Verisign Inc/Ca Q4 FY2021 Earnings Call

Good day, everyone, and welcome to VeriSign's Fourth Quarter and Full-Year 2021 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 2021 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.

Thank you, David. Good afternoon to everyone, and thank you for joining us. I'm pleased to report another solid quarter and full-year operational and financial performance for VeriSign. Throughout 2021, 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 24 years. I would like to thank our team for their dedicated efforts and expertise, which enabled us to realize these results. The critical infrastructure we operate provides the domain name system navigation service, which people around the world increasingly depend on for commerce, education, healthcare, and person-to-person connection. For the full year 2021, we processed 44.6 million new registrations and delivered revenue of $1,328 million while generating free cash flow of $754 million. During the full year of 2021, we repurchased 3.3 million shares for $700 million. Effective today, the Board of Directors has increased the amount authorized for share repurchase of VeriSign common stock by approximately $705 million, to a total of $1 billion authorized and available under the share repurchase program, which has no expiration. Our financial and liquidity position remained stable with $1.2 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 173.4 million, consisting of 160 million names for .com and 13.4 million names for .net, with a year-over-year growth rate of 5%. Looking at fourth-quarter operational results, we processed 10.6 million new registrations, and the domain name base increased by 1.37 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 2021 will be approximately 74.8%. This preliminary rate compares to 73.5% achieved in the fourth quarter of 2020 and 75% in the third quarter. As we look to 2022, we expect the domain name base to grow at a rate of between 2.5% and 4.5%. As announced in today's earnings release, we have given notice of a price increase of $0.58 to the annual wholesale price for .com domain names, which raises the price from $8.39 to $8.97, effective September 1, 2022. I should point out that anyone can register a .com domain at any time before September 1 for up to 10 years and lock in that price for the full term, of up to 10 years. Turning to .web, we noted last time that affiliates had filed an application for reconsideration of the May 2021 final decision, which, as a reminder, rejected their request to be awarded .web. Since we last spoke with you, the significant development in December was that affiliates' application for reconsideration was also rejected. Further, affiliates were sanctioned for filing it because the arbitration panel found that it was frivolous. Since then, in mid-January, ICANN's Board of Directors directed one of its standing committees to review the panel's final decision and provide the Board with its findings. With the rejection of affiliates' application and the reaffirmation of the panel's final decision, those roadblocks are now out of the way. And ICANN looks to be moving forward with making the decision on the delegation of .web, and we will be monitoring their process. As we have said before, we continue to look forward to becoming the .web registry operator and establishing it alongside .com and .net as an additional option for businesses and individual end users worldwide. 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, 2021, the company generated revenue of $1,328 million, up 4.9%, and delivered operating income of $867 million, up 5.2% from 2020. Operating expense totaled $461 million and was up 4.5% from the prior year. The full-year 2021 operating margin was 65.3%, and free cash flow was $754 million. For the fourth quarter, revenue came to $340 million, up 6.3% from the same quarter in 2020, with operating income of $222 million, up 8.6% from $205 million in the same quarter a year ago. Operating expense totaled $118 million for the fourth quarter of 2021, compared to $113 million in the third quarter and $116 million in the fourth quarter of 2020. The sequential increase was primarily a result of increased marketing spend in the quarter. The operating margin in the quarter was 65.3%, compared to 66.2% in the third quarter and 63.9% for the same quarter of 2020. Net income totaled $330 million, compared to $157 million a year earlier, which produced diluted earnings per share of $2.97 in the fourth quarter of 2021, compared to $1.38 for the same quarter of 2020. As noted in our earnings release today, net income for the fourth quarter of 2021 included the recognition of a deferred income tax benefit related to a restructuring of two of our international subsidiaries, which involved the transfer of certain non-U.S. intellectual property between these subsidiaries. The recognition of this deferred income tax benefit increased net income by $165.5 million and increased diluted earnings per share by $1.49 in the quarter. Net income for the fourth quarter of 2020 included the recognition of $12.4 million of previously unrecognized tax benefits, which increased diluted earnings per share by $0.11. As we noted in the fourth quarter of 2020 earnings release, for 2022, we expect our GAAP effective tax rates to be between 21% and 24%. Operating cash flow for the fourth quarter was $206 million, and free cash flow was $193 million, compared with $195 million and $189 million, respectively, for the fourth quarter of 2020. Starting with our first-quarter financial statements, we will combine our sales and marketing and general administrative operating expense lines into one SG&A line to better align with peer-company reporting. In addition, any significant fluctuations in sales and marketing would continue to be disclosed within our new SG&A section of our MD&A, contained in our filings. I'll now discuss our full-year 2022 guidance. Revenue is expected to be in the range of $1,420 million to $1,440 million. This revenue range reflects the domain name base growth expectation of between 2.5% and 4.5% that Jim mentioned earlier, as well as the impact of the .com price increase announced today. The operating margin is expected to be between 64.5% and 65.5%. Interest expense and non-operating income net is expected to be an expense of between $70 million to $75 million. Capital expenditures are expected to be between $40 million and $50 million. As mentioned, the GAAP effective tax rate is expected to be between 21% and 24%. We expect the cash tax rate for 2022 to also be within the same guidance range. In summary, VeriSign continued to demonstrate sound financial performance during the fourth quarter and for the full year 2021. And we look forward to continuing our focused execution. Now, I'll turn the call back to Jim for his closing remarks.

