VeriSign Q3 2023 Earnings Call Transcript

Presentation

[Operator]

Good day, everyone. Welcome to VeriSign 's Third Quarter 2023 Earnings Call. [Operator Instructions]

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, Investor Relations at VeriSign]

Thank you, operator. Welcome to VeriSign 's third 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 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, Chairman of the Board and Chief Executive Officer at VeriSign]

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 third quarter, I'm pleased with the financial results which show the continued strength of our business model during this uncertain macroeconomic period. For the third quarter, revenues grew 5.4% year over year, while EPS grew 15.8% year over year. At the end of September, the domain name base in.com and.net totaled 173.9 million domain names, up slightly from 173.8 million names at the end of 2022. During the third quarter, the domain name base decreased by 0.5 million domain names. From a new registration perspective, the third quarter ended with 9.9 million new registrations, flat with the same quarter last year. We believe that the renewal rate for the third quarter of 2023 will be approximately 73.4%, compared to 73.7% a year ago.

While there are many factors that drive demand for domain names, the core value proposition for domain names remain strong, and 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.

Our financial and liquidity position remained stable, with $943 million in cash, cash equivalents, and marketable securities at the end of the quarter. During the third quarter, we repurchased 1.1 million shares for $220 million. At quarter end, $1.34 billion remained available and authorized under the current share repurchase program. Regarding.web, 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 ICANN's answer is informative, and I'd like to read the concluding paragraph from ICANN's document.

First, I just want to clarify that the reference to NDC here is a company Nu Dot Co, which is VeriSign's partner in the.web application. 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 policies, and 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. I will also repeat our intention, which is to bring.web to market by this company that has operated.com and.net with reliability and confidence for nearly 30 years. With its newly available namespace,.web will add more choice of registrations for our global channel of thousands 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?

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

Thanks, Jim, and good afternoon, everyone. For the quarter ended September 30, 2023, the company generated revenue of $376 million, up 5.4% for the same quarter of 2022, and delivered operating income of $254 million, an increase of 7.4% from the same quarter a year ago. Operating expense in the third quarter totaled $122 million, compared to $123 million last quarter and $120 million a year earlier. Net income totaled $188 million compared to $169 million a year earlier, which produced diluted earnings per share of $1.83 for the third quarter of 2023, compared to $1.58 for the same quarter of 2022.

Operating cash flow for the third quarter of 2023 was $245 million and free cash flow was $217 million, compared with the $262 million and $255 million, respectively, in the year ago quarter. Operating cash flow and free cash flow for the nine-month period ended September 30, 2023, totaled $650 million and $609 million, respectively, and were up from $614 million and $595 million for the same nine-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 million to $1,495 million. Operating income is now expected to be between $995 million and $1 billion. Interest expense and nonoperating income net, which includes interest income estimates, is now expected to be an expense of between $25 million to $35 million. Capital expenditures are still expected to be between $45 million to $55 million, and the GAAP effective tax rate is now expected to be between 21% and 24%. In summary, VeriSign continued to demonstrate sound financial performance during the third quarter of 2023, and we look forward to continuing to deliver on our mission and our objectives to finish the year.

Now I'll turn the call back to Jim for his closing remarks.

[D. 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 service 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. 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, 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 our first question will come from Rob Oliver with Robert W. Baird.

[Rob Oliver, Analyst at Robert W. Baird & Co., Inc.]

Great, thank you. Good afternoon. Appreciate you taking the questions. Jim, I'd like to start. 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 that we should be aware of. And then I had a follow up.

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

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. 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 million, or about 6% of revenue, in the quarter from China-based registrars, and that revenue was down about $5 million from the year ago quarter. The remaining $354 million of revenue in a quarter from registrars outside of China was up $24 million, or about 7%. So we're able to drive both top line and operating income growth even as our China registrars adjust to their specific set of factors.

To your specific question of when we think things will normalize for our China-based registrars, I would say two things: one, the only certainty is change and the future developments that influence that change are not within our control, so your guess would be as good as ours; and two, I think the term perfect storm is overused, but it feels a bit like that here. So I feel that the chances that change will be helpful is at least as likely as not.

[Rob Oliver, Analyst at Robert W. Baird & Co., Inc.]

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, and forgive me if I should know this, it's been a labyrinthine journey here on.web, so now that opinion from ICANN has hit, where does that leave us and what should we expect next? Or what do you think will happen next? Thanks.

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

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. I clarified the term NDC to be Nu Dot Co, which is a company that we actually partnered with in something called the DAA, the Domain Acquisition Agreement. And you'll see those terms used throughout. And so 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 is 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. We 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.

[Rob Oliver, Analyst at Robert W. Baird & Co., Inc.]

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

[Operator]

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

[Ygal Arounian, Analyst at Citigroup Global Markets]

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 just speak a little bit to the domain growth by geography, too. 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 below historical norms and what you think the contributing factors are there around that?

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

Yeah, thanks, Ygal. Just a couple, there's obviously a lot going on in the world today. Obviously, we have some macroeconomic factors. There's still high interest rates. There's still high inflation. Obviously, there's some geopolitical factors going on there. So I think those know, like other companies, those things are impacting our business. But as Jim mentioned, we are seeing, ex our China's registrars, growth from those groups, both in new registrations as well as a 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 do charge the same price across all markets, so 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 that as the other geographies have performed better.

[Ygal Arounian, Analyst at Citigroup Global Markets]

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 get to the end of this year and start looking into 2024, just walk us through how you're thinking about costs and investments and what's needed, what's not, and how you're approaching that. Thanks.

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

Yeah. 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 cost come out of the business with regard to when.tv migrated away from us. That was about $5 million of fees that we paid to.tv that is not picked up this year. But if you were to normalize that out, we're probably at a similar expense growth rate this year than last year. And as you would recall, last year expenses grew about 4% or so. So we'll continue to manage expenses and be responsible, as Jim said, several quarters in a row. 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 we'll 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.

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

Yeah, Ygal, this is Jim. George is exactly right. The term responsible expense control for us means that first 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.

[Ygal Arounian, Analyst at Citigroup Global Markets]

I appreciate the color. Thanks.

[Operator]

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

[Rob Oliver, Analyst at Robert W. Baird & Co., Inc.]

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, I know you guys are growing outside of that generally. But I'd just be curious to hear your take on the current macro and whether your characterization earlier was anything incremental or if it was the same now as when you entered the quarter? Certainly in terms of Middle East and headlines out there, sentiment feels like things are a bit softer, but just wanted to get a sense from what you're seeing and hearing from your partners. Thanks.

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

Yeah, 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 effect for tech companies, I think, across the board. That one is tough to assess how it's going to impact us in the future. The events there are relatively recent, so I don't know that we have any real insight into anything we can identify at this point. I can tell you, at least from what I'm seeing publicly, I think there are certainly challenges in the Chinese market, and 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 trend sense even really to share at this point.

Certainly, they do have some negative impact. 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 put some pressure on the business, interest rates in particular, in 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 absolutely certain that we're delivering our services in accordance with our contracts. 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 wait for better economic climate.

[Rob Oliver, Analyst at Robert W. Baird & Co., Inc.]

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

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

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.

[David Atchley, Vice President, 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]

Participants

Corporate Executives

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

Analysts

• Rob Oliver, Robert W. Baird & Co., Inc.
• Ygal Arounian, Citigroup Global Markets