VRSN - NASDAQ

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.

Thank you, operator. Welcome to VeriSign's first quarter 2023 earnings call. Joining me are Jim Bidzos, Executive Chairman and CEO; and 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 2 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 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 6-year term of the agreement are all unchanged. Regarding .web. On Monday, ICANNs 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 publish the minutes from 2 BAMC meetings, 1 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 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.

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 nonoperating 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.

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 Instructions] Your first question comes from Rob Oliver with Baird.

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.

Okay. Thanks, Rob. I know this may sound simple like I'm trivializing but what we do is anything but trivial. By the way, a wise man from Omaha said that just because something is simple doesn't mean it's easy to do and to do it consistently and over a sustained period of time is even more difficult. So I mentioned in my remarks that what we accomplished in the quarter as we reliably and securely operated our infrastructure. We added another 3 months to a 25-year uptime record. That's really significant. We responsibly and efficiently run our business. That's always important. That's how we take care of our people. That's how we control expenses. That's how we focus on things that we can control. And number three, we return value to our shareholders. We certainly have obligations there. So this is what our customers want. They want reliable and secure operation of our infrastructure, of course, they want it to work. It needs to work. This is what our governing bodies, ICANN and the U.S. government want the contracts and the SLAs and the performance requirements make that clear. And we believe that this is what our shareholders want. So I guess that's what I mean when I say that this was a solid quarter for us. That's what we -- that's consistently what we strive for every quarter. And I would say that -- so those are the takeaways. I would just add that the fundamental drivers of our business are Internet adoption and reliance and that fundamental long-term trend line is strong. So another solid quarter.

Okay. There's been so much -- and .web has been so long since we've had news. So I guess just trying to read into here what you told us about this meeting this coming Sunday. It sounds to me like that could be an indication that there's some decision would be rendered imminently here. Just curious to know if that's the way you think about it.

Well, you're right, Rob. It has been a long time and we have always declined to speculate on ICANNs process. It is ICANNS process. So I won't speculate as to what the more 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, when it does pass resolutions and board meetings, ICANN typically publishes them on their website within 2 days. So if there are resolutions that come out of the Sunday meeting, they should be public by Tuesday.

Okay, really helpful. If I could squeeze in 1 one. I appreciate it. I know I'm not the only one anymore, so I want to be conscious of that which is great. Just around the macro -- I mean, you guys did tweak down the high end of the range a little bit. At the same time, Jim, you talked a little bit about the stability and kind of steady improvements, my language, not yours necessarily in the business. Can you talk about -- I think we've seen 13 the last 14 weeks or something with sequential improvement in domains. Can you talk about what you're seeing in the macro and specifically around how China reopening impacted you guys? And anything else relative to geographies that you would call out here?

Well, I don't know that I can point to any specifics that would give any indication. I can tell you that our general view is, first of all, the worst of COVID is certainly mostly behind us. And the long-term effects, the recovery, there's certainly still some turbulence associated with that recovery supply chain issues, etcetera. There's certainly some economic turbulence interest rates were up. They're down a little. They're up again. Employment data is good, not so good. It's good. So that's the kind of turbulence we're referring to. That long term -- that long trend line is a strong one that we watch. But we are seeing what I would call some stability in our business. The fundamental value of the services that we provide, the utility of domain names is unchanged. And so I think we're just sort of going through that turbulence and it's affecting us. But we have seen an improvement and we're happy with the quarter.

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

Appreciate Rob saving some questions from me. Maybe I'll just start on just a follow-up on the macro and the domains. You guys gave the full year guide and you're raising the low end, you're lowering the high end. Can you just talk about how you -- how 1Q came in versus where your expectations were? Are trends stronger to start the year than you thought? And what are -- what needs to happen to get to the high end of the range versus the low end of the range in terms of demand registrations as we work our way through the year?

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 and 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.

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?

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 said -- I 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.

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 comments 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?

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 totally 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.

Okay. And then I'll ask one more and then ask someone so I'll let him -- I'll take some for him, too. So on the .web, hopefully one step closer here, can you help us understand what happens, let's say, let's just assume that it goes through and it's all said and done. What are the steps from there? What happens? How long does it take for -- to become meaningful or for .web registration to start opening up? Maybe just help us -- help them just think about the time line for what happens if we just assume that this part of the process finishes.

Sure. I can give you some information that I think will be helpful to your question. One is that there are -- first of all, there is nothing in our 2023 guidance that we provided that includes any revenue or expense for .web. And I think I don't want to speculate about what's going to happen at the Board meeting Sunday and I certainly don't want to speculate beyond that. But there are processes that are required to be followed. There are a number of things that have to be done. There are a number of security periods where certain things have to be done and then there are some other trademark holder protection periods where they're exclusively allowed to come in and acquire their protected domain name. So there's certainly a number of cycles that are all roughly collectively, it's some number of months. But I think at this point, whenever anything happens, if it does, that there will be no change in what I just said about the revenue or expense in 2023.

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