 1 point $5,000,000,000 authorized and available under the share repurchase program, which has no expiration. On Dotweb, as many of you have seen from our statement on May 3, ICANN's Board of Directors dismissed Affilius' objections regarding the .web auction and directed that NDC's .web application move forward. This was a significant finding by the Board and we're pleased that our role in the auction was proved to be consistent with Icahn's policies. Subsequently, according to Icahn's website, Affilius has filed another IRP complaint, presumably challenging the Board's decision.

Speaker 2

This filing has not been posted nor has any response from ICANN. ICANN has placed NDC's .web application sorry, on hold now. Given the Board's decision, we see no basis for any further delay in delegating .web, but this is an ICANN process and we're not yet involved in it. Finally, as announced in today's earnings release, we have given notice of a price increase of $0.99 for the annual wholesale price for dotnetdomainnames, which will raise the price from $9.92 to $10.91 effective February 1, 2024. And now I'd like to turn the call over to George.

Speaker 2

I'll return when George has completed his financial report with closing remarks. George?

Speaker 3

Thanks, Jim, and good afternoon, everyone. For the quarter ended June 30, 2023, the company generated revenue of $372,000,000 up 5.7% from the same quarter 2022 and delivered operating income of $249,000,000 an increase of 5.4% from the same quarter a year ago. Operating expense in the 2nd quarter totaled $123,000,000 compared to $123,000,000 last quarter and $116,000,000 a year earlier. Net income totaled $186,000,000 compared to $167,000,000 a year earlier, which produced diluted earnings per share of $1.79 for the Q2 of 2023 compared to $1.54 for the same quarter of 2022. Operating cash flow for the Q2 of 2023 was $145,000,000 And free cash flow was $139,000,000 both of which were at similar levels in the year ago quarter.

Speaker 3

Operating cash flow and free cash flow for the 6 month period ended June 30th totaled $404,000,000 $392,000,000 And we're up from $352,000,000 $339,000,000 respectively for the same 6 month period a year ago. I'll now discuss our updated full year 2023 guidance. Revenue is now The domain name base growth rate will be between 0% and 1% as Jim mentioned. Operating income Interest expense and non operating income net, which includes interest income estimates, is now expected to be an expense of between $30,000,000 to 40,000,000 Capital expenditures are now expected to be between $45,000,000 to 55,000,000 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 Q2 of 2023, and we look forward to continuing to deliver on our mission and our objectives throughout the year.

Speaker 3

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 secure and reliable infrastructure services, Managed our business responsibly and efficiently and returned value to our shareholders. I want to thank our teams for their dedication and focus. Thanks for your attention today. This concludes our prepared remarks and now we'll open the call for your questions.

Speaker 2

Operator, we're ready for the first question.

Operator

Please mute your line. Our first question comes from the line of Rob Oliver with Baird.

Speaker 4

Great. Good afternoon, guys. Jim, my first question is for you. I've got 3 questions total. But first is for you and It's on dotcom.

Speaker 4

I think we all can kind of see real time some of the sluggishness in the market. And it looks like Really, really domain activity in dotcom has not kind of come back to sort of pre pandemic levels maybe as You guys had hoped. I know in your prepared remarks and appreciate the commentary relative to China, but we'd just love to hear a little bit more about Your view there on what's happening, whether it be China or if there are other factors? And I know Janet Yellen was just over in China, call for stimulus, sounds like there's some coming. So just would also love to hear, what you think gets us out of this rut?

Speaker 4

Thanks.

Speaker 2

I wish I knew the answer to that, but let me do my best. I'm happy to share what I can. Well, first, there's the obvious Growth factors affecting the economy, an extended COVID recovery declining, but still high inflation rates, geopolitics And the growth rate of new business starts, which while still improving are still off their highs. As far as specific factors for our business, I don't know how to put it Rob. There's China.

Speaker 2

It's the largest single factor and it continues to remain soft in both new registrations and renewal rates. Stringent registration rules and a challenging COVID recovery seem to be the main factors there. In the U. S, channel focus is a factor. As we've seen before, some channel partners shift their focus to ARPU rather than new customer acquisition in times of slower economic activity.

Speaker 2

That is cyclical. At some point, they you got to acquire new customers, and so they'll return to that. Our revised guidance recognizes The uncertainty that all these factors represent for the remainder of 2023. I'll just add, and as far as things we can control, these include meeting our contractual requirements obviously, the practicing responsible expense management and focusing on our capital allocation strategy, continuing to focus on those areas that we can control, that's the key for us to deliver long term value creation for our shareholders. So that's helpful.

