Q3 2020 Verisign Inc Earnings Call
Good day everyone.
Third quarter 2020 earnings call today's conference is being recorded.
According to this call is not permitted it must be authorized.
At this time I'd like to turn the conference over to Mr., David actually.
<unk> and Investor Relations and corporate Treasurer. Please go ahead Sir.
Thank you operator, welcome to <unk> third quarter 2020 earnings call. Thank you everyone for joining our call today, and we hope that each of your staying safe and healthy when you meet rebound from their respective location Virginia itself.
<unk> chairman and CEO.
Striby, 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 Verisign Dot com.
There you will also find third quarter 2000, <unk> earnings release.
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.
<unk> 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 FCC specifically the most recent reports on forms 10-K and 10-Q there are signs.
There are signs that not a big 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 to non-GAAP measures.
Adjusted EBITDA and free cash flow.
GAAP to non-GAAP reconciliation information to depend to the slide presentation, which can be found on the Investor Relations section of our website at <unk>. After this call.
In a moment, Jim and George will provide some prepared remarks and afterwards, we will open the call for your questions with that I would like to turn the call over to Jim.
Thanks, David and good afternoon, everyone.
That's a good word student lending revenue for the quarter of 3.1% from the same quarter a year ago.
Before we dive deeper into our results I want to speak just a bit about told at 19 and how we're addressing it with <unk>.
With the increased demand for the <unk>.
I'm not sure it's just starting to kick in.
During block, where she better infrastructure has become even more important.
Our focus remains on our mission, which is to ensure the availability of our critical internet infrastructure for the benefit of Internet users.
We continue to operate a registry services for Com and net and how we operate.
Operations rigorous standards of performance and availability covered by it looks like yet well start.
Starting speech and you don't work remotely.
Now I'll address your question.
<unk> third quarter 2020 was another consistent quarter progressed.
We focused on our core business expanded the domain name <unk> solid financial results Rick.
Regarding third quarter operational.
At the end of September the domain name base in Dr. <unk> <unk> that totaled 163.7 million consisting of 150.3 million night.
After 2.4 million names for dot net with the year over year growth rate 4%.
During the third quarter, we processed 10.9 million, new registrations and the domain name base increased by 1.65 million names.
Although renewal rates are not fully measurable until 45 days after the end of the quarter. We believed that the renewal rate for the third quarter of 2020 will be approximately 73.4%. This preliminary rate compares to 73.7% achieved in the third quarter of 2019 that 72.8% last quarter.
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The 2020, we now expect the domain name base lightweight between 3.54 per se.
Updated range reflects the strength, you're seeing a new registrations and our expectations for domain name base rates for the remainder of the year balanced with the ongoing uncertainty presented by cold at night.
During the third quarter, we continued our share repurchase program that resulted in 823000 shares of common stock repurchase for 170 million.
At quarter end. This 506 million remained available authorized under the current share repurchase program, which has no expiration date.
Our financial and liquidity position remained stable with 1.15 billion, Josh cash equivalents and marketable securities at the end of 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.
And now I'd like to turn the call over George.
Thank you, Jeff and good afternoon, everyone.
As mentioned.
Quarter ended September Thirtyth 2020.
The company generated revenue of 318 million up 3.1% year over year and delivered operating income of 207 million compared with 206 million in the same quarter a year ago.
Operating expenses totaled 111 million up from 140 million in the third quarter, a year ago and up from 108 billion last quarter.
The increase in operating expenses reflects our continued investments throughout the year in personnel to support our <unk> cyber security and infrastructure initiatives among other factors.
The operating margin in the quarter came to 65% compared to 66.7% in the same quarter, a year ago and 65.8% last quarter.
Net income totaled 171 million compare.
Compared to.
The 154 million a year earlier, which produced diluted earnings per share of $1.49 cents in the third quarter. This year compared to one dollar and 30 cents for the same quarter last year.
As noted here, you're not going to lose that.
Net income for the third quarter included a previously unrecognized income tax benefit of 24 million, which increased diluted earnings per share or 21 cents and resulted from a reduction in their subject pool for uncertain tax positions.
Operating cash flow for the third quarter was 140 million free cash flow was 125 million compared with 208 million and 100.
7 million, respectively for the third quarter last year.
