Verisign Inc/Ca Q4 FY2020 Earnings Call

Good day, everyone. Welcome to VeriSign's Fourth Quarter and Full Year 2020 Earnings Call. Today's conference 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.

Thank you, operator. Welcome to VeriSign's fourth quarter and full year 2020 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 reports on Forms 10-K and 10-Q. 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 afterwards, we will open the call for your questions. With that, I would like to turn the call over to Jim.

Thanks, David, and good afternoon, everyone. This past year has presented challenges and uncertainties for all of us. This has also been a year when our mission has never been more relevant. Like many of you, we spent the majority of the year with most of our teams working remotely. During this time, we continued to maintain, invest in and evolve our infrastructure, which enables us to reliably and accurately provide the critical DNS navigation service people around the world rely on more than ever, for commerce, education, healthcare, and person-to-person connection, while complying with the high operational standards as required by our ICANN agreements. Thanks to the dedication of our team and the resilience of the specialized network they operate and maintain, we extended our record of DNS availability to over 23 years during 2020, and we will continue our focus, as it appears we will be working remotely well into 2021. Turning to our results. I'm pleased to report another consistent quarter that concludes a solid year of operational excellence for the company. As I mentioned, in 2020, we marked more than 23 years of uninterrupted availability of the VeriSign DNS for .com and .net. We also processed 42.4 million new registrations, delivered revenue of $1.265 billion, and generated free cash flow of $687 million. During the full year 2020, we repurchased 3.7 million shares for $735 million. Effective today, the Board of Directors has increased the amount of VeriSign common stock authorized for share repurchase by approximately $747 million to a total of $1 billion authorized and available under the share repurchase program, which has no expiration. Our financial and liquidity position remains stable, with $1.17 billion in cash, cash equivalents, and marketable securities at the end of the quarter. We continually evaluate the overall liquidity and investing needs of the business and consider the best uses for our cash, including potential share repurchases. At the end of December, the domain name base in .com and .net totaled 165.2 million, consisting of 151.8 million names for .com and 13.4 million names for .net, with a year-over-year growth rate of 4%. During the fourth quarter, we processed 10.5 million new registrations and the domain name base increased by 1.46 million names. Although renewal rates are not fully measurable until 45 days after the end of the quarter, we believe that the renewal rate for the fourth quarter of 2020 will be approximately 73.5%. This preliminary rate compares to 73.8% achieved in the fourth quarter of 2019 and 73.7% last quarter. Looking to 2021, we expect the domain name base growth rate of between 2.5% and 4.5%. As announced in today's earnings release, we have given notice of a price increase of $0.54 to the annual wholesale price for .com domain names, which raises the price from $7.85 to $8.39 effective September 1, 2021. This represents the first wholesale price increase of .com domain names since 2012 and is in alignment with a limited and regulated pricing flexibility permitted under our Registry Agreement. This announcement is consistent with our statements over the last several months that we expected to effectuate an increase in the wholesale price of .com domain names before October 25th 2021. We believe this positions .com competitively in the marketplace. And now, I'd like to turn the call over to George.

