Q2 2020 Verisign Inc Earnings Call
Welcome to Verisign second quarter 2020 earnings call.
Brent is being recorded.
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Mr. David.
And investor relationship.
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<unk> Treasurer. Please go ahead Sir.
Thank you operator, welcome to Verisign second quarter 2020 earnings call. Thank you to everyone for joining our call today and we hope to each of you are staying safe and healthy joining me remotely from their respective locations or Jim Jones, Executive Chairman and CEO, John Stroup, <unk>, President and CEO.
Oh, and George Kilguss, Executive Vice President and CEO.
Thank you and advance for your patience, if we experienced any interference delays or sound quality issues during today's call.
This call.
<unk> are being webcast from from the Investor Relations website, which is available under about Verisign on Verisign Dot com. There you'll also find our second quarter 2020 earnings release.
The end of this call the presentation will be available on that side and within a few hours. The replay of the called will be posted.
Natural results in our earnings release or unaudited and our remarks include forward looking statements that are subject to the risks and uncertainties that we discussed in detail in or documents filed with the FCC specifically the most recent reports on form 10-K and 10-Q.
There are signs is not a big financial poor performance work guidance during the quarter unless it is done through public disclosure.
Financial results in today's call matters, and we'll be discussing today include GAAP results in two non-GAAP measures used by Verisign, adjusted EBITDA and free cash flow.
Non-GAAP reconciliation information is appended to the slide presentation, which can be found on the Investor Relations section of our web sites available. After this call.
In a moment German George will provide some prepared remarks and afterwards, we'll open the call for your questions with that I would like to turn call over to Jim.
Thanks, David and good afternoon, everyone.
With the increased demand for and reliance on Internet services during the cold at 90 prices, the secure and reliable operation of our infrastructure becomes even more importantly.
Focus remains on our mission, which is to ensure the availability of our critical infrastructure.
We have been aren't prepared to continue operating all of our services, including registry services for dotcom and Dotnet and I read operations at the rigorous standards of performance and availability governed by.
Most of their implies continuing to work remotely.
Focus on mission has emphasized by the fact that the company last week March 23 years up 100% availability of the Dot com and Dot net domain name resolution system. This achievement as a result at the dedication and expertise and our team and our specialized infrastructure.
Also as part of our response to the Cobot 19 crisis, we announced in March a freeze up the wholesale prices in all of our geographies, including Dot com through the end of 2020.
Today, given the current environment, we're further extending that price for Easter the wholesale prices and all of RTL days through March 30 of 31st 2021.
Additionally, we are also extending the waiver of the wholesale restore fee for expire domain names through the end of 2020.
Now I will address our quarterly results due to 2020 was another consistent quarter for Verisign, and which we focused on our core business expanded the domain name base and delivered solid financial results.
Regarding the second quarter operational highlights at the end of June the domain name base in dotcom and Dotnet totaled 162.1 million.
Consisting of 148.7 million names for Dot Com and 13.4 million names for dot net with a year over year growth rate of 3.8%.
During the second quarter, we processed 11.1 million, new registrations and the domain name base increased by 1.41 million names.
Although renewal rates are not fully measurable until 45 days. After the ended the quarter. We believed that the renewal rate for the second quarter of 2020 will be approximately 72.8%.
This preliminary rate compares to 74.2% achieved in the second quarter of 29, King and 75.4 last quarter.
For 2020.
We now expect a domain name base growth rate of between 2.75% and 4%.
This updated range, which recognizes the ongoing uncertainty presented by Copel 19.
Reflects the strength, we have seen a new registrations and our expectation for domain name base growth for the balance of the year.
During the second quarter, we continued our share repurchase program that resulted in 730000 shares of common stock repurchase for $150 million.
At June Thirtyth 2020, $676 million remained available authorized under the current share repurchase program, which has no exploration.
Our financial and liquidity position remained stable with 1.2 billion cash cash equivalents and marketable securities at the ended 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.
Now I'd like to turn the call over to George.
Thanks, Jim and good afternoon, everyone.
For the quarter ended June Thirtyth 2020, the company generated revenue of 314 woman up 2.6% from the same quarter in 2019 and delivered operating income of 271.
2.5%.
From two I didn't 2 million in the same quarterly never go.
Operating expenses totaled 108 million up for 105 million in the second quarter goal and up from 106 million last quarter.
The sequential increase in operating expense is primarily a result increased sales and marketing spend during the quarter.
The operating margin in the quarter came to 65.8% compared to 65.9% in the same quarter a year ago.
Net income totaled 152 million.
Compared to 148 million <unk> earlier.