Speaker 4

Very helpful. Thank you. And I also appreciate that you went into some detail in your prepared remarks on .web. And I think Just stepping back now, it's been a 6, almost 7 year journey now. And I think investors are You're confused by the landscape and what's going on.

Speaker 4

And it's very hard to know whether this sort of resets us back to the beginning of the process with the IRP Or whether this is now a next step in the process, which would circumvent the need to do that. If you could help us perhaps Provide a little bit more color as to how you view that currently to the extent that you can?

Speaker 2

Happy to do that. I'll keep a couple of notes here handy. Just for that purpose, let me well, first of all, it's easy to get confused. I completely understand that. There's a lot of we talk about this every And there are a lot of terms that we use, acronyms like IRP and CEP that even Experienced lawyers, I wouldn't be familiar with if they didn't operate in the ICANN world.

Speaker 2

So maybe I can simplify with a little bit of background, what's happened, Maybe you can define some of these terms. So first, when we talk about an IRP, independent review panel, that's a lawsuit, Not in court, but more like an arbitration demand that someone can bring against ICANN. However, the only claims allowed are those based on a violation by ICANN of its bylaws. A CEP, you've heard us use that, or Cooperative Engagement Process is a discussion between a potential IRP filer and ICANN, ahead of an IRP. And all actions associated with the issue behind the IRP are automatically put on hold during The CEP and that's kind of what we've been in for the last few weeks.

Speaker 2

You've also heard another acronym NDC that stands for new.co and that's a company That VeriSign entered into an agreement with about .web. So let me try to simplify just how we got here. I don't want to speculate about what's going to happen going forward, not just because it's pending litigation, but much of it is ICANN process that's not ours. But Let me just give you a really brief history now that some of the terms are easier to understand with .web. So in 2016, there was an auction for .web.

Speaker 2

NDC won that auction without backing. In 2018, a company called Affilius, the plaintiff Filed an IRP seeking to have the IRP panel disqualify NDC and to award .web to them Because Affiliates objected to the auction and to our VeriSign's participation with NDC. A few years Later in 2021, after lengthy legally maneuverings, the IRP panel said no. The panel said ICANN owns the issue And the panel tells ICANN to go review and decide the issue. But Affilius doesn't like that answer and files a follow-up motion asking the panel essentially for a do over.

Speaker 2

And the panel once again tells Affilius no, but this time they call Affilius' request frivolous and they sanction Affilius ordering Affilius to pay ICANN's attorney fees. During 2022 early 2023, ICANN then followed the panel's recommendation. They undertook a thorough 16 month Review process. In early May of this year, I can announce that if it completed its review And had concluded by a Board vote that was without objection that Affilius' accusations were wrong and that the Board and then the Board directed ICANN staff To proceed with processing NDC's .web application, Affilius then filed the CEP, which then automatically paused the processing of .web. So now Affiliates has filed another IRP, that's true.

Speaker 2

But this time, there's something new and substantial. There's a definitive and affirmative ruling from the ICANN Board of Directors, Again, without objection, I vote that DotWebb should be awarded to NDC. A vote resulting from a 16 month process that included work by ICANN staff Who reviewed new submissions by VeriSign and Affilius working with their law firms, who were allowed to use and even supplement the entire legal record From the earlier 2 year IRP, a vote that resulted in a finding that Dotweb should be awarded to NDC. So that's new and that's not trivial. We believe that Affiliates has been and is still litigating for delay.

Speaker 2

Now in terms of next steps, we'll have to see whether ICANN continues with the hold on .web, The .web delegation or not during the IRP. ICANN could continue processing the .web TLD during the IRP, although that decision could be challenged. We don't believe there should be any further delay, but this is iCAN's process and we will continue to work within that system. So what happens next? I don't want to comment on, as I said, it's pending litigation, but I hope that bit of background and history was helpful.

Speaker 4

Yes. It's really helpful. I appreciate that. Sorry, Jim, and I'm glad it's on the transcript because I know For one, I'm going to need to look back at that, although I've lived through a

Speaker 2

lot of it. A lot there, but yes.

Speaker 4

Yes, really, even having lived through a lot of it. I really appreciate it. I know I'm not the only one anymore, so I'll squeeze in one Last question and that is just on dot net. I just wanted to ask, so it's the 2nd year in a row where you guys are availing yourself of the opportunity to raise price On dotnet and that's coming off for a long period where you did not. What's changed for you guys relative to your To view to take price now on dotnet, what if anything in terms of your mindset mentality has changed There and relative to dot net pricing.

