VeriSign Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 26, 2023

There are 6 speakers on the call.

Operator

Good day, everyone. Welcome to VeriSign's Third Quarter 2023 Earnings Call. Today's conference is being recorded. Recording of this conference is not permitted unless preauthorized. At this time, I'd 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 Q3 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 Veracyte, 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 and 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

Speaker 2

to Jim. Thank you, David. Good afternoon to everyone and thank you for joining us. We delivered another solid quarter by focusing on our mission as a critical Internet infrastructure operator. In addition to delivering on our mission during the Q3, I'm pleased with the financial results, which show the continued strength of our business model during this uncertain macroeconomic period.

Speaker 2

For the Q3, revenues grew 5.4% year over year, while EPS grew 15.8% year over year. At the end of September, the domain name basin.comand.net totaled 173,900,000 domain names, Up slightly from 173,800,000 names at the end of 2022. During the Q3, The domain name base decreased by 500,000 domain names. From a new registration perspective, the 3rd quarter ended with 9,900,000 new registrations, Flat with the same quarter last year. We believe that the renewal rate for the Q3 of 2023 will be approximately 73.4% compared to 73.7 percent a year ago.

Speaker 2

While there are many factors that drive demand for domain names, the core value proposition for domain names remains strong We're seeing broad based engagement from our registrar channel. However, even with those fundamentals intact, low demand from China remains the primary source of drag on the overall domain name base growth. Excluding registrars based in China, both our domain name base and new registrations are up year over year through Q3. With this current trend, we now expect the change in the domain name base for full year 2023 to be between negative 0.4% and positive 0.4%. This updated range reflects continued uncertainty, primarily due to the weakness we're seeing from China.

Speaker 2

Our financial and liquidity position remains stable $220,000,000 At quarter end, dollars 1,340,000,000 remained available and authorized under the current share repurchase program. Regarding DotWeb, today ICANN posted AltaNovo's IRP complaint and ICANN's answer to its website. I urge anyone interested in this issue to read it as I believe it will help you understand our current and past statements on .web. We think Icahn's answer is informative, and I'd like to read the concluding paragraph from Icahn's document. First, I just want to clarify that The reference to NDC here is a company, new dotco, which is VeriSign's partner in the .web application.

Speaker 2

The conclusion reads as follows, After an exhaustive first .web IRP and an extremely thorough evaluation process following that IRP, ICANN determined that NDC did not violate the guidebook or the auction rules. ICANN fully complied with its articles, bylaws and internal seasoned procedures when it made that determination and the Board's resolution is entitled to deference under the bylaws' enshrinement of the business judgment rule. Accordingly, AltaNovo's IRP request should be denied. We agree with ICANN. We continue to believe that this IRP Filed by AltaNovo and its backers has been filed for the purpose of delay.

Speaker 2

I will also repeat our intention, which is to bring .web to market By this company that has operated .comand.net with reliability and confidence for nearly 30 years. With its newly available namespace, .web will add more choice of Registration for our global channel of 1,000 of registrars and their millions of potential customers in a new generic top level domain. Now I'd like to turn the call over to George. I will return when George has completed his financial report with closing remarks. George?

Speaker 3

Thanks, Jim, and good afternoon, everyone. For the quarter ended September 30, 2023, the company generated revenue of 376,000,000 up 5.4% from the same quarter of 2022 and delivered operating income of $254,000,000 An increase of 7.4% from the same quarter a year ago. Operating expense in the 3rd quarter totaled 122,000,000 compared to $123,000,000 last quarter $120,000,000 a year earlier. Net income totaled $188,000,000 Compared to $169,000,000 a year earlier, which produced diluted earnings per share of $1.83 for the Q3 of 2023 compared to $1.58 for the same quarter of 2022. Operating cash flow for the Q3 of 2023 was $245,000,000 and free cash flow was $217,000,000 compared with the $262,000,000 $255,000,000 respectively in the year ago quarter.

Speaker 3

Operating cash flow and free cash flow for the 9 month period ended September 30, 2023, totaled $650,000,000 $609,000,000 respectively and were up from $614,000,000 $595,000,000 for the same 9 month period a year ago. 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 1,495,000,000 Operating income is now expected to be between $995,000,000 $1,000,000,000 Interest expense and non operating income net, which includes interest income estimates, is now expected to be an expense of between $25,000,000 to $35,000,000 Capital expenditures are still expected to be between $45,000,000 to $55,000,000 And the GAAP effective tax rate is now expected to be between 21% 24%. In summary, VeriSign continued to demonstrate sound financial performance during the Q3 of 2023, and we look forward to continuing to deliver on our mission and our objectives to 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 While there is ongoing turbulence in the economy due to macroeconomic and geopolitical issues and there continues to be low demand from China, The fundamentals of our business remain strong. These strong business fundamentals and our focus on managing items within our control continues to deliver strong financial results, including steady growth in revenue, operating income and EPS. Thanks for your attention today. This concludes our prepared remarks.

