Q1 2020 Earnings Call
Please standby.
Good day, everyone Verisign first quarter 2020 earnings call today's conference maybe recorded according with this cost not permitted and that's pretty authorized.
It sounds like attorney.
Okay, but actually vice president of Investor Relations and corporate Treasurer. Please go ahead Sir.
Thank you operator, welcome to bear Stearns first quarter 2020 earnings call.
Due to everyone for joining our call today, and we hope to each of you were saying shakes unhealthy joining me remotely from their respective locations or Jim themselves Executive Chairman and CEO, such Truby, President and CEO.
And George Kilguss Executive Vice President and CFO. Thank you in advanced relationship, we experienced any interference delays or some quality issues during today's call.
This call and presentation are being webcast from the Investor Relations website, which is available under about Verisign unfair signed dot com. There. You'll also find our first quarter 2020 earnings release at the end of this call. It doesn't teaching will be available on that site and within a few hours replay will be called will be posted.
Actual results in our earnings release, our unaudited and our remarks include forward looking statements that are subject to risks and uncertainties that you discussed in detail in our documents filed with the FCC specifically the most recent reports on forms 10-K, entering Q, which identify risk factors that would cause actual.
So differ materially from those contained in the forward looking statements Verisign retains its longstanding policy not to comment on financial performance or guidance during the quarter. Once it has done through public disclosure.
Financial results in today's call and the matters, we will be discussing today include GAAP results and true non-GAAP measures used by <unk>, adjusted EBITDA and free cash flow.
GAAP to non-GAAP reconciliation information is appended to the slide presentation, which will be found on the Investor Relations section of our web sites available. After this call in a moment, Jim and George will provide some prepared remarks and afterward, we will open the call for your questions with that I'd like to turn the call over to Jim.
Thanks, David and good afternoon, everyone.
Lets people work to address the global challenges posed by told at 19, we are focused on protecting their people managing our operations supporting our local communities and helping small businesses through our channel partners.
Well the issues posed by Cobot 19 are unprecedented they fall within our standard preparation for disruption caused by local regional and global events. The company's readiness, Japan, which are routinely exercised include the ability to maintain critical internet infrastructure, what's most employees working remotely.
We are prepared to continue to operate all of our services, including registry services for dotcom and Dotnet and I read operations at the rigorous standards of performance I can't even in the beginning environment created by coded 19.
Additionally to help our local communities as announced in March we made an initial 2 million dollar donation during the first quarter to first responders and medical personnel in the Northern Virginia area.
The United ways worldwide, Cobot, 19 community response and recovery fund.
Simplifying and Americas Fund.
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Works to protect our people manage our operations help communities and help small business through our channel partners can be found the intercompany blog, which is available at their assigned Dot com.
Now I'd like to address.
Dates and first quarter results.
Well to reported another solid quarter for parasite in which we focused our core business expanded the domain name base and delivered consistent.
On March 27th we announced that there so I can't entered into the third amendment to the Dot Com registry agreement and to separate binding letter of intent, which formalized the new framework, where I can't and Verisign to work together on initiatives related to the securities all the and resiliency immune system.
I'm pleased with the outcome of the process and remain confident that these agreements will serve to public interest by providing pricing certainty.
Well the securities to Bill.
Calm and the critical internet functions it supports globally.
In addition, we announced in light of the global disruption caused by the called ignite.
We have registry fees for off you don't needs, including dotcom and Dotnet through the end of.
As we stated last quarter regarding letter Garden Chad.
One time and commitment to.
To provide for another $1 per year over five years, beginning on January 1st 2021, four I cant to support activities to preserve and enhance the security stability and resiliency with the BNS and the Internet.
Believes that the activities funded by this commitment will benefit the entire internet community.
Also as an update in February touched or the was promoted from executive Vice President and Chief operating officer to President and Chief operating officer, further strengthening or senior management team.
