VeriSign Q1 2023 Earnings Call Transcript

Presentation

[Operator]

Good day everyone and welcome to VeriSigns First Quarter 2023 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, Investor Relations and Corporate Treasurer at VeriSign]

Thank you, operator. Welcome to VeriSign's First Quarter 2023 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 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.

[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 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 first quarter revenues grew 5.1% year-over-year, while EPS grew 19% year-over-year. At the end of March, the domain name base in.com and.net totaled 174.8 million domain names with a year-over-year growth rate of 0.1%. During the first quarter, the domain name base increased by just over 1 million domain names. From a new registrations perspective, the first quarter delivered a modest year-over-year increase with 10.3 million new registrations, compared to 10.2 million last year and 9.7 million last quarter.

Our renewal rates remained stable. We believe that the renewal rate for the first quarter of 2023 will be approximately 75.6% compared to the 73.3% final renewal rate last quarter and 75.9% a year ago. Having seen modest improvement in the registration trend during Q1, we now expect the domain name base growth rate between 0.5% and 2.25% for the full year of 2023. This updated range reflects the current macroeconomic uncertainty and recent trends in our business. Our financial and liquidity position remained stable with $1.015 billion in cash, cash equivalents and marketable securities at the end of the quarter.

Share repurchases during the first quarter totaled $220 million for 1.1 million shares. At quarter end, $639 million remained available and authorized under the current share repurchase program, which has no expiration. As many of you are aware, we are in the process of renewing the.net registry agreement with ICANN as the current term ends on June 30th. Consistent with ICANN's usual process, on April 13th, ICANN posted the new.net registry agreement for public comment, which is open until May 25th. The business in terms of the agreement, such as pricing, the fees paid to ICANN, our renewal rights and the six year term of the agreement are all unchanged.

Regarding.web on Monday, ICANN'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 dark web IRP final declaration. ICANN then publish the minutes from two BAMC meetings, one helped on January 31st which discuss the BAMC's consideration of certain recommendations related to.web and also the minutes from a meeting on March 2nd, 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 towards a final resolution is being made, but beyond what was posted we have no updates.

And 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 Kilguss, Executive Vice President and Chief Financial Officer at VeriSign]

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

I'll now discuss our updated full-year 2023 guidance. Revenue is now expected to be in the range of $1.490 billion to $1.505 million. 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 million and $1.005 million. Interest expense and non-operating income net which includes interest income estimates is still expected to be an expense between $35 million to $45 million. Capital expenditures are still expected to be between $35 million to 45 million. And the GAAP effective tax-rate is still expected to be between 22% and 25%.

In summary, VeriSign continued to demonstrate sound financial performance during the first quarter of 2023, and we look-forward to continuing to deliver on our mission as well as our objectives throughout the year.

Now. I will turn the call-back to Jim for his closing remarks.

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

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 return value to our shareholders. I 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 the resolution of.web.

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

Questions and Answers

[Operator]

Thank you. [Operator Instructions]. Your first question comes from Rob Oliver with Baird.

[Rob Oliver, Analyst at Robert W. Baird]

Hi. Great. Good afternoon, guys. Jim, a lot -- a lot of the call here, so I guess just to kind of level-set at the outset, up -- 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?

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

Okay, thanks. Thanks Rob. I know this may sound simple, like I'm trivializing, but what we do is anything but trivial. And 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 of time is even more difficult. So I mentioned in my remarks that what we -- what we accomplished in the quarter is we reliably and securely operated our infrastructure. We added another three months to a 25 year uptime record that's really significant. We have responsibly and efficiently ran our business that's always important, 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 three, we return value to our shareholders, we certainly have obligations there..So this is what our customers want, they want reliable and secure operation of our infrastructure. Of course, they wanted to work, it needs to work. This is what our governing bodies ICANN and the U.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 -- 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. And. I would say that -- so those are the takeaways. I would just add that the fundamental drivers of our business. Our internet adoption and reliance and that fundamental long-term trend-line is strong. So another solid quarter.

[Rob Oliver, Analyst at Robert W. Baird]

Okay, thanks. There just been so much -- we talked about web as it's been so long since we've had due so. I guess just trying to read into here, what you've told us about this meeting -- this coming Sunday, it sounds to me like that could be an indication that there's some decision will be rendered imminently here. Just be curious to know if that's the way you think about it?

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

Well, you're right, Rob. It has been a long-time and we have always had declined to speculate and on ICANN's process. it is ICANN process, so. I won't speculate as to what the Board may do. We're certainly pleased that there has been progress this information about the meetings it's good to see. I can add one thing, which is that, when the ICANN Board, when it does resolutions in Board meetings ICANN typically publishes them on their website within two days. So if there are resolutions, that come out of the Sunday meeting, they should be public by Tuesday.

