VeriSign, Inc. (NASDAQ:VRSN) Q4 2022 Earnings Call Transcript

VeriSign, Inc. (NASDAQ:VRSN) Q4 2022 Earnings Call Transcript February 9, 2023

Operator: Good day, everyone. Welcome to VeriSign’s Fourth Quarter and Full Year 2022 Earnings Call. Today’s call is being recorded. Recording of this call 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 Fourth Quarter and Full Year 2022 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. I’m pleased to report another solid quarter of operational and financial performance for VeriSign. Throughout 2022, we delivered strong financial results while continuing to strengthen our critical Internet infrastructure. We complied with the high operational standards required by our ICANN agreements and extended our record of .com and .net DNS availability to over 25 years. I’d like to thank our team for their dedicated efforts, which enabled us to realize these results. The critical infrastructure we operate provides to the domain name system navigation service which people around the world depend on for commerce, work from home, education, healthcare and much more.

During 2022, we acknowledged the uncertainty that macroeconomic and other challenges beyond our ability to influence presented and we said that we would focus on what was within our ability to control. We also indicated what that meant. First, reliably maintaining operating and investing in our critical Internet infrastructure. Next, exercising careful expense control where appropriate. And additionally, it meant keeping focused on long-term value creation and efficient return of capital. During 2022, revenue grew 7.3% year-over-year and operating income by 8.8% year-over-year. Additionally, shares outstanding at the end of 2022 decreased by 4.8% from those outstanding at the end of 2021. Our financial and liquidity position remained stable with $980 million in cash, cash equivalents and marketable securities at the end of the year.

During the full year of 2022, we repurchased 5.5 million shares for $1 billion. At year-end, $859 million remained available and authorized under the current share repurchase program, which has no expiration. At the end of 2022, the domain name base in .com and .net totaled 173.8 million domain names with a year-over-year growth rate of 0.2%. In the fourth quarter, there were 9.7 million new registrations compared to 9.9 million last quarter and 10.6 million in the year ago quarter. While there are many factors that drive demand for domain names, we saw lower new registrations during 2022 as a result of factors that I’ve already mentioned in prior calls. These include pandemic-driven acceleration of new registrations in 2020 and 2021 which has subsided, global macroeconomic headwinds, reduced new registrations from China and lower first-time renewal rates.

Photo by Leon Seibert on Unsplash

We believe that the renewal rate for the fourth quarter of 2022 will be approximately 73.2% compared to the 73.7% final renewal rate last quarter and 74.8% a year ago. For the full year 2022, the renewal rate for previously renewed names remained similar year-over-year. However, first-time renewal rates were lower year-over-year with the largest single driver being names renewing from China, which were registered during 2021. Looking to 2023, our expected 2023 domain name base growth rate is between 0% and 2.5%. This guidance reflects our knowledge about our domain name base, our channel and the broader macroeconomic backdrop. As announced in today’s earnings release, we have given notice of a price increase of $0.62 to the annual wholesale price for .com domain names, which raises the price from $8.97 to $9.59, effective September 1, 2023.

Even after this increase, we believe .com will remain highly competitive with other TLD choices. As a reminder, any of our domains may be registered for terms of up to 10 years at the current price. While we do not guide to pricing changes, I can say, as I did last year, that under the limited pricing flexibility we have the wholesale price of a .com registration cannot exceed $10.26 until at least October of 2026. Turning to web. The parties made their submissions to ICANN during Q3 and we are still waiting for ICANN to complete its process. 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: Thanks, Jim, and good afternoon, everyone. For the year ended December 31, 2022, the company generated revenue of $1.425 billion, up 7.3% and delivered operating income of $943 million, up 8.8% from 2021. Operating expense totaled $482 million and was up 4.6% from the prior year compared to a similar 4.5% increase experienced in fiscal 2021. The full year 2022 operating margin was 66.2% and free cash flow was $804 million. For the quarter ended December 31, 2022, the company generated revenue of $369 million, up 8.5% from the same quarter of 2021 and delivered operating income of $245 million, up 10.5% from the same quarter a year ago. During the fourth quarter of 2022, we executed a transition of the .tv agreement to a new registry operator.