Operating cash flow and free cash flow in the third quarter were both lower mainly due to the permit a deferral of $52 million in U.S. federal tax payments until the third quarter, which we mentioned in our last quarter's call.
I will now discuss updated full year 2020 guidance.
Revenue is now expected to be in the range of 1.262 billion to 1.267 billion. This rather.
This revenue range reflects the updated domain name base growth of between 3.5% and 4% that you mentioned earlier.
The operating margin, which includes stock based compensation.
Now expected to be between 64.75% 65.25%.
This guidance range reflects our expectation of incremental and continued investments.
You know operational infrastructure and security capabilities as well as sales and marketing expenses during the fourth quarter of 2020.
Interest expense and <unk> operating income, but it's still expected to be an expense of between 70 $580 million.
Capital expenditures are now expected to be between 45 million to $50 million.
We now expect upsell your effective tax rate to be a net benefit of between 6% and 8%, which reflects the 168 million and 24 million of previously unrecognized income tax benefits recorded in the first quarter and the third quarter respectively.
Cash taxes for 2020 are still expected to be in the range of 18% to 20% of pre tax income.
In summary, there are some continued to demonstrate sound such performance during the third quarter and we look forward to continuing our focused execution.
Seem to have 2020.
Now I will turn the call back to Jim for his closing remarks.
Thank you George I'd like to.
I'd like to say again that our priorities continue to be our mission of ensuring the availability to critical infrastructure and the safety of our people.
Internet usage has increased during the pandemic and reliance on online services, even more so so many people who are working from home and isolating at home online services are critical and more businesses and individuals that ever depends on internet infrastructure for their livelihood, but like to acknowledge the kids get an airplane for their hard work a penny Howard is critical.
Internet infrastructure, even during a pandemic.
We'd like to walk your two questions, which we believe were on your borrowing before we open the call for your additional questions.
First question are there any updates regarding your plans to use the limited pricing flexibility you have for dot com.
No updates to what we said last quarter, we still expect to effectuate the dotcom wholesale price increase before October 20 2021.
Just for all of our T.L. These are frozen through March 31st 2021.
Second question are there any updates on the status of Dot web.
As we noted last quarter final hearing was scheduled in August the hearing took place in early August the participants, including Verisign submitted that post hearing briefs vine.
A final decision from the panel maybe issued later this year or early next year as a result.
As a reminder, there upside is not a party every buyer p. proceedings, but was granted the right to participate in certain limited aspects.
So as a reminder, that high RP other <unk> bylaws is for the purpose of ensuring that I cant follows its own policies and procedures when making decisions.
Our expectation is that following the resolution of the RP I cant board will make a final decision on the delegation of the Dot web T.L.D.
And now we'll open the call for your questions operator were ready for the first question.
Thank you I would like to ask a question because you are pressing star one on your telephone keypad.
Using a speaker phone. Please make sure your mute function is off to allow your signal to reach our equipment also.
Also in order to seek the best signal. Please refrain from using a headset to ask a question.
Take our first question from Rob Oliver with Baird. Please go ahead Sir.
Great. Thank you very much. Thank you guys for taking my questions.
Appreciate it Jim just to start with you.
With you you know just just overall I'd love to get your thought on the domain environment. You know clearly coming out of go get a lot of concerns about small business small business failure and you guys said you know consistent leap from that time, when you took down or the guy.
Domain growth have ratcheted it back up and came in at four this quarter pretty impressive. So just was wondering if you could maybe step back and talk a little bit about what you're seeing in the environment helped a lot of new business starts and it would seem that that would be offsetting some of the kind of macro concerns that you know that may be weighing on small businesses or maybe the holding onto their web sites.
Good to hear your thoughts there and then and then I had a quick follow up thanks.
Okay. Thanks for the question well I'll make a comment or two and then I'll bye bye George its hard to comment as a as they see that market. How do you develop over the crisis I'll just say that I mentioned in my remarks, obviously people are making greater use of the internet a wide variety of reasons for their livelihood or.
Sort of a likelihood [noise] in starting new businesses, others may not be bearing as well there are a lot of complex reasons that people Register I keep and delete domain names and there is a complex that's sort of analysis that leads to where the increase does growth resulted in the quarter overall and the.
The numbers speak for themselves, but it was a solid quarter of additional growth. There's clearly additional internet usage, there's clearly additional growth in the domain name space as a result of that.