Thank you, George. Before we open the call for your questions, I'd like to update you, as I've done in previous quarters, on some of our activities in the field of corporate citizenship under our VeriSign Cares program, which aims to make a positive and lasting impact on the global internet community and the communities in which we live and work. During the fourth quarter, we once again joined forces with food banks in the areas where we have a footprint to help alleviate seasonal and COVID-related food insecurity. We also renewed for a further year our partnership with Virginia Ready, the launch partner of our initiative to help those whose employment has been adversely affected by the COVID-19 pandemic access retraining and other assistance to find new jobs in the growing technology sector. Finally, in Q4, we made a further contribution to the Equal Justice Initiative, recognizing that there remains much to be done in the important area of racial and social justice. And now, we'll open the call for your questions. Operator, we're ready for the first question.

Thank you. We'll go to Sterling Auty of JPMorgan.

Yes, thanks. Hi, guys. So, now that you've taken the second price increase, I know it's kind of a, what have you done for me lately question, but how should we think about the final two price increases that you still have left? And probably just as important, what happens after the six-year period of this contract?

Thank you for your question, Sterling. For those on the call who may not be familiar with the structure I mentioned, let me briefly explain. Every six years, we can implement four price increases in the last four years of the first six-year period, which started in October 2018. We have announced today the second of those four allowable price increases, effective September 1 of this year. During this period, we do not provide guidance on pricing. This announcement pertains to an increase in .com domain registrations starting September 1, 2022. Beyond this, we do not provide guidance on future pricing or the factors influencing those decisions. Notably, this marks the second wholesale price increase for .com since January 2012. Over the last decade, this amounts to an average cost increase of only 1.3% per year. Regarding your second question, in 2020, which is eight years from 2018, we will enter a second six-year period. This period is part of our cooperative agreement with the Commerce Department, which automatically renews every six years. The first two years of this period do not permit price increases. Assuming we take all four price increases, meaning the remaining two in this six-year timeframe, the price for a .com registration cannot exceed $10.26, at least until October 2026. We believe .com remains competitively positioned. While we are in a six-year cycle and have already taken the first two increases, we will start a second period soon, during which any increases can only occur in the latter four years. To summarize, the current price increase allows for two more, and those prices cannot change until at least October 2026. I hope this provides clarity.

Yes, it is helpful. I appreciate that. And then, within the context of the initial guide you're giving here for '22 for the domain name growth of the 2.5% to 4.5%, I think there's a lot of us that have watched the data year-to-date and we're just in the very beginning. But any comments you give, do you feel like the base is off to a slower than normal start for the year, and is there timing of renewals or other things that investors should be thinking about and how that factored into your guide?

Sure. George?

Yes, sure. Thanks, Jim. Yes, Sterling, this is George. I would just remind you and others on the call that we do have some seasonality as it relates to certain holidays and how they fall on the calendar. This year in Q1, for example, the Chinese New Year is about two weeks earlier, starting on February 1. Last year, it was February 12. We tend to see new registrations from our Chinese registrar slow down a few weeks before the actual holiday and then recover once the holiday is over. So, that could be playing into some of the data that you see on our website. But overall, as you mentioned, we do expect continued growth in the domain name base. We have it at 2.5% to 4.5%. Last year at this time, we experienced a similar growth rate.

It makes sense. And then, very last one on .web, if all goes well with ICANN Board, is it your anticipation that you would be in the market selling .web domains in '22?

