VeriSign, Inc. (NASDAQ:VRSN) Q3 2023 Earnings Call Transcript

VeriSign, Inc. (NASDAQ:VRSN) Q3 2023 Earnings Call Transcript October 26, 2023

VeriSign, Inc. beats earnings expectations. Reported EPS is $1.83, expectations were $1.74.

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

David Atchley: 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.

Jim Bidzos: 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, I can posted Altanovo’s IRP complaint and ICANNs 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 new .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, I can determine that NDC did not violate the guidebook or the auction rules. I can fully comply with its articles, bylaws and internal policies and procedures when it made that determination, and the Board’s resolution is entitled to difference 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 followed 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 there are 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: Thanks, Jim, and good afternoon, everyone. For the quarter ended September 30, 2023, the Company generated revenue of $376 million, up 5.4% from 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 billion to $1.495 billion. 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.

Jim Bidzos: 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. 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.

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Q&A Session

Operator: [Operator Instructions] And our first question will come from Rob Oliver with Robert W. Baird.

Rob Oliver: 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 demand 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.

Jim Bidzos: 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 and 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 the 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 changed 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. I feel that the chances that change will be helpful is at least as likely as not .

Rob Oliver: Okay. Great. 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 labor journey here on .web. And so now that, that opinion from iCANN has hit. What — where does that leave us? And what should we expect next? Or what do you think will happen next?

Jim Bidzos: Okay. Thanks for that question. let’s say 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 ICANNs response will be. I clarified the term NBC to be new .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 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 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 would be when the proceedings begin.

Operator: And we’ll take our last question from Ygal Arounian with Citi.