Earnings Call Transcript - VRSN Q1 2021

Operator, Operator

Good day, everyone, and welcome to VeriSign's First Quarter 2021 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 and Corporate Treasurer

Thank you, operator. Welcome to VeriSign's First Quarter 2021 Earnings Call. Joining me are Jim Bidzos, Executive Chairman and CEO; Todd Struby, 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'll 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 Forms 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

Thanks, David, and good afternoon, everyone. I'm pleased to report another solid quarter of performance for VeriSign. During the first quarter, we saw increased demand for our domain names across most regions as businesses continue to expand their online presence. During the first quarter, we processed 11.6 million new registrations, and the domain name base increased by 2.8 million names. At the end of March, the domain name base in .com and .net totaled $168 million, consisting of 154.6 million names for .com and 13.4 million names for .net, with a year-over-year growth rate of 4.6%. Although renewal rates are not fully measurable until 45 days after the end of the quarter, we believe that the renewal rate for the first quarter of 2021 will be approximately 75.9%. This preliminary rate compares to 75.4% achieved in the first quarter of 2020 and 73.5% last quarter. As we look forward for fiscal 2021, we now expect a domain name base growth rate of between 4.0% and 5.5%. This updated range reflects the strength we've witnessed in new additions to the base and our outlook for the balance of the year. During the quarter, we continued to deliver solid financial results while maintaining, investing in and evolving our critical infrastructure and complying with high operational standards required by our ICANN agreements. Our critical infrastructure enables us to reliably and accurately provide the DNS navigation service people around the world rely on for commerce, education, healthcare, and person-to-person connection. Our financial and liquidity position remained stable with $1.18 billion in cash, cash equivalents, and marketable securities at the end of the quarter. Share repurchases during the first quarter totaled $173 million for 876,000 shares. At quarter end, $910 million remained available and authorized under the current share repurchase program, which has no expiration. We continually evaluate the overall liquidity and investing needs of the business and consider the best uses for our cash, including potential share repurchases. Regarding .web, we have been informed that the independent review process panel formally declared the IRP hearing closed on April 7, 2021. Under the applicable arbitration rules, the IRP panel should now issue a final decision within 60 days from that date. As a reminder, an IRP, under ICANN's bylaws, is for the purpose of ensuring that ICANN followed its own policies and procedures when making decisions. Our expectation is that following the resolution of the IRP, the ICANN Board will make the final decision on the delegation of the .web TLD. The updated guidance we're providing today does not include any revenue or expenses related to .web. And now I'd like to turn the call over to George.

George Kilguss, Executive Vice President and CFO

Thanks, Jim, and good afternoon, everyone. For the quarter ended March 31, 2021, the company generated revenue of $324 million, up 3.6% from the same quarter in 2020, and delivered operating income of $210 million, up 2% from $206 million in the same quarter a year ago. Operating expense totaled $113 million compared to $116 million last quarter and $106 million in the first quarter a year ago. The year-over-year increase in operating expense is primarily a result of incremental and continued operational investments in personnel and infrastructure. The operating margin in the quarter was 65% compared to 66% over the same quarter a year ago. Net income totaled $150 million compared to $334 million a year earlier, which produced diluted earnings per share of $1.33 in the first quarter this year compared to $2.86 for the same quarter last year. As noted in our earnings release, net income for the first quarter last year included the recognition of $168 million of previously unrecognized noncash income tax benefits, which increased diluted earnings per share by $1.44. Operating cash flow for the first quarter was $198 million, and free cash flow was $192 million compared with $180 million and $169 million, respectively, for the first quarter last year. The year-over-year increase in operating cash flow was primarily driven by the increased volume of new registrations and renewals, partially offset by higher cash payments for operating expenses. I'll now discuss our updated full-year 2021 guidance. Revenue is now expected to be in the range of $1.315 billion to $1.330 billion. This narrowed and increased revenue range forecast reflects the updated domain name base growth rate expectation of between 4% and 5.5% that Jim mentioned earlier. The operating margin is still expected to be between 64% and 65%. This guidance reflects our expectation of incremental and continued investment in our operational infrastructure and personnel in 2021. Interest expense in nonoperating income net is still expected to be an expense of between $88 million to $92 million. Capital expenditures are also still expected to be between $55 million and $65 million. The GAAP effective tax rate is still expected to be between 20% and 23%, and we expect the cash tax rate for our 2021 fiscal year to also be within the same guidance range. In summary, VeriSign continued to demonstrate sound financial performance during the first quarter, and we look forward to continuing our focused execution throughout 2021. Now I'll turn the call back to Jim for his closing remarks.