The waiting to first quarter operational highlights at the end of March the domain name base in Dotcom and Dotnet totaled 160.7 billion, consisting of 147.3 million names for Dot Com and 13.4 million names forgotten that with a year over year grates rate of 3.8%.
During the first quarter, we process 10 million, new registrations and the domain name base increased by 1.83 million names.
Although our renewal rates are not fully measurable until 45 days. After the ended the quarter. We believed that the renewal rate for the first quarter 2020 will be approximately 75.4%.
This preliminary rate compares to 75.0 achieved in the first quarter of 29 team.
And 73.8% in the fourth quarter of 2019.
By the way our press release that we just released this afternoon hasn't type, though and then the sentence that I just read in the press release.
It says that.
In the fourth quarter of 2020, instead of the fourth quarter 2019, when inventions that 73.8% renewal rate so the.
The fourth.
First quarter 20 that started the fourth quarter of 2019 renewal rate was 73.8%.
And the type of says fourth quarter of 2020.
That's getting ahead of itself I suppose.
Wanted to point out that typo.
So back to the business for 20 Twond.
We now expect a domain name base growth rate of between two and 3.75%.
Recognizing the uncertainty presented by Cobot 19. This updated range reflects a more cautious view of domain name base growth for the balance of the year.
During the first quarter, we continued our share repurchase program that resulted in 1.3 million shares of common stock repurchase for 245 million.
March 31st 2020, 826 million remain available and authorized under the current share repurchase program, which has not expiration.
Our financial liquidity position remained strong with 1.139 billion in cash cash equivalents and marketable securities at the end of the corridor.
We continually evaluate the overall liquidity and investing needs of the business and consider the best uses for our care, including potential share repurchases.
Now I'd like to turn call over to George.
Yes.
Thank you, Jeff and good afternoon, everyone.
For the quarter ended March 31st 2020.
The company generated revenue of 300, the so keep.
<unk> two person and the same quarter in 2019.
And delivered operating income of 206 million up 3% from 200 million in the same quarter a year ago.
Operating expense totaled 106 million.
But what the first quarter goal and lower from 112 million last quarter.
The sequential decrease in operating expense is primarily a result of the decrease in sales and marketing expenses in the quarter.
Actually offset by the 2 million of donations that Jim mentioned earlier.
The operating margin in the quarter came to 66% compared to 65.4% in the same quarter, though.
Net income totaled 334 million.
Compared to 163 million.
Which produced diluted earnings per share $2.86 in the first quarter this year compared to $1.35 cents for the same quarter last year.
As noted in our earnings release net income for the quarter included the recognition of 168 million of previously unrecognized tax benefits.
This income tax benefit increased diluted earnings per share a one dollar and 44 cents.
As of March 31st 2020.
The company maintained total assets of 1.754 billion in total liabilities of 3.163 billion.
That's what's included 1 billion 130 month by month of cash cash equivalents in marketable securities.
Operating cash flow for fourth quarter was 180 million and free cash flow was 169 million compared with 187 million.
78 million, respectively for the first quarter last year.
I will now discuss full year 2020 guidance.
Revenue is still expected to be in the range of 1.250 billion to 1.265 billion.
Its revenue range forecast reflects the updated domain name base growth rate of between 2% and 3.75% that Jim mentioned earlier.
The operating margin, which includes stock based compensation is still expected to be between 64.5% and 65.5%.
This guidance range reflects our expectation of incremental continued investment operational infrastructure security capabilities.
Sales and marketing expense.
Hundred 2020 [noise].
Interest expense and non operating income that is not expected to <unk> expense between 80 million and 85 million.
Just like they did range reflects lower expected interest income on cash balances due to decreased interest rates.
Capital expenditures are still expected to be between 45 million at 55 million.
We now expect all full year effective tax rate to be a benefit of between 2% and 5%, which reflects the one hundreds of 68 million income tax benefit recognized in the first quarter.
For the balance of 2020, we expect tax expense as a percent of pre tax income.
Nice mix for said it was 22%.
Cash taxes for 2020 will not be impacted does injection that public schools.