And it's quite clear as you see in our results and as you observed and Oh, George talked all about the economy that you'd like.
Oh sure. This is George Kilguss, Jay as you mentioned, we had a good quarter you registrations were up 10.9 million, which was up about 980000, a new name sort of year ago, but very similar to the last.
The last quarter.
And the trends that we're seeing here that usually have done similar to last quarter or two that we saw a striking registrations from all North American registrars video registrars and Ah you populate the stores.
Maybe that's from a snapshot of those registrations during the quarter was similar to Q2 level. However, they were down a year over year, but overall, a very solid quarter continuing to see good demand here in the third quarter like and I think as Jim said those are good secular trends.
We're seeing that people are seeing the value in the utility of the of it having a website and get it got delayed name to better service their customers young and maximize their ecommerce objectives.
I think we're all we're helping to sports that are those those small business isn't doing that and those trends at least oh. So far this year had been had been good for us.
Great. Thanks, guys. That's helpful. My follow up George This is for you I think you mentioned in your prepared remarks a.
Well comment relative to Q4 sales and marketing expenses and just wanted to just ask.
Ask on that anything you out of the ordinary.
Out of the ordinary relative to the kind of standard practice on investing in your.
Investing in your channel around you know dot com growth than any color you can add there would be great. Thanks very much.
Yeah, Rob I would say nothing out of the ordinary all I think if you look at the past couple of years, we had that tended to spend a little bit more on the sales and marketing area in the fourth quarter just based on the timing. It always does a this year, we had some activity that they're going to do over the year, but with other pandemic.
And in full slowly you talked about pivoted on some of those those efforts and we've repositioned the deal in the fourth quarter. So I don't.
I don't think there's anything unusual there just the normal management of all marketing activities throughout the year.
Great. Thanks again.
Thank you we'll take our next question Nick Jones with Citigroup.
Great. Thanks for taking my questions I guess, a two the first one I guess a little bit more on dot led how can you expand a out a decision that's I guess, how many either later this year early next year I guess in terms of because this kind of a definitive decision that touched does matter to arrest or is it more of a decision that the projects that the matter.
Her longer just any.
I guess color how to think about the timing of of what we're waiting to hear.
Well, we're waiting to hear the final resolution.
That I RP and just as a reminder, the therapy. This form of arbitration that's used in the eye care community actually involves a two parties primarily that's affiliates is essentially the play dip here and I can give to defend it and as I mentioned in the question.
And the question that I asked and answered this is about whether I cant follows its own policies and procedures. When it makes decisions. So that is what the panel will decide and our expectation as I said is that following back resolution.
I Cant Board then that the matter will be returned I cant sports process, which is to make a final decision on the delegation of adopt web T.L.D.
T L b.
So that's a that's the expectation as in any litigation that said, it's it's really not proper to speculate on those outcomes, obviously I want something that's pending but we we do know and the process, what's pending here, which is a a decision by the panel.
And that they have the vinyl hearing what schedule you know that was a help and of course as a as a participant but not there yet but again so to speak we were there at the table. So we're waiting I hopefully by the end of this year or early next year, we will hear from the panel they will answer that the the allegations.
By the plaintiff affiliates I guess I get another matter should be added to the Ikea Board resolution on on the Dot web issue, that's our expectation.
That's what we hope to see and then we'll certainly share with you what we though it beyond that.
Great and then and then a follow up just one follow up on I guess, just dot com market share. So there's some third party data out there that kind of indicates dot com is regaining share despite their kind of getting more.
You know I guess, maybe I'll leave a lot why do you think that it <unk> you know that what you're saying can you speak to kind of you know any trends you're seeing there you know, maybe making dot com or popular versus utilities, I guess, just any thoughts or color around that would be great. Thanks.
Well I'll, just say that I mean, I got to know what data you're referring to so I can't really address that specifically I couldn't tell you, though that the market does not cause us all day of Dot Com and then.
Luke T L d's or alter that T.L.D., there's a larger driving market country code TLD like dot C.N. for try to dive deeper Germany. Many of those have been commercialized like doxey out from Columbia that coal is the commercialized C.L.D. that many many organizations and individuals that chosen to brand himself.