Thank you, Jim, and good afternoon, everyone. For the year ended December 31, 2020, the company generated revenue of $1.265 billion, up 2.7% from 2019. Operating expense totaled $441 million and was up 3.6% from last year. For the fiscal year, the company delivered operating income of $824 million, up 2.2% from $806 million a year ago and a full year operating margin of 65.2%. Fourth quarter revenue came to $320 million, up 3.1% year-over-year. Operating expense totaled $116 million, compared to $111 million last quarter and $112 million in the fourth quarter a year ago. The quarter-over-quarter increase in operating expense is primarily a result of increased sales and marketing expenses. Fourth quarter operating income totaled $205 million, compared with $199 million in the same quarter of 2019. The operating margin in the quarter came to 63.9%, which was unchanged from the same quarter a year ago. Net income totaled $157 million, compared to $148 million a year earlier, which produced diluted earnings per share of $1.38 in the fourth quarter this year, compared to $1.26 for the same quarter last year. As noted in our earnings release, net income for the fourth quarter of 2020 included recognition of $12.4 million of previously unrecognized income tax benefits as a result of the lapse of certain statutes of limitations. This income tax benefit increased Q4 diluted earnings per share by $0.11. Operating cash flow for the fourth quarter was $195 million and free cash flow was $189 million, compared with $194 million and $185 million respectively for the fourth quarter last year. I'll now discuss full year 2021 guidance. Revenue is expected to be in the range of $1.300 billion to $1.320 billion. This revenue range forecast reflects the domain name base growth rate of between 2.5% and 4.5% that Jim mentioned earlier. The operating margin is expected to be between 64% and 65%. This guidance range reflects our expectation of incremental and continued investment in our operational infrastructure in 2021. Also, this range reflects the annual $4 million payment to ICANN, which began this year, to support activities to preserve and enhance the security, stability, and resiliency of the DNS and the Internet. Interest expense and non-operating income net is expected to be an expense of between $88 million to $92 million. Capital expenditures are expected to be between $55 million and $65 million. This range reflects our ongoing investment in our infrastructure as well as an expected 2020 capital spend that moved into 2021. The GAAP effective tax rate is expected to be between 20% and 23%. We expect the cash tax rate for 2021 to also be within the same guidance range. In summary, VeriSign continued to demonstrate sound financial performance throughout last year, and we look forward to continuing our focused execution in 2021. Now I'll turn the call back to Jim for his closing remarks.

Thanks, George. I'd like to say again that our priorities continue to be our mission of ensuring a secure, reliable, and accurate operation of our critical Internet infrastructure and the safety of our people. And I also want to acknowledge once more the team here at VeriSign for their hard work in maintaining and operating our infrastructure, even during the challenges of working remotely during the pandemic. Those efforts are undertaken almost entirely behind the scenes, that are not well known, but there are many hundreds of dedicated professionals that develop, maintain, and operate our purpose-built network. And have done so without service interruption for over 23 years. Even today, some people may think we still operate an SSL Certificate Authority of PKI business that VeriSign's predecessor, RSA Data Security, built going all the way back to 1986. That business was sold in 2010, and we have increasingly tightened our focus on our core mission of secure Internet directory and registration services ever since. More information on just what we do today can be found on our homepage at verisign.com. Now we'd like to walk through your questions, which we believe is on your mind before opening the call for your additional questions. Many of you have asked if there are any updates on the status of .web. As we noted last quarter, a final hearing took place in early August of 2020. We expect a decision from the panel in the coming weeks, but we don't control the timing, and the panel is not operating under any deadline. And as a reminder, VeriSign is not a party in these IRP proceedings but was granted the right to participate in certain limited aspects. Also, as a reminder, an IRP under ICANN bylaws is for the purpose of ensuring that ICANN follows the term policies and procedures when making decisions. Our expectation is that following the resolution of the IRP, the ICANN Board will make a final decision on the delegation of the .web TLD. The guidance we provided today does not include revenue or expenses related to .web. Now we'll open the call to your questions. Operator, we're ready for the first question.

We will take our first question from Rob Oliver with Robert W. Baird.

Great. Thank you, guys. Thanks for taking my question. Appreciate it. George, I was just hoping we could walk maybe through a little bit more of the thought process on the expense structure for 2021? And then also I wanted to sort of maybe get some color on that. I know you guys had talked a little bit in recent quarters about spending some more on the security side and certainly looked reasonable given the headlines that happened in December, but wanted to get a sense for where you are on that spend, whether the bodies that you need to hire have been hired? And then also on the CapEx comment just wanted to understand what it was that came out of last year and into this year and just get a little bit more color on the CapEx, which is higher than in our model I believe?

Hello?

Yes. Were you guys able to hear my question?

Yes, we heard your question. George, I don't know if you were on mute but just double checking.

I'm sorry. Yes, I was. So yes, thanks for the question Rob. We've been talking about this most of the year that we've been making additional investments in both our infrastructure and our cybersecurity initiatives. And you see this bearing out in our numbers as both R&D and G&A are up in those areas and we continue to invest in personnel and hardware and software tools in those areas. As far as 2021, we expect our expenses to be similar as a percent of revenue next year for most of the categories that we report on with the exception of cost of revenue which we expect will increase slightly as a percent of revenue for next year. As far as capital expenditures, as stated in my prepared remarks, capital expenditures are expected to be between $55 million and $65 million. And that again reflects ongoing investment in our infrastructure as well as some expected 2020 capital spend that slipped into 2021. We guided between $55 million and $65 million. Last year, we guided between $45 million and $55 million at this time. So this year's range is slightly higher than last year, but we feel these investments are appropriate to continue to ensure the security and stability of our infrastructure.