She said she just discussed will give you know expected to still be in a range of 18% to 21% pre tax income.
In summary.
So I continue to demonstrate solid financial performance during the quarter. When we look forward to continue well focused execution for the balance of 20 twice during this trade as market uncertainty.
Now I'll turn the call back to Jim for his closing remarks.
Thank you George.
Before moving to the question and answer portion of this call I'd like to acknowledge the efforts of critical staff not only here at Verisign, but everywhere the hard work and commitment there demonstrating during this crisis. We appreciate the training skill and dedicated effort and our team which remains focused on operating are critical infrastructure I hope everyone remains well continues to stay safe.
Given the participants are dialing in remotely for this call it would like to walk through a few questions, which we know where I'm. Your line before we open the call for your additional questions.
First question I'll ask him to answer against.
Could you provide more information than uncoated nineteens impact to your business in terms of your infrastructure supply chain customers demand for dot com and button that and capital allocation.
The answer is that we recognize that Verisign operates critical internet infrastructure, that's relied on now more than ever.
Acting unconditionally the infrastructure that operates registry services for dot com and that as well as our lead operations remains job one.
And he's readiness plans, which are routinely exercise include the ability to maintain critical internet infrastructure with the most employees working remotely verisign maintains multiple redundant population centers as well as hundreds of service locations distributed worldwide across six continents.
There are signs diverse DNS infrastructure is not dependent on a single type of technology vendor or power source at a given location and there are some technical teams across the globe, we're able to perform keep functions from multiple locations.
We are prepared to continue to operate all of our services, including registry services for Dotcom and Dotnet cannot read operations at the rigorous standards of performance governed by I can't even in demanding environment created by companies 19.
And it's back to our supply chain. We're monitoring these issues and are taking action where appropriate to ensure that we continue to have everything necessary for the ongoing operation of our infrastructure is important to remember that our infrastructure is not dependent upon a single type of technology vendor or power source to get them location.
With regards to our customers. These are clearly uncertain times for businesses and the economy as we discussed in our blog posts, we're taking actions to help small business through our channel partners in order to support individuals and small business is affected by this crisis parasites freezing registry prices for all of RTL bees, including common that through the end of 22.
Right.
In addition from April 2nd until June 1st Verisign is waiting what is known as the restore fee for dotcom and Dotnet domain names.
Equally when a domain registration gets depleted by a registrar there is a period of time during which the person who registered the name can pay a onetime restored to get it back before the named goes back into general availability. So protect register on she may have led to domain names laughs accidentally an opportune time.
As it relates to demand for dot com and Dot net domain names you see in today's results that we saw good demand for new registrations during the first quarter as well as an improved preliminary renewal rate that being said and as I stated earlier, recognizing the uncertainty over the duration and economic impact of the cold at 19 crisis you updated guidance.
Range reflects a more cautious view of domain name base growth for the rest of the year.
As a reminder, you can track the performance of the domain name base with daily updates on our website.
Finally regarding capital allocation recognizing that these are unprecedented times and that is a period of market uncertainties for at least the next quarter or capital returns will be more in line with historical amounts.
Second question asked and address.
With amendment three finalize when can you take price increases for Dot com.
And then that treat Conrad mystery agreement reflects certain changes agreed to under amendment 35 to the cooperative agreement with the U.S. Department of commerce, including the pricing changes, which allow limited dot com price increases in each of the last four years every six year period.
First period began on October 26, plenty 18. Therefore October 26, 2020 was the earliest state the verisign could have taken a price increase that said as we announced in March Verisign. It's freezing gets registry, probably some spot for all about top level domains, including dotcom and dotnet through the end of 2020.
In order to support individuals and small business is affected by the company's 19 pandemic.
Also as a reminder of the common net registry agreements required there assigned to provide six months' notice if any price increase.
Now the third and last question I'd like answered before we take yours are there any updates on the status of Dot web.