As the proposed contract terms in the new .tv request for proposal, no longer aligned with our strategic framework, we decided not to participate in the RFP. Revenue related to this agreement during the full year of 2022 was approximately $19 million, of which approximately $10 million was recorded in the fourth quarter. Operating expense in Q4 totaled $124 million compared to $118 million a year earlier. Net income in the fourth quarter totaled $179 million compared to $330 million a year earlier, which produced diluted earnings per share of $1.70 for the fourth quarter of 2022 compared to $2.97 for the same quarter of 2021. As a reminder, net income for the fourth quarter of 2021 included the recognition of a deferred income tax benefit related to the transfer of certain non-U.S. intellectual properties between wholly-owned subsidiaries which increased net income by $165.5 million and increased diluted earnings per share by $1.49.

Operating cash flow for the fourth quarter of 2022 was $217 million, and free cash flow was $209 million compared with $206 million and $193 million, respectively, for the fourth quarter of 2021. I will now discuss our full year 2023 guidance. Revenue is expected to be in the range of $1.485 billion to $1.505 billion. This revenue range reflects our expectation that the domain name base will grow at a rate between 0% and 2.5% as Jim mentioned and is also impacted by the transition of the .tv agreement at the end of 2022. Operating income is expected to be between $985 million and $1.05 billion. Interest expense and non-operating income net, which includes interest income estimates, is expected to be an expense of between $35 million to $45 million.

Capital expenditures in 2023 are also expected to be in a range between $35 million to $45 million. The GAAP effective tax rate is expected to be between 22% and 25%. In summary, VeriSign continued to demonstrate sound financial performance during the fourth quarter and the full year of 2022, and we look forward to continuing our focused execution in 2023. Now I’ll turn the call back to Jim for his closing remarks.

Jim Bidzos : Thank you, George. We believe our strategic focus and disciplined management served us well during 2022, allowing us to deliver solid financial results in a challenging environment as the economy struggled to recover from disruption caused by the pandemic. VeriSign’s mission is about security and stability, not only in the operation of our critical infrastructure, but financial stability is also important for our customers, employees and shareholders. Today, we reported profitable revenue growth for 2022, and we guided to profitable revenue growth for 2023. This was possible through modest domain name base growth, limited pricing flexibility and responsible expense management. We believe that the long-term fundamentals of our business remain strong.

As I said earlier, our strategy prioritizes reliable, uninterrupted operation of our critical infrastructure, along with long-term value creation and its efficient return to shareholders with consistent, efficient management. We believe this strategy will serve all of our constituents well for the long term, and you can expect us to maintain this focus. 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: And our first question will come from Rob Oliver with Robert W. Baird.

Rob Oliver : Appreciate the opportunity to ask a question. First one for me is, just around the macro, obviously, second half of last year you guys really focused on kind of what you can control operationally, a lot of moving parts in the macro. And I think that, that approach really served you well. Looking out here into ’23, also obviously, tremendous amount of moving parts, layoffs, macro uncertainty; on the other hand, China reopening. So just curious if you could add a few finer points to your thoughts relative to the outlook, having seen many cycles as well as to the domain guide that you guys offered of the 0% to 2.5%? And then I had a quick follow-up.

Jim Bidzos : Okay. Thanks for that question. Well, first, for 2022, looking back on that year, as soon as we recognize that the pandemic-driven growth was subsiding, we began planning for what I’d called responsible expense control, meaning that, first and foremost, we make all necessary investments in our infrastructure and then look everywhere for efficiencies. As far as layoffs, we did not, as many companies did accelerate hiring during the pandemic-driven growth period. And I would also point out that the average employee tenure at VeriSign is over nine years. So we’re fortunate to have a loyal experienced and stable employee base. I should also point out, we also try to take advantage of opportunities to return value to shareholders with more effect as we did in 2022, retiring nearly 5% of our shares outstanding.