Great. That's helpful. Thanks, George. Appreciate it. And then Jim just one for you if I may. Just obviously the price increases. So I'm glad you guys were able to get those through. On the domain outlook for the year, it's a bit of a wide range. And I just wanted to maybe get your thought process on that I guess probably understandable given a lot of macroeconomic puts and takes but just wanted to get your sense. And I think you said 2.5% to 4.5%. Appreciate that.

I'm sorry, did you just want clarification?

Yes, I would appreciate some clarity on your thought process regarding that range.

I'm not sure I can give you any more detail beyond that, I guess. Maybe I don't understand your question. Let me...

Yes. At the low end of that range, the growth number would be below GDP growth. Were there other elements where you experienced pull-forward due to COVID or maybe not, especially regarding domain activity? You ended the year at the high end of your original guidance, which likely surprised many in the spring. Is there a feeling that we are experiencing the aftereffects of that on domains? Is that why the low end is being considered? Any additional insights would be appreciated.

Yes, Rob, this is George. I can provide some insights here. Generally, the trends we observe in the domain name base are consistent with those of the past few quarters, where registrars in both North America and EMEA are performing well. However, this growth has been somewhat countered by slower activity from registrars in China. In the fourth quarter, we reported approximately 10.5 million registrations, an increase from 10.3 million a year ago. Throughout the year, we noted rising demand in these regions as more people sought to establish an online presence and initiate new businesses, along with new features introduced by website builders in the registrar community. Looking ahead to next year, we anticipate these trends will persist, although we remain uncertain about the market's response as we transition out of the work-from-home period. We usually maintain a range of expectations going into the year, and so far, January is off to a promising start. Currently, our expectation is between 2.5% and 4.5%. We'll provide updates on this range as the year progresses.

Great. Thank you.

Yes, I understand your question. If the idea is to connect some macroeconomic factors to the guidance we provided, I can say that there is uncertainty regarding how COVID will unfold in 2021. There are many fluctuations, and that certainly plays a role. However, as George mentioned, various factors contribute to the range. If you were to focus on one macroeconomic indicator, the uncertainty around COVID is probably the most significant factor influencing that range.

Okay. Thank you again.

We'll go ahead and take our next question from Nick Jones with Citi.

Thank you for addressing the questions. First, I would like to clarify if it would have been possible to increase the price by another $0.01, or if the current increase is constrained by being just over 7%. Any clarification on this would be appreciated. Additionally, I have a follow-up question.

I'm sorry. You've got it right. The issue is that we don’t bill in fractions of a cent. The actual increase was 0.9 pennies, so even though the number was nine, we rounded down to avoid exceeding 7%.

Got it. Got it. That's helpful. And then on COVID, kind of, threw a wrinkle I think into potentially how investors were thinking about the price increases. How should we think about the cadence from here? I mean, is it something that's like you kind of expect to happen annually? Is there room to compress the timeframe and take them earlier? I guess just how are you thinking about the cadence of the price increases over the next few years as the windows open?

Nick, this is George.

I'm sorry. I was on mute, George. I'm sorry. Mute is tricky. I will let George weigh in, but basically, we don't guide to future price increases. And today's announcement is only for an increase in .com domain registration fee, that's effective and begins on September 1 of this year. Beyond that, obviously, we don't guide. George, do you want to comment? Please go ahead.

Those are going to be my comments, Jim, as well.

Yes, sorry, I was on mute there for...

Okay. One last question just kind of as COVID restrictions may be loosened, in certain markets vaccines are rolling out. Are you seeing any change in kind of the trends we saw in 2020 in terms of people's SMBs switching to digital solutions, people leaning into online solutions? Is there any meaningful changes and trends kind of early in the year in certain regions, even just within the US in terms of registrations or anything to kind of give you pause as to kind of how the reopening may impact these trends? Thanks.