Which produced diluted earnings per share of $1.32 cents in the second quarter this year compared to $1.24 cents for the same quarter last year.
Operating cash flow for the second quarter was 250 million and free cash flow was $204 million compared with the 165 million and $154 million, respectively for the second quarter last year.
Operating cash flow in the second quarter benefited from lower cash tax payments.
The permitted the full of approximately 50 million can do you guys federal tax payments until the third quarter 2020.
Additionally, the deferred revenue balance increased during the quarter as a result of the strength of new registrations.
I will now discuss full year 2020 guidance.
Revenue is now expected to be the range of 1.255 billion to 1.265 billion.
This revenue range forecast reflects updated the navy schools between 2.75% and 4%, but you had mentioned earlier.
Operating margin.
Which includes stock based compensation is still expected to be between 64.5% and 65.5%.
This guidance range reflects an expectation incremental continued investment you know operational infrastructure security capabilities and sales and marketing expense during the remainder of 2020.
Interest expense and non operating income that is now expected to be an expense of between 75 million to 80 million.
This updated range reflects the additional 5 million dollar gain recognized during the second quarter related to the school security services business.
Capital expenditures are still expected to be between 45 million, that's 55 million.
We still expect that full year effective tax rate to be a benefit of between 2% and 5%, which reflects the 168 million income tax benefit recognized in the first quarter.
The balance of 2020, we still expect tax expense as a percent of pretax income.
Tool like that 2% in 22%.
Cash taxes for 2020 are now expected to be in a range of 18% to 20% of pre tax income.
In summary.
Parents aren't continue to demonstrate sound financial performance during the second quarter and we look forward to continuing on focused execution in the second after 2020.
Now I'll turn the call back to Jim for his closing remarks.
Thank you George I'd like to say again that our priorities or our mission of ensuring you availability of our critical infrastructure and the safety of our people.
Internet usage has increased during the pandemic and reliance on online services, even more so.
Many people who are working from home isolating it online services are critical and more businesses and individuals and never dependent on internet infrastructure for their livelihood.
A record of dotcom and Dotnet DNS availability speaks volumes about our commitment to our mission.
Back to acknowledge the team here at Verisign for their hard work and maintaining our uptime record even during a pandemic.
Given the participants are dialing in remotely for this call we'd like to walk through a few questions, which we believe around your mind before we open the call for your additional questions.
First question with today's announced extension that the price freeze how should we think about the limited pricing flexibility you have for dot com.
First as a reminder, wholesale price for Dot Com domain names has been unchanged at $7, an 85 cents for eight years since 2012.
Also as a reminder, our wholesale prices for dot com are governed by our registry agreement what I can retail prices at the end user actually pays for a domain name to satisfy the retail channel, which is the registrars who have no regulation at their pricing. Additionally, there was an unrivaled unregulated secondary market for domain names.
Well that background I Wonder and then three to the Dot Com Registry agreement Verisign is now permitted to raise the wholesale price of Dot com domain names by up to 7% in each of the final four years of every six year period.
Then the current six year period, the first year in which we may increase the wholesale price ends on October 25th 2021 and.
We expect to effectuate the dot com wholesale price increase before that October 21 date 2021 days.
Second question are there any updates on the status of dot wet.
Answer as we noted last quarter a final hearing is currently scheduled to begin on August threerd in the independent review process or RP.
That affiliates initiated in November 2018.
That hearing is scheduled to take place minor video conferencing.
A reminder, verisign is not a party and desire p. proceedings that was granted the rights to participate in certain limited aspects.
Also as a reminder, ERP under icons bylaws is for the purpose of ensuring that I can follow with its own policies and procedures when making decisions.
Our expectation is that following the resolution of the IP I cant board will make a final decision on the delegation of the Dot web GLP.
Question three can you help me better understand what is impacting increase in new registrations tend to lower preliminary quarterly renewal rate for the second quarter.
Most of the strength in new registrations comms getting from registrars in North America, while we don't have the same visibility that retailers do based on feedback from our retailers. They are seeing increased demand from small businesses getting online the strength was partially offset by slower activity from registrars in China.
As it relates to the preliminary quarterly renewal rate the year over year decrease is primarily related to a lower overall first time renewal rate year over year. The overall previous renewal rate remained relatively consistent.
Question for.
Are there any updates to the donations you announced earlier this year.
Yes, there are during the first quarter, we made an initial $2 million donation to organizations assisting those impacted by covered 19 locally and nationally during the second quarter. We made a cash contribution of $1 billion to equal Justice initiative and supported their work.