These are all the parts of our business that we can control. So that’s where we focused in ’22. Looking forward, we’re hearing what you’re hearing. Many economists and CEOs talking about 2023 say that the macroeconomic and geopolitical factors suggest some continued uncertainty. I suppose it should be no surprise that the recovery from the pandemic and with all the global impact in ’20 and 2021 is going to take more than one year to fully recover. So it seems prudent to factor that uncertainty into our guidance for 2023, which we did. And as far as strategy, what you can expect from us in 2023 is a continuation of our 2022 strategy. It’s actually not that different from what we try to do every year.

Rob Oliver : Okay. Great. Thanks, Jim. And a bit on the road marketing for the last couple of weeks and particularly in the news now is ChatGPT. And I just wanted to get your thoughts relative to that. It’s obviously very early, and we’re in the high stage around this new technology now. And we’ve seen — I’ve seen with you guys many times over the years where there have been calls for the demise of the domain. But I just wanted to get your preliminary thoughts relative to ChatGPT and potential risks, it seems to direct people towards information rather than directing them towards websites at least at the outset and just wanted to get your thoughts?

Jim Bidzos : Okay. Well, that’s an interesting question. Well, first of all, I’ll say this. I mean, right now, ChatGPT looks like a very interesting and potentially beneficial thing for us. We are actually looking at it quite closely. We have a product called NameStudio, which we use in some of our channel users to help them when they go to register a domain name, if it’s already taken by somebody else, which happens. ChatGPT and NameStudio will actually help you find a similar and equally good or maybe even better name and we’re looking closely at the ChatGPT to see about using its capabilities to enhance what NameStudio does. So I see it as actually a benefit to those efforts. I would say, ChatGPT similar. I mean, I guess, at one point, a lot of people said, “Well, voice assistants are going to replace the DNS” I just — that one had me shaking my head.

Voice assistants go out and collect data and report it to you. And the data that they collect is found by searching the Internet for the relevant data that they seek. And that’s navigated using the DNS. So they’re completely complementary.

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

Ygal Arounian: Maybe just starting on China. You just mentioned it before a little bit. But given the reopening there and some of the factors, think about some of the puts and takes that are kind of driving — moving the needle there or impacting your expectations for next year?

Jim Bidzos : Well, I guess just — well, first of all, just understanding. Oh, I’m getting an echo there. Do you hear that?

David Atchley : I do. Yes.

Jim Bidzos : I don’t know if the audience is hearing my echo. I’m hearing it. Seems to be gone now.

Operator: Okay. Yes. Please proceed. I just muted the participant’s line while you’re responding. That’s all.

Jim Bidzos : Okay. All right. Maybe there was some feedback there. So in 2022, we did see a lot of China names that were registered in 2021, renewing with lower first-time renewal rates. That was a factor in 2022. And also, China, as you know, has treated the pandemic differently. It’s somewhat unique in that sense. And those are the factors that contributed to lockdowns, which are ongoing. There’s zero COVID policy increased regulation, economic uncertainty, the proportion of names renewing from China that’s higher. We mentioned last year that we did see some signs of returning. I think my comments about the — what — if there’s any consensus about 2023, I think it’s that uncertainty still exists and that the recovery is maybe a little bit slower than people thought.

So we’re sort of just factoring that in. China is certainly part of it. But things are changing in China. I think it’s too early to say exactly what that impact will be. But certainly, the economy seems to be moving in a different direction there with some of the COVID restrictions lifting. Maybe after a quarter next quarter, we’ll be able to tell you more about what that’s doing to the 2023 outlook. And obviously, we’ll update our guidance if we see something meaningful that we consider worthy of reporting and representing a trend. At this point, I think it’s just too early to say.

Ygal Arounian: Okay. Hopefully, not on mute any part, but one more — can you guys hear me?

David Atchley : Yes, we’re hearing you.