Yes. Nick, this is George. I don't see any materially different trends compared to the trends that we saw last quarter even through January. The only thing I'll just mention is we do have a little seasonality in our business from time to time, and we do get impacted by holidays. The Chinese New Year this year is a little bit later. I think it was in late January last year and it's in early February this year. But other than that, to answer your question, nothing yet that we've seen to change our views.

Great, thanks for taking the question.

And we'll take our final question from Sterling Auty with JPMorgan.

Yeah. Thanks. Hi, guys. When I saw that you announced the price increase, I'm like damn, what am I going to ask on the call now that you announced the increase?

Well, is that the question?

No, of course not. All right, let's start with the renewal rate, which is down 20 basis points year-over-year. Did you notice anything in particular this year? For instance, I've observed that over the last month, there were a couple of days when the domain base dropped by 93,000 on one day and by around 102,000 on another. I usually associate these drops with registrars performing purges. Did anything like that impact the renewal rate this quarter?

Sterling, as you pointed out, the renewal rate was relatively flat year-over-year. I think 73.5% in the fourth quarter versus 73.8% in the fourth quarter of 2019. So, relatively similar. We did have a very strong 2019 performance from China-based registrars. And as we talked before, as a group, we tend to see first-time renewal rates come out a little bit lower. And as that cohort was renewing this year that did put a little downward pressure, I would say, on our first-time renewing rates for the international group as a whole. But again, I think overall 73.5% was a pretty good result.

Now that makes sense. You made the comment that .web, neither the revenue nor expenses are factored into the guidance. If we just say hypothetically that you get the approval and you can move forward to getting it up and running, what should be some of the cost levels that investors should expect to get it launched, and perhaps some of your thoughts around the marketing muscle in terms of spend that you might put behind at launch?

Sterling, I believe that with the process of the IRP now complete and while we await further developments, I can reiterate my previous statement that we are hopeful we are weeks away from receiving something from the panel. We are definitely making progress over time, but it is still too early to provide any indication of a timeline for the launch of the web or the associated costs. It's just a bit premature for that.

Okay. And then last question from my side is, in the US if you look at the new business applications, they spiked late summer early fall. So, I think August, September timeframe, but they're still elevated in the fourth quarter especially on a year-over-year basis. If I think about that relative to your new domain registrations, the 10.5, new registrations have been up relative to historical norms for a while now, is there a correlation there? And does that actually give you some confidence that hopefully the economy opens back up on the back of vaccines and perhaps we could see even faster domain growth in 2021?

So, Sterling, we've seen that same data. And as you know we're a thin registry. So we do get some insights from our registrar partners and from what we hear from them. Yes, new business starts and companies finding that they can better serve their customers by having a website and ergo domain name helps to facilitate that. I think that's been good for our business here in this work-from-home environment. As Jim mentioned, when the pandemic subsides and things start opening up, I think it could probably go either way, either it could accelerate or it could slow a little bit. We're just not sure how the market would react just as we were somewhat uncertain when this whole pandemic started, but that clearly is a possibility.

As a follow-up to that, regarding the mix of domains, it seems that the new top-level domains have taken back some of the market share that this category gained in previous years. Are you noticing any impact on your business from this mix?

I am not sure I understood this.

Well, to be more specific you're a thin registry, but you work with hundreds of registrars on a global basis. Are registrars coming back to you given that you do marketing programs and suggesting that they want to put more muscle behind .com because they're just not seeing the traction that perhaps they expected in the new TLDs?

I think the best answer I can provide is that .com is a well-recognized brand that helps people find visibility online. It's a well-established brand. I'm not aware of any specific intentional efforts to shift in the way you're suggesting. George, would you like to add anything?

Yeah. I think that's right, Jim. I mean I think that's probably a great question for one of the registrar's earnings calls but as to what they're seeing specifically. But our programs tend to be relatively set at the beginning of the year. We rolled them out, we announced them, and we tend not to change them too much year-over-year or intra-year, I would say. But I don't think I have anything more to add than what Jim commented on.

Understood. Thank you so much.

Thanks.

I'd like to now turn the call back to Mr. David Atchley for any final comments.

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.

This concludes today's call. Thank you for your participation. You may now disconnect.