Yes. Well, first of all, the process that I mentioned that was directed by the ICANN Board has been held up for many years during litigation, which the panel has now basically shut down for the second time and directed ICANN to move with this process. We're pleased to see ICANN doing it. That is ICANN's process. So, I can't speak quite for the duration that will take. Obviously, we hope it's as brief as it can be. But that is an ICANN process. There are standard processes associated with the launch of any TLD. There's a period where some security issues are observed and addressed. There's a period where trademark holders are given the right to make their registrations first. Putting all that together, it's hard to speculate on the exact timeline for .web. I will say that we have not budgeted in 2022 any launch or marketing costs or any revenue for .web. We'd certainly like to be in the market if we could, but I think given all of those variables, it isn't helpful for me to speculate when .web will come to market. We hope it does soon, and we certainly intend to bring it to market and be successful with it, but beyond that, I don't think I can speculate.

It makes sense. Thank you, guys. I appreciate it.

Sure.

And we'll take our last question from Rob Oliver of Baird.

Great. Thanks, guys. Good afternoon, Sterling asked a lot of good questions, I'll just follow-up on his. So, just I'll start with .web since Jim that's where you left off. You did mention in your prepared remarks that you're going to be monitoring the process at ICANN, I just want to understand what's the vehicle, who's actually doing that, how you monitor that? And then, I feel you used to say, rattling about further legal actions, and I'm just wondering from your perspective, what exactly that is like, what avenues they have left. They've been able to stretch this out for so long. And then I had a follow-up for George as well. Thanks.

Okay. Well, I can't speak for affiliates, I can only tell you that the result of their last application was sanctioned, and the panel used the word 'frivolous' in their response to their application in reiterating their earlier finding, which is to direct ICANN to proceed. In terms of how we monitor that, when ICANN's Board takes these actions, that information is publicized, and you can follow some of that on ICANN's website. For example, the results that I mentioned, the direction that ICANN gave to one of their standing committees was, in fact, publicly available information. So, we'll be monitoring that, and you can certainly monitor it yourself on ICANN's website. Again, I can't really speak for affiliates. We've blogged about this, and you can find our blogs and see our position; we've been firm from the beginning that we believe that affiliates' claims and demands were without merit. So far, the panel has reaffirmed what we expected to happen: that ICANN would be directed to proceed with its process and determine the delegation of .web. That's where we are now. What affiliates will do next, if anything, is up to them. But at this point, ICANN has taken some action, and we're monitoring that.

Got it. Okay. That's helpful, Jim. Thank you. And then, George, I have a couple of quick questions for you regarding the operating margin guide for '22. Assuming that the guide does not include .web, and assuming you acquire .web, there would be associated expenses. I'm not asking you to predict the specific expenses since Jim has already mentioned that you won’t, but can we understand that the initial operating margin guide may need to be adjusted if you obtain .web and incur expenses related to its ramp-up?

Yes, Rob. To the extent that when .web comes to us, clearly, we've got our plan and our launch in place. We will provide updated guidance to the extent that those expenses or annual revenue are going to impact the current year.

Got it. Okay. And then, just lastly, you mentioned some of the kind of vagaries around global domain trends and Chinese New Year, of course, and just was wondering for about any sort of geographic color and again a follow-up on Sterling's question just about what you're seeing here early in the year. I know renewal rates have been higher because of some of the activity that you guys have seen in the U.S. and EMEA, and how that is trending and how that looks to you here as well. Thanks.

Yes, sure. Rob. As we mentioned in our prepared remarks, we had a solid year of growth in the domain name base; it was up 5% year-over-year. In 2021, we saw big gains in the base primarily from our U.S., EMEA, and Asia Pacific registrars. When you look at new units or gross ads, Jim mentioned we generated 44.6 million in 2021. That was up about 2 million units year-over-year, similar to the new unit increases we experienced in 2019 and 2020. We've had pretty consistent demand growth over the last few years. From a new unit perspective, we saw gains in 2021 from registrars in EMEA, Asia Pacific, and China. We will provide more color as we come out of here in 2021 as to the trends that we're seeing in the regions at that time.

Great. We're going to get at Super Bowl. I mean, we're going to be watching that. That's what I'm going to be watching for the .com, right, and hopefully we get one of those this year. Thank you, guys.

Thank you, Rob.

And so, that concludes the question-and-answer session. I will now turn the call back over to 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.

Again, that does conclude today's call. Thank you for your participation. You may now disconnect.