Speaker 2

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

Operator

Thank And our first question will come from Rob Oliver with Robert W. Baird.

Speaker 4

Great. Thank you. Good afternoon. I appreciate you taking the questions. Jim, I'd like to start.

Speaker 4

You certainly noted the comments relative to China and that the rest of the business would have been Up on the domain front had it not been for China. So loud and clear on that. Just curious to hear your take on The China market right now, maybe what you're hearing from your partners on the ground there as to when things might stabilize or if there's anything else going on in that market And then I had a

Speaker 2

follow-up. Okay. Thanks, Rob. So with respect to China, as we mentioned in our prepared remarks, For the past several quarters, our domain name demand from China based registrars has been weak as a result of several factors. They include Challenging economic conditions, a more stringent regulatory environment and the impact of a weaker local currency combined with retail pricing adjustments.

Speaker 2

We believe these factors combined have driven down demand in China, which has been offset by domain name gains in other geographies. As you can see in the geographic revenue table filed in our 10 Q this afternoon, we generated $22,000,000 or about 6% of revenue In the quarter from China based registrars and that revenue was down about $5,000,000 from the year ago quarter. The remaining $354,000,000 of revenue in the quarter From registrars outside of China was up $24,000,000 or about 7%. So we're able to drive both top line and operating income growth even as our China To your specific question of when we think things will normalize for our China based registrars, I would say 2 things. One, the only certainty is change and the future developments that influence that change are not within our control.

Speaker 2

So your guess would be as good as ours. And 2, I think the term perfect storm is overused, but it feels a bit like that here. So I feel that the chances the

Speaker 4

Okay, great. Thanks, Jim, for that very helpful color. My follow-up was around the ICANN post on .web. And I guess, pretty clear their view, but just and forgive me if I should know this, but There's been so it's been a labyrinthine journey here on .web. And so where now that that Opinion from ICANN has hit.

Speaker 4

What where does that leave us? And what should we expect next? Or what do you think

Speaker 2

Okay. Thanks for that question. Let's see a couple of things. First of all, I mentioned that In the document, I urge everybody to read the document. I think it's really indicative of obviously what ICANN's response will be.

Speaker 2

I clarified the term NVC to be new dotco, which is a company that we actually partnered with and something called the DAA, the Domain Acquisition Agreement, and you'll see those terms used throughout. And so the, what to expect next, I think the Important thing here is that this is a legal proceeding that we are currently not a party to that might change. So I think what you're going to see next They're working to form a panel and then the documents that are going to be filed became public today and that is the IRP complaint from AltaNovo And ICANN's answer. So we'll be watching those developments. We don't know anything beyond that.

Speaker 2

We I urge you to read what's out there now and I think that gives you some expectation of what the issues on the table will be when the proceedings begin.

Speaker 4

Great. Thanks. Okay. I'll get back in the queue, if there's opportunity later on. Thanks, guys.

Speaker 4

Appreciate it.

Operator

And we'll take our last question from Ygal Arounian with Citi.

Speaker 5

Hey, good afternoon guys. I want to dig into the pace of domain growth a little bit and understood the pressures in China. So maybe just a few things around outside of China. You disclosed the revenue growth by geography. Maybe you could Speak a little bit to the domain growth by geography too.

Speaker 5

And if you're seeing different trends, there's some pricing within The geography revenue growth, as well. So what are you seeing overall, by geography and domains? And Even though it's better than what we're seeing in China, we're still kind of below historical norms and what you think the contributing factors Are there around that?

Speaker 3

Yes. Thanks, Yigal. Just a couple of points. I mean, there's obviously a lot going on in the world today. Obviously, we have some macroeconomic factors.

Speaker 3

There's still high interest rates, there's still high inflation. Obviously, there's some geopolitical factors going on there. So I think those are like other companies, those things are impacting our business. But as Jim mentioned, we are seeing Exar China's registrar's growth from those groups both in new registrations as well as the domain name base there. Again, I would point you, we really don't break out the domain name base for competitive purposes, but I would point you to Our geographic revenue disclosure, which really gives you a sense of some of the growth, we don't we charge the same price.