[Rob Oliver, Analyst at Robert W. Baird]

Okay, really helpful. Thanks, if. I could squeeze in one more? I appreciate it. I know that the only want anymore. So would it be conscious of that, which is great. Just around the macro, I mean you guys did to tick down the high-end of the range a little bit. 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 or last 14 weeks or something was 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 then anything else relative to geographies that you would call out here?

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

Well. I don't know that if I can point to any specifics, that would give any indication. I can tell you that our general view is first of all, the worst of COVID certainly mostly behind us. And the longer-term effects, the recovery, there's certainly still some turbulence associated with that recovery supply-chain issues, etc. There is certainly some economic turbulence, interest rates were up, they're down a little, they're up again. Employment data is good, not-so-good, it's good. So that's the kind of turbulence, we're referring to that long-term that longer 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 yeah, we have seen an improvement and that we're happy with the quarter.

[Rob Oliver, Analyst at Robert W. Baird]

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

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

Thank you.

[Operator]

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

[Ygal Arounian, Analyst at Smith Barney Citigroup]

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

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

Yeah, hi Gal, it's George. Or., sorry. there is little echo there. But. in any event as Jim mentioned, we had modest gains here in Q1 with the domain name base growing about 1 million names here in the first quarter. When we look around our various regions, we did see the domain name base grow and 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. was a little bit a [Indecipherable] 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 so, as Rob alluded to as you are enquiring -- 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, that reopening happens sooner or later. That clearly can help us get to the higher end of our domain name base range.

[Ygal Arounian, Analyst at Smith Barney Citigroup]

That's helpful. [Technical Issues]

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

If I may.

[Ygal Arounian, Analyst at Smith Barney Citigroup]

Sure.

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

Go-ahead I'm sorry.

[Ygal Arounian, Analyst at Smith Barney Citigroup]

No please jump-in.

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

Okay. No go ahead please, you have another question.

[Ygal Arounian, Analyst at Smith Barney Citigroup]

Okay, sure so I was going to follow-up on the renewal rates, which had a nice bump from 4Q and really in the past couple of quarters 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 past few quarters.

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

Yeah, so as you point out, renewal rates were relatively stable year-over-year, 75.6% versus the 75.9% in the first quarter. We did see an improvement from Q4. I'd said -- I'd say, when look at renewal rates on a big-picture our domestic renewal rates are relatively stable and what 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 so we've seen the improvement here sequentially year-over-year, and I think renewal rates are pretty stable, right now, when we see them.

[Ygal Arounian, Analyst at Smith Barney Citigroup]

Got it. On the and the.web, What's if you that can expand on, so I ICANN posted Agreement for public comment until May 25th. All the factors of the contract are the same, nothing is really changing, what is the process from here to renewal? What is the public comment piece -- what are things that might change for a stand-in the way or you kind of expect to just kind of work-through pretty seamlessly?

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

Well, typically in this process comments will be collected and ICANN will address the comments in response, so. I think until we see that I can really totally answer your question, but that the process of engaging with ICANN and coming up with the contract that was proposed, negotiated than proposed 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 My ICANN, then the next step concludes.

[Ygal Arounian, Analyst at Smith Barney Citigroup]

Okay, thanks. And then I'll ask one more and then if someone else -- let him [Technical Issues] to. So on the top web that hopefully once the culture here. Can you help us understand, what happens, let's say. Well, let's just assume that that it goes through and it's all said and done. What are the steps in there -- what happens? How long that takes for to become meaningful or for.web registrations to start opening up Just help us -- help us -- just think about the timeline for what happens if we just assume that that's part of the process initiatives. Thank you.

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

Sure, I can give you some information on that. I think it be helpful to your question. One is that there are, first 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 on Sunday and so I certainly don't want to speculate beyond that, but there are processes that are required to be followed, there are a number of things that have to be done, there are number of security periods where certain things have to be done and then there are some other trademark holder protection periods where they are exclusively allowed to come in and acquire their protected domain name. So there 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 our revenue or expense in 2023.

[Ygal Arounian, Analyst at Smith Barney Citigroup]

Great, thanks for taking my question.

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

Sure.

[Operator]

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

[David Atchley, Vice President, Investor Relations and Corporate Treasurer 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]

Participants

Corporate Executives

• David Atchley, Vice President, Investor Relations and Corporate Treasurer
• James Bidzos, Chairman of the Board and Chief Executive Officer
• George Kilguss, Executive Vice President and Chief Financial Officer

Analysts

• Rob Oliver, Robert W. Baird
• Ygal Arounian, Smith Barney Citigroup