As mentioned on our last call we were awaiting a ruling on whether verisign could participate in the arbitration called it independent review process under I cans rules.
As announced in our 10-K in February the arbitration panel permitted verisign and new Daqo to participate in aspects of the independent independent review process, we could not have further updates at this time.
Now, we'll open the call for your questions.
As a reminder, due to the remote nature of participants we will do our best to respond to each question and we appreciate your patience, if we experienced technical issues.
Operator, we're ready for the first question.
Thank you if you would like to ask the question Pete signal by pressing star one I'm a telephone keypad figures in the speaker phone. Please make sure. Your mute function has turned off till I was trying to treat try equipment.
So in order to receive the best signal. Please refrain from smear headset to ask the question.
Well take our first question today from ROP Oliver with Baird.
Great. Thank you guys very much for taking my question and Oh God Congratulations on your promotion I.
I can you guys are already a mile of efficiency, but yes answering your questions takes it to a new level you you've taken most of mine, but I did want to just flush out the strong renewal rates, which were very strong and maybe get a bit more color on what you guys you're seeing in terms of domain activity.
I mean, the slight tweak down of the of the revised the revised range as it is fairly modest.
And I'm just curious what you guys are seeing and how that plays into your forecasting about you know any residual effect on it beats from covert 19. Thank you very much.
Hi, This is Jim I'll, Oh, yes, George debt to apps or via the substance of your question I would just say beforehand that that that there's obviously.
<unk> economic impact from Covidien 19, and that we're talking about Q1 here, but obviously this is going to last more than one quarter. So I would just say again for clarity that our out more cautious view because of this crisis is reflected in all of our guidance, but George let me.
Have you answer any questions Keith.
Sure Hi, Rob it's George from a really well with perspective, we did see window, which took up a little bit from my yoga levels.
We'll take a deeper look we see the previously renewed rate really being the driver that so we're seeing that people who had a good lead names previously I continue to hold onto those names and as we talked about before that's all that's a normal function that we've seen previously as the base agents.
As as we look at.
The domain name base performance itself, Yeah, clearly here you know mall in the first quarter calm as Jim mentioned.
We have also was a good Q1.
New units were up 2.1% or something we'll go.
And delivered 1.8 more than a she mentioned what people all the domain name base and demand.
For the rest of the year in the quarter. All we saw good strength from states registrars and let's say the.
China market was a little softer, but the strength from Las Vegas wise.
Well, yeah, postop and a little bit compensated for that helping though the double meetings to become the globally in Q1.
Great. Thank you got so much for all the great color appreciate it.
Our next question will come from Nick Jonas with Citi.
Hi, Thanks for taking my questions I'm, just two quick ones one on <unk> Dot com pricing agreement on I guess is one of the timing without I guess asking for specific timing, but.
Since you aren't taking any pricing increases of 2020 are you able to take the October 26 say early 2021, and if you work to take on slide 21.
The way they contact grades or are you done not able to take.
He taught the October tied to 21.
Ultimate could you do to prices cute increases in the same year, especially if you fall there, but that's my first one quick follow up.
Okay.
Well I think the best way I can answer your question first of all let me just said that.
The question is actually started getting to a process that we employ so rather than try to interpret that flies when he just give you some facts about that.
Under amended three that I think will be helpful answer. Your question on the amendment Threed to comically Garside is allowed to take a price increase in each of the last four years of at least six year period of up to 7% over the maximum price into proceeding pricing here.
Pricing year as defined as October 26 to October 25.
This timeframe is consistent with amended 35 to the cooperative agreement that establish the started the six year period as of October 26 2018.
So those are the sort of the facts and when the Kinex I think that should help you.
That does study that's helpful.
That's helpful.
The second one just quickly on a kind of new top level domain.
Registrar acquired a.
A registry that issue.
You know how does that answer part because they'll be how does that potentially increase or.
The risk of Ah.
Impacting dot com demand or is there is any any thoughts around that.
So I assume you're referring to go guys acquisition Newstar.