Speaker 3

We do charge the same price across all markets. We offer that to everybody. So I think it's a fair comparison for you to take a look at that. But the domain name base continues to be Resilient, I think the value proposition of a domain name remains strong, but the declines we're seeing in China, which is a smaller Geographical segment of ours is impacting the total domain name base growth, but we're able to offset As the other geographies, I have performed

Speaker 5

better. Got it. Okay. That's helpful there. And maybe on the cost side, Also, you guys continue to come in ahead of expectations despite the relative softness On the revenue side, so as we kind of get to the end of this year and start looking at the 2024, just Can you walk us through how you're thinking about costs and investments and kind of what's needed, what's not and how you're approaching that?

Speaker 5

Thanks.

Speaker 3

Yes. We'll provide full year guidance on our next earnings call for 2024. Our expenses or the midpoint of our guidance suggests that our expenses will be lower this year, Around 3% and that's down from prior years. Keep in mind, we did have some costs come out of The business with regard to when Dot TV migrated away from us that was about $5,000,000 of fees that we paid to Dot TV that It's not picked up this year, but if you were to normalize that out, we're probably at a similar expense growth rate this year Then last year, and as you recall last year expenses grew about 4% or so. We'll continue to manage expenses and be responsible, as Jim said, several quarters in a row.

Speaker 3

During this time of uncertainty, we're trying to control what we can control And that means being responsible, making sure we're making the right investments and areas where we can make some efficiencies will do so. But I can assure you we're making all the necessary investments we need to execute our mission and our strategic framework to protect The company and meet our SLAs.

Speaker 2

Yes, Yigal, it's Jim. George is exactly right. The term responsible expense control For us, it means that 1st and foremost, investment in our infrastructure to provide the critical infrastructure services that we do provide is simply Mandatory, we make all of those, but we manage responsibly where we can. And as George said, Next round of earnings, we'll give you full 2024 guidance.

Speaker 5

Great. I appreciate the color. Thanks.

Operator

And we will go back to Rob Oliver with Robert W. Baird.

Speaker 4

Great. Thanks guys for squeezing me in here with one more. Jim, my question is for you. You mentioned, I think in response to My earlier question just around the macro, which you characterized some ongoing turbulence and clearly China is part of that. But outside of China, But I know you guys are growing outside of that generally, but just curious to hear your take on the current macro And whether your characterization earlier, there was anything incremental or if it was sort of the same now as when you entered the quarter, certainly In terms of Middle East and headlines out there, it feels sentiment, it feels like things are a bit softer, but just wanted to get a sense And what you're seeing and hearing from your partners?

Speaker 4

Thanks.

Speaker 2

Yes. That is all of the events around the world Whether it's Ukraine or the Middle East, all of those we believe are impacting the economy and indirectly are part of the geopolitical issues That affect some of the macroeconomic trends and headwinds that we're seeing. And I think those are broad and you're seeing that affect for companies, Tech companies I think across the board, that one is tough to assess how it's going to impact us in the future. It's relatively the events there relatively recent. So I I don't know that we have any real insight into anything we can identify at this point.

Speaker 2

I can tell you at least from what I'm seeing publicly, I think there are certainly challenges in the Chinese market That's obviously the biggest impact and that seems to be felt broadly across the tech space as well. But we monitor these things and we observe them, but Nothing to report right now. I appreciate your question. I just don't have any trend data or trendsense even really to share at this point. Certainly, they do have some negative impact.

Speaker 2

People are more cautious, interest rates rise, all sorts of second and third order effects occur from these. And that's what we were alluding to when we talk about them. They do sort of put some pressure on the business, interest rates in particular, No particular order, all of the things we mentioned. And as George said, what we do then as a result is we focus on what we can control. We make Certainly certain that we're delivering our services in accordance with our contracts.

Speaker 2

That's first and foremost. And secondly, we Engage frequently, constantly in responsible expense control. Those are the things we can do and our business model allows us to deliver solid quarters while we

Speaker 4

Great. Okay. Thank you, Jim. I appreciate that. Thanks again, guys.

Speaker 4

Thank you.

Operator

Thank you. That does conclude the question and answer session. I'll now turn the conference back over to Mr. 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.

Operator

Thank you. This does conclude today's conference. We do thank you for your participation. Have an excellent day.

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