Earnings Call Transcript - VRSN Q1 2023

Operator, Operator

Good day, everyone. Welcome to VeriSign's First Quarter 2023 Earnings Call. Today's conference is being recorded. Recording of this call is not permitted unless preauthorized. At this time, I would 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 of Investor Relations

Thank you, operator. Welcome to VeriSign's first 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, Executive Chairman and CEO

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. We delivered these results while continuing to strengthen our critical internet infrastructure and complying with the high operational standards required by our ICANN agreements. For the first quarter, revenues grew 5.1% year-over-year, while EPS grew 19% year-over-year. At the end of March, the domain name base .com and .net totaled 174.8 million domain names with a year-over-year growth rate of 0.1%. During the first quarter, the domain name base increased by just over 1 million domain names. From a new registration perspective, the first quarter delivered a modest year-over-year increase with 10.3 million new registrations compared to 10.2 million last year and 9.7 million last quarter. Our renewal rates remain stable. We believe that the renewal rate for the first quarter of 2023 will be approximately 75.6% compared to the 73.3% final renewal rate last quarter and 75.9% a year ago. Having seen modest improvement in the registration trend during Q1, we now expect a domain name base growth rate of between 0.5% and 2.25% for the full year of 2023. This updated range reflects the current macroeconomic uncertainty and recent trends in our business. Our financial and liquidity position remained stable with $1.015 billion in cash, cash equivalents and marketable securities at the end of the quarter. Share repurchases during the first quarter totaled $220 million for 1.1 million shares. At quarter end, $639 million remained available and authorized under the current share repurchase program which has no expiration. As many of you are aware, we are in the process of renewing the .net registry agreement with ICANN as the current term ends on June 30. Consistent with ICANN's usual process on April 13, ICANN posted the new .net registry agreement for public comment which is open until May 25. The business terms of the agreement, such as pricing, the fees paid to ICANN, our renewal rights and the six-year term of the agreement are all unchanged. Regarding .web, on Monday, ICANN's website published a notice of a scheduled Board of Directors meeting to take place this Sunday. One of the Board's agenda items is to further consider the .web IRP final declaration. ICANN then published the minutes from two BAMC meetings, one held on January 31 which discussed the BAMC's consideration of certain recommendations related to .web. And also the minutes from a meeting on March 2 which state that the BAMC approved recommendations related to .web and requested that those recommendations be sent to the Board. We believe that this new information published this week means that progress towards a final resolution is being made but beyond what was posted, we have no updates. 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, Executive Vice President and CFO

Thanks, Jim and good afternoon, everyone. For the quarter ended March 31, 2023, the company generated revenue of $364 million, up 5.1% from the same quarter of 2022 and delivered operating income of $241 million, an increase of 7.3% from the same quarter a year ago. Operating expense in Q1 totaled $123 million compared to $122 million a year earlier. Net income for the first quarter totaled $179 million compared to $158 million a year earlier which produced diluted earnings per share of $1.70 for Q1 2023 compared to $1.43 for the same quarter of 2022. Operating cash flow for the first quarter of 2023 was $259 million and free cash flow was $253 million compared with $207 million and $200 million, respectively, for the first quarter of 2022. I'll now discuss our updated full year 2023 guidance. Revenue is now expected to be in the range of $1.490 billion to $1.505 billion. This updated revenue range reflects our expectation that the domain name base growth rate will be between 0.5% and 2.25% as Jim mentioned earlier. Operating income is now expected to be between $990 million and $1.05 billion. Interest expense and non-operating income net which includes interest income estimates is still expected to be an expense of between $35 million to $45 million. Capital expenditures are still expected to be between $35 million to $45 million. And the GAAP effective tax rate is still expected to be between 22% and 25%. In summary, VeriSign continued to demonstrate sound financial performance during the first quarter of 2023 and we look forward to continuing to deliver on our mission as well as our objectives throughout the year. Now, I'll turn the call back to Jim for his closing remarks.

Jim Bidzos, Executive Chairman and CEO

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, manage our business responsibly and efficiently and return value to our shareholders. I want to thank our teams for their dedication and focus. While there is some continuing turbulence in the economy due to macroeconomic and geopolitical issues, we see signs of stability and modest growth in our business. We're also pleased that there is progress on the resolution of .web. 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.

Operator, Operator

Your first question comes from Rob Oliver with Baird.

Rob Oliver, Analyst

Jim, a lot on the call here. So I guess just to kind of level set at the outset, maybe you can give us a sense of kind of what you thought were kind of the biggest takeaways here for you guys? And then I had a few other questions.

Jim Bidzos, Executive Chairman and CEO

Thanks, Rob. I understand this might seem simple, but what we do is far from trivial. A wise person once said that just because something is simple doesn’t mean it’s easy to execute consistently over time, which is even more challenging. I highlighted in my remarks that we successfully and securely managed our infrastructure this quarter, adding another three months to our 25-year uptime record, which is significant. We operate our business responsibly and efficiently, which is vital for taking care of our employees, managing expenses, and focusing on what we can control. Additionally, we return value to our shareholders, as we have commitments there. Our customers expect reliable and secure infrastructure operations; it simply needs to function properly. This is also what our regulatory bodies, ICANN and the U.S. government, require, as outlined in contracts and performance agreements. We believe this aligns with our shareholders' interests as well. This is what I mean when I refer to this as a solid quarter for us. It reflects our consistent goals every quarter. Fundamentally, the drivers of our business remain strong with ongoing Internet adoption and reliance, which indicates another solid quarter for us.