So I'd just say go Daddy <unk> has been and he has an important channel partner for us.
And we expect that to continue and users continue to see tremendous value in common that top level domains, and we know that all of our channel partner should recognize that bound as well. So I also it's important to note that vertical integration is not new several of our Registrar channel partners also operate TLD registries include.
Google, which has a Google registry and the main dot com registrar that owns donuts, which is a large registry in each case. These registrars continue to be important channel partners for Verisign.
Got it thank you for taking my question.
Pleasure.
Well take our last question from Sterling Auty with JP Morgan.
Yes, Hi, guys, George maybe start with you if I look at the revenue results in the quarter, it's stronger than I would've been anticipated base on the.
The 1.8 billion that means added so can you comment was there something to either the seasonality of the net additions that helped revenue or was there any other onetime revenue or non domain related revenue that maybe help the quarter.
Hi, there was no I'm gone domain name revenue that was material that we didn't have to present in the fourth quarter I think what maybe impacting what perception is we had a very very strong fourth quarter.
So we had quite a few deals come in the fourth quarter and that's just waterfall and give you the first quarter and and helping us getting older detailed into into one.
Okay, Great and then on the go Daddy acquisition and use our let's look at it. This way does this change or influence what you might think about doing with web and vertical integration or perhaps in terms of a future consolidation of of registries.
I I'd really like I don't see that it really has any impact on in thinking about that as I said this is not be.
She is not the first time that registrars become a registry.
There are several of them out there and those relationships work buying but.
I think there's no update on bad so it's.
Early to speculate about that web per se, but them.
At this point.
No no real comment to say about that I mean, we thought.
We'd certainly discussed.
The ability to.
Be vertically integrated but wanted to say amendment 35 to the cooperative agreement clarified that the vertical integration limited to calm registry was probably meant to apply to calm.
So we can't be vertically integrated column that clarification is now included independently.
To the comp registry agreement and that the net registry agreement doesn't have a similar clarification.
Okay, and then on dot wed be mentioned they didnt have is coping 19 delaying the process.
Or any other color you could provide would be helpful.
I don't believe it has the the proceedings in getting this arbitration or actually have even proceeding.
'cause it 19 prices, even the appearance of called at 19, I have always been telephonic.
And so and it's it's unlike a.
Appearances in court, where.
People need to show up and physically be there I believe there is a and upcoming hearing out later this year that is at least planned to be in person, but I can't speculate about what would happen there, but everything that's gone on thus far.
Has been telephonics, so thus far there's been no slowdown beyond that I can't speculate about what will happen.
So you mentioned that there isn't in personal on later this year so is that.
Is that kind of give us an indication that there would not be resolution.
<unk> Dot web you know, let's say over the next quarter or so.
Hi.
I can't speculate about exactly what will happen when I. Just noted that there was I'm hearing that that was at least plant to be in person hearing I don't know that subject to change or not I I'm not familiar at that level of detail with the rules the flexibility or the plans are or what impact did come with 19 crisis may have.
On that particular plan I, just know that things that preceded that so far because again all of the proceedings of literally every one it's been telephonic.
Got it and last question you talked about the supply chain what is the capacity utilization in the bare side network. Yeah look like today do you have ample overhead to you know to handle some of the spikes that we're seeing and some of the traffic data coming out to our company and other shows some pretty.
Significant internet usage, you know how is the resiliency problems to performance in capacity utilization within Verizons network.
We we are we're very pleased with the performance of our network under increase traffic loans. Its designed with a considerable excess capacity and as I stated earlier, we're where we plan for situations like this which I'm certainly the not just from the working from home environment perspective.
Also found that increase traffic capacity excess capacity to deal with traffic load says I always been a design criteria in our network and that weren't comedy and your traffic without issues.
Got it thank you guys.
Thank you.
That will conclude today's question and answer session I'm, not trying to comments or what the mr. do it actually for any additional closing remarks.
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.
That does conclude today's conference. Thank you for your participation you may now disconnect.
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