Jim Bidzos, Executive Chairman and CEO

Thank you, George. In closing, I want to acknowledge the team here at VeriSign for their hard work in maintaining and operating our critical Internet infrastructure, even during the challenges of working remotely during the pandemic. Now we will open the call for your questions. Operator, we're ready for the first question. We will go first to Rob Oliver of Baird.

Rob Oliver, Analyst

Great. First one, Jim, for you. Just clearly, macro trends appear better with you guys taking up the range on domains on the revenue side. I know you mentioned in your prepared remarks that, that was sort of strength across the board. And I was wondering if you could add a little more context to that, maybe both from a geographic perspective to see if there are any particular pockets of strength, as well as maybe to talk about some of the dynamics that you believe are driving or what you guys are seeing driving that increased domain activity. And then I had a follow-up.

Jim Bidzos, Executive Chairman and CEO

Okay. Thanks. Well, first of all, I think the recovering economy is certainly contributing to increased Internet use, and that includes additional domain name usage. A good part of the strength came from the U.S., but it was very broad-based in virtually all geographic regions. We do have limited visibility recall through our channel. But certainly, the ads this quarter were broad-based across all regions, driven, I think, primarily by the recovering economy and the economic activity that comes with it. But also recall that Common Net are trusted brands, and as people continue to get online, our ads are certainly going to benefit from it, and they did this quarter.

Rob Oliver, Analyst

Got it. Okay. And then George, just one follow-up for you. I know you guys, going back a couple of quarters, have talked a bit about the need for increased operational spend for your infrastructure and R&D and security and things like that. I guess a couple of questions. How do you feel you are in that trajectory? And I guess, by your implied increased revenue guide for the year for maintaining the margin, you guys are looking to probably spend a little bit more. And just wanted to get a sense for you spending on the same things and how you're thinking about that this year.

George Kilguss, Executive Vice President and CFO

Yes, thank you, Rob. Like last year and continuing into this year, we are investing in cybersecurity and infrastructure, focusing on both personnel and new software tools. Our headcount for the quarter reached 918 people. We are progressing with our plans this year and will maintain our investments in these areas. Therefore, the guidance range of 64% to 65% for operating margin remains appropriate.

Operator, Operator

We will now go to our next question, and that will be from Nick Jones with Citi.

Nick Jones, Analyst

Great. I have two. I guess the first one, can you just expand a little bit on the timeline for .web? 60 days from the seventh, a decision needs to be made, and then it sounds like there potentially is additional time after that. I guess how should we be thinking about the 60-day timeline in the context of when .web will be delegated and then when .web can kind of start being issued to consumers?

Jim Bidzos, Executive Chairman and CEO

Well, first of all, the announcement from the IRP panel indicated that they concluded their hearing on April 7, which started the 60-day timeline you're referencing. They have completed the hearing, and we anticipate that a final report will be issued in that period. This should ideally represent the final step in the litigation process. We do not comment on the ongoing litigation, but according to their announcement, by our next quarterly discussion, we should have much more information to share. Until then, it's too early to discuss when and how .web will be delegated and launched for consumers. As I mentioned, we expect that once we receive the IRP report, the ICANN Board will move forward with the .web delegation. At that point, we will be able to provide more details about our timing. Until then, it’s premature to speculate. At least we know we should have a lot more to discuss when we speak again next quarter.

Nick Jones, Analyst

Great. I see that the domain name industry is showing a decline in TLDs, approximately $4.5 million or slightly less sequentially, while .com continues to grow. Can you discuss the factors contributing to the share gains in .com gaming and TLDs, and why other TLDs are experiencing a decline? What are your thoughts on these trends?

Jim Bidzos, Executive Chairman and CEO

Well, so let me just say, first of all, that we did understand that this broad-based bit of growth in ads that we had this quarter. The registrars are reporting, this is growth from small businesses and individuals, and it's broad-based. The competitive registries, we don't have insights into their particular businesses and their exact numbers. I'll just simply say that as people are getting online, Common Net are trusted brands, and we continue to see that growth. The registrars are having success with them, and we're pleased with that growth in the quarter.