Jim Bidzos: You’re not on mute. Go ahead.

Ygal Arounian: Okay. So one — a couple of questions we get on domains. One is, I know the environment was different in the early part of the pandemic. But I get the question on counter cyclicality. We’re seeing a lot of layoffs in the tech world right now. And often that can lead to kind of new business formation, people starting projects. Are there any indications of that are you seeing that? Is that factored into your guidance at all? And then the other thing people kind of ask us about regularly is how we think about normalized domain growth going forward, right? We’ve got some macro headwinds here, but prior to the pandemic, domains were growing at about 4%, plus 5% or let’s just call it 4%, growing about 4%. We’ve been well below that now for duration this year. Our guidance is well below that for next year. How do you guys think about a normalized growth rate for domain? Return back to the levels of pre-COVID? Or are there other factors to think about?

Jim Bidzos : Well, let’s see. I think there’s a couple of questions in there. But I guess, first of all, we — to answer directly part of your question, we have not tried to assess and factor in the impact of layoffs the new business starts might have, although that is a data point that we do track. I think you can map new business starts going back to 2020 with a fairly good sized jump then. And some elevated activity in 2021, and then you see it declining in 2022. So that does tend to correlate a bit to the domain name activity and registration activity that we saw what. That’s going to mean for the future? I’m not sure it’s not a planned part of our guidance for 2023. I will just say, and I’ll invite George to comment as well.

But we think that the fundamentals of our business and the long-term prospects for the business are fundamentally strong. Domain names are established, have tremendous utility and tremendous value and registrations. We think long-term, it’s a great business to be in. We think it will return to pre-pandemic levels. But 2023 is a tricky year to predict. So we haven’t gone as far as predicting a return at that point. So I do think, one of the overriding sort of macro factors and all of this is just a complicated longer recovery from COVID than people thought. I think it’s pretty clear that we’re seeing that some of the ups and downs and the bumps that we’re encountering. George, do you want to add anything to that?

George Kilguss : The only thing I’d add, Ygal, is that when you look at our business and what we’ve previously indicated, we look at factors such as Internet adoption, Internet penetration and the growth of e-commerce influencing our business. And I think if you look back during 2020 and 2021, clearly, we saw a lot of those statistics increase significantly. And while they’ve come down, there’s still, I think, a longer growing trend that I think bodes well for domain names.

Jim Bidzos : Yes. And I would just add one statistic, one trend is that even the names that we registered in 2020 and 2021 exclusive of some of the China names that are now renewing for the second time or even the third time, are renewing at the traditional previously renewed rate, which is in the mid-80s. So I think that’s a good indicator about the long-term strength of the business.

Ygal Arounian: Great. That’s helpful, and I agree on the trends on e-commerce and all that. Last question. The operating margins, if I’m looking at it correctly, since have come in quite better than where the guidance applied for 4Q. Can you just talk about what is driving that and how that fits into the expense control that we’re talking about? Or is it a separate thing?

George Kilguss : Yes. Thanks, Ygal. I think a couple of things. As I mentioned in my prepared remarks, we did during the year, it was actually late in the fourth quarter, transition out of .tv management at TLD and in doing so, we — as we completed all our obligations there, we did recognize about $8.4 million of deferred revenue in the fourth quarter. Again, total revenue for that contract in 2021 was about $19 million. But as Jim mentioned, we — in the beginning, I would say, in the second quarter, we started looking pretty closely at our expenses and did more responsible management of those expenses, and we were able to get those expenses down. Overall, our expenses grew by about 4.6% this year which is similar to last year. As far as the fourth quarter, we did do a little bit of seasonal marketing more than we had done in the third quarter, in the fourth quarter. And so, some of the increase there sequentially was a result of some of those marketing activities.

Operator: And that does conclude the question-and-answer session. I’ll now turn the conference back over to Mr. David Atchley.

David Atchley : 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. And that does conclude today’s conference. We do thank you for your participation, and have an excellent day.