Speaker 4

Thank you.

Speaker 3

Yes. Thanks, Rob. This is George. I mean, if you look back at dot net, I mean, We had not taken a price increase for quite a period of time. I think the last price increase we took was in 2018 and obviously we announced And just took one here in February to 9.92.

Speaker 3

So as we think about net, we look at the industry, we look at where It's positioned within the marketplace and we think the price that we're raising it to that we just announced is keeping .netcompetitive with the other TLDs within Which it competes with.

Speaker 4

Great. Thanks guys. Appreciate it. Thanks Rob. We will

Operator

take our last question from the line of Yigal Arunyan with Citigroup.

Speaker 5

Hey, good afternoon guys. I'll come back to the overall growth in domains. Two parts on that. First, I want to dig into So the comment about China being the kind of biggest piece of this and China is a much smaller part of your overall revenue base. So just want to understand like how it's driving that much impact?

Speaker 5

And so are you saying that the main growth in the U. S. Is Relatively healthy. Is there any color you can get to what the growth in the U. S.

Speaker 5

And other regions might be, so what ex China looks like? And then, the comment on the channel focus and the channel focusing on ARPU versus net adds that was really interesting. Can you just elaborate on that point a little bit? Like how responsible are the channel partners For driving the growth, their marketing and the way that they push for domain registration, like what What is the role and how much of an impact it may have in spurring

Speaker 3

up demand? Thanks. Yes, sure, Yigal. This is George. So your first question was from kind of a domain name base perspective.

Speaker 3

We have seen growth here in Q2. I would say the regions that we report out on the U. S, EMEA and our all other segments From a year over year domain name base, have all been growing, but China, we've seen that domain name base segment decline. I think if you want to get some relative terms, you probably can look in our 10 Q that's filed this afternoon And look at the revenue growth rates of those segments, you'll see that China in the quarter was down about 10%. EMEA was up about 1% and the U.

Speaker 3

S. Was up about 7% and all of the category was up about 15%. And that Really comprised the weighted average of that comprised 5.7%. So we're still seeing growth. As far as new units, I would say China again is down.

Speaker 3

The U. S. Was relatively flat here in the Q2 from a new unit perspective, But the other markets that we report on were up. So still seeing some growth here In the market, but China has really been, as Jim mentioned, the drag on new unit growth here and a little bit on revenue growth as well.

Speaker 2

Yes. Hi, Ghaul. Jim, your question about ARPU, let me just say one thing upfront. You can clarify the question after this if you want, but I just want to say that we I think you know, but we have Sort of limited visibility into the end user, obviously sell only through registrars. So I think The point is that ARPU is a sort of phenomenon that's typical of any business in certain economic conditions.

Speaker 2

It becomes more efficient for them To focus on ARPU rather than customer acquisition as the cost of those activities vary and the results are different and more advantageous in certain economic conditions. So the observation is based on a phenomenon that affects our channel just like everybody else, not on Anything that's particularly unique that we see or understand about it. And we can just observe this behavior obviously through our own registrations and monitoring their websites and looking at how They bundle their products, but this is something that every business does not unique to registries, registrars or the DNS, just to clarify. So there's a limit to what I mean there's not a great insight there that it's just an observation, a factual observation based on what we see And it tends to be cyclical. We see that obviously they go through cycles.

Speaker 2

You focus on ARPU for a while and then you go back into new customer acquisition. So we've seen I think it was in 2014 we had a very visible cycle of this that we went through.

Speaker 5

Okay. I'm asking, because I think it's a really interesting comment and just kind of tie And what we've seen from those channel partners, some of the key web builders just talked about marketing efficiencies and the pullback Materially on their marketing spend. And then we also saw some consolidations within the space on the registrar space. So Not sure what you think about that, if that has an impact to or directly tying it to the marketing expenses.

Speaker 2

I had some difficulty hearing the last part of that. Marketing spend certainly is another factor in various economic Circumstances, obviously, any retailers are going to vary their marketing spend and that has an effect on us. And obviously, During the pandemic and recently we've seen some of that behavior that affected registrations as well. If I missed anything in the last part of your question, I apologize. Please, Please ask again.

Speaker 2

The line is a bit fuzzy.

Speaker 5

No, that's it. I think you got the spirit of the question. It's Really helpful and really interesting. I haven't thought about it that way. So, Glenn, interesting to hear.

Speaker 2

Okay, great. I was glad it was helpful.

Speaker 1

Great. Thanks Yigal.

Operator

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

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