Operator, Operator

And we will take our last question from Sterling Auty of JPMorgan.

Sterling Auty, Analyst

So just following along that line of questioning, the 11.6 million gross new registrations in the quarter was up nicely versus what you saw last year. You pointed to both small business and consumers, but I'm wondering what you might be hearing back from the registrars in terms of the mix. How much of this might be tied to the continued elevated new business application data that we see versus maybe other types of consumer use cases for domains?

Jim Bidzos, Executive Chairman and CEO

Yes. George, do you want to comment there?

George Kilguss, Executive Vice President and CFO

Yes. I would say we don’t have a detailed breakdown from all the registrars, but it appears there is strong demand from businesses wanting to establish an online presence. Over recent years, registrars have invested significantly in enhancing the utility of domain names and simplifying the process of building websites for consumers. Consequently, registrars are increasing their spending on advertising and marketing aimed at small businesses to help bring them online. This trend seems to be beneficial for the domain name industry. Regarding the economy, registrars express optimism, believing this positive trend will continue for the remainder of the year. When asked about it, they indicated that they feel the economy is opening up, which supports their optimism.

Sterling Auty, Analyst

And then if you look at the total number of new TLDs, it's been in kind of a steady decline from when it hits the peak back in, let's say, September of 2020. How much of that is just kind of failed marketing programs? And have you heard from the registrars that they just kind of, back to Jim, your comment, .com and .net are trusted domains, are you just feeling like you're starting to regain share? And is there more marketing dollars being put behind .com and .net at this point?

Jim Bidzos, Executive Chairman and CEO

Let me ask George to share his thoughts on that. Before he does, I want to mention that we’re in a highly competitive marketplace. We haven't discussed country code TLDs, particularly those that are commercialized, like .co and .tv. Many of these are neither new gTLDs nor legacy TLDs, which means the market is larger than we usually recognize. It’s important to acknowledge that there is a broader perspective that we typically don’t cover and have limited insight into. Many of these TLDs are already commercialized and should definitely be considered. George, would you like to add anything? I think the other part of your question was about marketing.

George Kilguss, Executive Vice President and CFO

I don't have any detailed information on the marketing activities of the new gTLDs. However, if you check ICANN's public records, you'll find that the decline in new gTLDs seems to be concentrated in a few TLDs that experienced significant growth a year or two ago. As these TLDs come up for renewal, they may not be seeing the same renewal rates. I don't have any specific insights beyond what I can gather from the ICANN data, but the decline appears to be limited to just a few TLDs that had robust growth in previous years.

Sterling Auty, Analyst

Got you. And then for your own marketing programs here for 2021, can you give us a sense, within the context of the guidance you've given around margins? How should we think about the marketing spend, and in light of a potential favorable ruling on .web, what should we be thinking about the plans to put the marketing muscle behind the launch of .web?

George Kilguss, Executive Vice President and CFO

So this is George, Sterling. So as far as .web and marketing muscle, I just think it's too early at that point. The guidance that we provided this year for both revenue expense, as Jim mentioned, doesn't include any revenue or expense associated with .web. Once we have the TLD delegated, and we've got our plans in place, then we'll be able to communicate that. As far as our own sales and marketing programs, you saw us spend a little bit more in sales and marketing in the first quarter compared to last year. I think that's more about some of the programs we curtailed in 2020 in the first quarter as a result of the pandemic coming on and people working from home. This year, we're continuing to execute on our direct marketing plans as well as the other programs that we rolled out at the beginning of the year. And as far as I can tell, it's really business as usual for us here this year as well.

Sterling Auty, Analyst

All right. Great. And last question because I get it quite a bit. I kind of know probably how you're going to answer, but I want to ask in a public forum anyway. You made a price decision for .com, which has been announced. However, it has been a while since you last adjusted the price for .net. What are your thoughts about what you might do with pricing for .net in 2021 or 2022?

Jim Bidzos, Executive Chairman and CEO

Yes, Sterling, you've asked this before, and I have to give you the same answer. We don’t provide guidance on pricing. However, I would like to highlight that .net is competitively priced. At this moment, .com is priced lower, but we do not offer guidance on future pricing decisions. As you mentioned, there is a price increase for .com that will take effect in September.

David Atchley, Vice President of Investor Relations and Corporate Treasurer

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

And again, everyone, that does conclude today's call. We'd like to thank you again for your participation. You may now disconnect.