We are actively working on an expansion to our Verisign cares program beyond the $3 million accompany donated during first half of the year again with a focus on providing assistance to that was impacted during the coded banking crisis I'm sure you have questions and I can only say that these additional efforts should be further along by the time, we talk to you again next quarter.
Yeah.
That will open the call for your questions operator, we're ready for the first question.
Yes, Sir thank you.
<unk> <unk> <unk> start flying on your telephone keypad.
Yes.
Please make sure your mute function, that's turned off to a liar signals range equipment.
Also in order to received a signal please refrain from using your handset asking question.
And well now take our first question some Oliver with Baird.
Great. Thank you guys for taking my question then Jim Thanks for all the color.
If I can be probably little bit more.
Remarkably the domain growth is it's back now above where it was pretty cold winter.
But the lower end of the range <unk>, which is which is.
Pretty remarkable you mentioned some of the drivers there you know U.S. strength.
Can you maybe flush that out a little bit more and then China weakest, maybe being responsible for the lower renewal wage rate can be perhaps get a little bit more color on that both geographically as well as some of the economic puts and takes around smbs.
And what you guys are seeing there and then I had one follow up thanks.
Okay, Rob I think.
I think we can try.
First of all let me just say that them basically this is the strength going from predominantly North America with a small businesses getting online as the geography, I think we have limited visibility, but let me invite George to comment further.
Yes. Thanks, gentlemen, thanks for your question, Rob So as Jim mentioned in Q2, the goods. These strengths in gross additions or new registrations, a lots America I will also say a media.
Patrick will also a strong they also a improved in the quarter year over year.
And in China was a little bit a lower as far as well they try to gross adds a they were similar to all the gross add levels. We had last quarter, there, but I think were down from year ago levels as far as Oh renewal rates are you mentioned they were down about 1.4% in total year over year.
And we saw that all the decline primarily manifests itself in a little a first time renewal rates and they were down also in most markets Oh that we keep the Fred people going on.
And as Jim also mentioned, you know where offend registry, we've talked before we don't have direct visibility into the end user. So it's a little more difficult for us to understand the economic impact.
Per se, but in general or gross adds were very strong this quarter. Our net adds were good they were 1.4 million.
Was that race learn a lot to if not slightly above oh third quarter or I'm, sorry, second quarter 2019, when they totaled 1.3 million.
Thanks, George I appreciate it and then just a follow up and I think it you don't [laughter] did it makes a lot of Santander.
Answer to the price increase given the pandemic and thought so I guess I would just ask if there's anything beyond the obvious in terms of the rationale there and then you do pop draw a line and that you guys will avail yourself of the price increase.
For which I believe what gets you guys to four years of the final six years, just want to make sure we understand that properly and if there's anything else you can add to flush that out. Thank you very much gentleman.
Sure. Thanks, Rob I don't think like you ever need to add anything you summarized it accurately we are taking another.
Freeze of prices through March 30, Onest 2021 that is related to the current environment.
[noise] the data the first year period of our.
Of our available price increase is October 25 to 2021, and you accurately stated that we expect to effectuate dot com wholesale price increase before that date.
I think we're ready for another question operator.
Well, Matt counseling setting.
Hey, Thanks for taking my question or the first one just as you extend.
Yeah, the waiver for Ah Ah, we start fees are female what the implications. There is there kind of a building group of their names that Oh.
Bob.
They could potentially I guess you guys. Good synergy revenue from these restore fees that maybe fall off.
Well you didn't recognize those is churn I guess, if he can walk through kind of the dynamic of the other restarts either and I.
They provide a little bit, Colorado or like a build up coming out of one follow up after that.
Okay, Let me invite Tottered George to answer your question.
Yeah.
Todd Nick first off that the impact of waiting to restore phases is immaterial to our financials and its accounted for in.
The revenue guidance, we provided a day, there's a period of time after a registrar deletes at domain name, that's known as the redemption Grace period, It's a 30 day period.
The registrar has a chance to get the name that Dan before it goes into general availability. So it's those names we're talking about its already been delete it.
By the registrar and so that's restart the as an addition to the standard registrations in renewal fee associated with the domain name or the wall and Ah, we don't disclose our wholesale what store fee.
Just charged to the registrar and of course, they determine what the actual retail we store he has and we thought we seen many registrars pass on the waiver from a retail perspective. So anecdotally, we we believe that small businesses and individuals are benefiting the Harley.
Got it. Thank you again I, just I guess, one follow up on operating margin and what kind of.
Increased SMB interested in having a digital presence or is there potential leveraging yes, so the marketing bucket kind of throughout the rest of the year as maybe you don't need to advertiser, albeit aggressive.