Rob Oliver, Analyst

There's been a lot of anticipation regarding .web, and since it's been a while without any updates, I'm trying to understand what you mentioned about the upcoming meeting this Sunday. It seems to suggest that a decision might be made soon. I'm interested to know if that's how you perceive the situation.

Jim Bidzos, Executive Chairman and CEO

Well, you're right, Rob. It has been a long time and we have always declined to speculate on ICANN's process. It is ICANN's process. So I won't speculate as to what the Board may do. We're certainly pleased that there's been progress. This information about the meetings is good to see. I can add one thing which is that when the ICANN Board passes resolutions and board meetings, ICANN typically publishes them on their website within two days. So if there are resolutions that come out of the Sunday meeting, they should be public by Tuesday.

Rob Oliver, Analyst

Thank you for the information. If I could ask one more question, I appreciate it. I know I'm not alone in this, so I want to be mindful of that. Regarding the macro situation, I noticed you adjusted the high end of the range slightly. Jim, you mentioned some stability and steady improvements in the business. Could you elaborate on that? I believe we've observed sequential improvements in domains for 13 out of the last 14 weeks. Can you discuss what you're observing in the macro environment, particularly how China’s reopening has affected your operations? Additionally, are there any geographic trends you would highlight?

Jim Bidzos, Executive Chairman and CEO

I can't point to any specific indicators, but generally speaking, we believe that the worst of COVID is mostly behind us. The recovery is ongoing, and while there are still challenges like supply chain issues and some economic fluctuations, including variable interest rates, the employment data has mixed signals. We're experiencing some turbulence, but the long-term trend remains robust. We are noticing stability in our business. The essential value of the services we offer, particularly in domain names, remains constant. Although we are navigating through this turbulence, we have observed improvements and are satisfied with our quarterly performance.

Operator, Operator

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

Ygal Arounian, Analyst

I appreciate Rob for saving some questions for me. I'll just start with a follow-up regarding the macro environment and the domains. You provided your full year guidance, raising the low end and lowering the high end. Can you discuss how the first quarter performed compared to your expectations? Are trends at the beginning of the year stronger than anticipated? What needs to happen for you to reach the high end of the range compared to the low end in terms of demand registrations as we progress through the year?

George Kilguss, Executive Vice President and CFO

Ygal, it's George. Sorry, a little echo there. But in any event, as Jim mentioned, we had modest gains here in Q1 with the domain name base growing about 1 million names here in the first quarter. When we look around our various regions, we did see the domain name base grow in pretty much all of our major regions with the exception of our China registrars; that segment was lower year-over-year. And when we look at our new units, we also saw some modest gains in new registrations, as Jim mentioned, year-over-year. The U.S. was a little bit tepid or flat here in Q1 relative to the prior year ago quarter. We did see some improvements in EMEA and the rest of the world, again, excluding China. China's new registrations were also lower year-over-year. And so, as Rob alluded to, as you're acquiring, as far as China and the reopening, I would just say it's a little early days for us. We haven't yet seen any meaningful impact there, but we are keeping an eye out for it. And I think to the extent that that reopening happens sooner than later, that clearly can help us get to the higher end of our domain name base range.

Ygal Arounian, Analyst

So I was just going to follow up on the renewal rates which had a nice bump from 4Q and really the past couple of quarters so 1Q is there. Is that more typical seasonality in 1Q? Or are you seeing that kind of trend line improve from here in the past few quarters?

George Kilguss, Executive Vice President and CFO

Yes. So as you point out, renewal rates were relatively stable year-over-year, 75.6% versus the 75.9% in the first quarter. We did see an improvement from Q4. I'd say when you look at renewal rates in a big picture, our domestic renewal rates are relatively stable, and where we see fluctuations is more in the international markets. And when we look a little deeper there, it's more in the first-time renewal rates there with international markets. And so we've seen the improvement here sequentially year-over-year. And I think renewal rates are pretty stable right now where we see them.

Ygal Arounian, Analyst

Got it. A, on the .web, I just want to see if you guys can expand on so I can't post this agreement for public comment until May 25, all the factors of the contracts are the same, nothing's really changing. What is the process from here to renewal? What is the public comment piece? What are things that might change or stand in the way? Or do you kind of expect it to just kind of work through pretty seamlessly?

Jim Bidzos, Executive Chairman and CEO

Well, typically, in this process, comments will be collected and ICANN will address the comments in response. So I think until we see that, I can't really answer your question. But the process of engaging with ICANN and coming up with a contract that was proposed, negotiated and the proposed and put out for comment with its consistent features, as you point out. That part is done. And of course, the comment as you mentioned. So until it's done and the comments are assessed and reported on by ICANN, then the next step concludes.

Ygal Arounian, Analyst

Okay. I'll ask one more question and then let someone else take over. Regarding .web, can you explain what will happen if everything goes through? What are the next steps? How long will it take for .web to become significant or for registration to commence? Please help clarify the timeline assuming we reach the conclusion of this part of the process.

Jim Bidzos, Executive Chairman and CEO

Sure. I can provide information that I believe will help with your question. Firstly, our 2023 guidance does not include any revenue or expenses related to .web. I prefer not to speculate about the upcoming Board meeting or any further developments. However, there are specific processes that need to be adhered to. Several tasks must be completed during designated security periods, and there are also trademark holder protection periods where only designated holders can acquire their protected domain names. Overall, there are multiple cycles involved that take several months. At this stage, regardless of what occurs, there will be no alterations to my earlier statements regarding revenue or expenses for 2023.

Operator, Operator

This concludes today's question-and-answer session. I will now turn the call back over to David Atchley for final comments.

David Atchley, Vice President of Investor Relations

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

This concludes today's conference. Thank you for your participation and you may now disconnect.