And that Opex line. Thanks.
Yes, Thanks, Nick I.
I mean, clearly every quarter, we're looking at our expenses and making sure. We're spending the appropriate involved so I mentioned the categories to drive profitable growth and support the business you know sales and marketing expense.
Sequentially was up and we do have plans to continue marketing activities throughout the year, but those costs again are all factored into the guidance that we provided but we do expect to continue to invest in sales and marketing given for the rest of 2020 here.
Great. Thank you.
Well take our last question Simon.
<unk> P. Morgan.
Yeah. Thanks, guys couple of questions. So the new guidance for <unk> domain gross for the full year. What did you factored in for the last two quarters in terms of the pace of new registrations and the renewal rate.
George.
Yeah. So so we don't guide to gross registrations or renewal rates, we've got to that that zone increase of clearly we've done a pretty well here through the first half of the year.
And which we expect that add up you continued to ban for for the products, but as far as you know what will happen specifically to the war right into into a quarter well gross adds we'll we'll wait and see recall, we publish a the gross adds a new giving information in the domain name base, Oh, let's say.
You can see what is going on there, but our full year guidance is the guys why they don't break it accordingly.
All right, but maybe just a follow up and try to different way at least qualitatively.
No I think if we look at some of the previous economic cycles will get to this point, we tend to see increased business closures and I think we saw that manifests itself in the renewal rate in the June quarter. All right are you at least you know incorporating the idea of lower renewal rate in the back half and maybe a higher elevation.
And in new registrations just qualitatively.
Yeah, we don't forecast.
Our model or.
Oh the results of that way, we do a lot of algorithmic all computations and models that are proven fairly accurate over the prior period and we'll use that algorithmic model to the guy that's not only for a while the quarters here, but also not uploading it's been fairly reliable for.
Yes, and so.
Actually methodology I will that be out it's very hard to go down and forecast or demand all by in end user or by registrar or about a country level because we look at those results, but Ah Ah data is so voluminous that we have to use other just to help us do that.
And Ah any algorithms, which is like I said it before the goal to be accurate are giving us the range that we put out here for bad.
Does that make sense can you give us what the number of domain names up for renewal in the September quarter looks like and how does that compare against what you just had in June and what does it look like versus September a year ago.
All right, yes so.
The number of names that were up 14 rule in the second quarter 2020 was 35.1 million a.
We expect a 34.2 billion to go up to more next quarter in the fourth quarter when I go back.
Never go in the second quarter 2019 that was closer to 43.3 billion and the third quarter. All of 2019 was 32.6 million.
Hi, Great and then last one and I I do checking gets me answer, but I still want to ask it anyway, because it's been a topic of a lot of investor conversations that I've. That's like you mentioned that you are going to take advantage of the price increase before the October or you know deadline no you have the six month window in terms of announcement.
But based on the condensate given our unique being opened the possibility that might at least now the price increase prior to that March.
Timeframe that and extended the price freezes until.
I'm not entirely sure I understand your question, but I think maybe the answer can be determined by.
Having the merely state that as you point out there is a six months' notice that's required to effectuate a price increase before it. So we have to provide six months' notice and obviously, we will do that.
The data that [noise] the date of the expiration of the first year of the for price increases available in the six your period as October 25 to 2021, and we are of course in a by virtue of today's announcement or our freezing wholesale prices and all of RTL. These through March 31st.
2021, so I think a little bit of math that could answer your question.
Yes, he said certainly up quite a somewhere right.
Absolutely not having sex though.
Yeah, I think that's okay. This is the sneak one last one is going well daddy's acquisition of them start registry assets no brings a let's say a stronger financially sound company into the registry operations you know how do you view their entrance into the registry space and.
I didn't think that might influence consolidation of registries moving forward.
Well go Daddy has been it is always has been an important general partner for US obviously never since all the way back to when Bob Parsons started and built that company.
We certainly expect there to continue a end users see tremendous value and dotcom and dotnet in those geographies and Oh, we know that our general partners recognize that value as well.
I just should point out the vertical integration is not new several of our other of our Registrar channel partners also operate TLD registries.
Google has Google registry.
Dot Com has donuts with over a 200 T O vsan and each of those cases. These registrars continuing to be an important channel partner to Verisign for LTL days.
I expect those relationships to continue.
Right. Thank you.
Thank you Sir.
That does conclude our question and answer session I like to turn the conference back over to Mr. actually for closing remarks.
Thank you operator.
Three relations department with any follow up questions from this call. Thank you for your participation. This concludes our call have a good evening.
And once again that does conclude today's conference maybe come off and your participation you may now disconnect.
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