Dawn and there are large number of does so the market is a far broader than that kind of a good brand and its performance is strong and I'm, Brad just drugs like the dotcom brown, because it helps them get sound, but beyond that without seeing what you're referring to I really can't comment on it I would just caution that.
I'm very.
Very often when I said people talk about the market. They haven't really considered how how large that market is there I would also refer you to a two.
Two our domain. They brief I think there's a a good survey of all of the T. I'll be there and I think if you look at that you might.
You might get a slightly different picture so I hope that's helpful.
Got it thank you for taking my questions.
Certainly.
Thank you well now take our last question from Sterling Auty with JP Morgan.
Yeah. Thanks, a lot guys right, you're going back to the domain name growth.
In the context of the guidance that given for the full year. It would seem to indicate is slowing down year over year, new registrations [noise] embedded in that so I guess my question is do you think that there were some one time benefits from <unk> that you're not factoring into the guidance for the fourth quarter or.
What else is kind of influence in floating how you kind of guidance here for full year.
Yes, Joan this is George.
Well, that's what are you most or all there just simply less less selling days that I would put it in the <unk>.
In the fourth quarter, but typically we see the fourth quarter, a new registrations are gipsies, Italy also all while keeping it all a lot also I can't there's still some uncertainty with regard to lucky coated and ER and how that Oh that disease may pick up here globally and so.
All of that caution is also in the guidance that we're providing.
Understood and I know that dot com as a fan registry, but based on your interactions with registrars and industry participants ladies.
Any sense as to what percentage of domains that are coming on board have ecommerce attached to them at this point or any other type of granular breakdown.
Yeah. As you mentioned is highly as a civil registry. We don't we don't quite have that bad that detail. We do you have to be registrars that they are seeing more so.
More small businesses all the standup web sites and a girl that portion of their business and which I think is good for our business, but as far as the granular detail I don't have that for you I'm sorry.
And that kind of brings I don't know that you guys have seen it but the census Bureau has a number of business applications. It looks like there was a significant spike in late summer coming into the fall and based on that comment I Wonder if you're seeing some of those.
Come in or is there the potential that there might be a delayed tailwinds from maybe new business formation.
Well speaking for myself I haven't seen that data I I I don't know that we correlate to any data like that to domain name registrations and our common that zone I think registrars are probably the first place that there'd be some indication there that I think clearly we have some indicate.
That that new business starts.
On the R&D up and that Oh that their agrees that debate domain name registrations in the U.S. associated with that so I think in general the answer to your question is yes that that there's nothing that I can think of the data that would disagree with what you're saying, but any any any detail or correlation I looked at the habit.
Got it and one housekeeping George what are the what's the number of names up for renewal in Q4.
In Q4 or 34.8 million.
Okay, Great and very last one you commented a little bit so, it's but I want to just put a fine point, you know given bringing down the high end of the operating margin.
For the for the full year, what would you say the incremental spend that you're now factored into that guidance is going to that maybe wasn't there before or is that the wrong way to look at it.
Well as I think I mentioned getting lots of care remarks, you know the increased expense year over year is only going to increase headcount or we've added about 34 or 36 heads since 36 said since the beginning of the year and a lot of those additional headcounts are healthy.
People that we have focused on cyber security and let's say software network engineering functions and those show up in our R&D and our DNA functions and so at the end of the quarter on head count was about long had been paid employees or so.
So that was up from 872 at the end of the year. So I guess the only thing I'll say is look at least you know we came out of a 2018 with a similar level of headcount what about not how do people we've been as high as a thousand employees in the business. If you step back and look at the prior years.
We've been in a GAAP.
GAAP operating expenses range. It will all go hungry they take longer than 12 million a quarter, but clearly in 20 or 20 here in Htwo liking I we.
Got out of Oh, we sold the VSS all security business, we had some moving pieces as we are reorganizing the company, but you know.
I'd like now we're at about 111 load for the quarter GAAP operating expenses so.
We've been in this range for a long period of time, whereas we always all while managing the expenses of the business to meet the needs of the business and and I think we've been doing that Doe reasonably well over the past seven or eight years and they were going to continue to do that but the catch your question. It's really been this additional headcount that we've got.
Did you know secured instability initiatives.
Understood and necessarily Yep Yep.
Yes, sorry, I would just add to that now there's always a baseline of funding that we make available and increased just simply because a huge aspect of what we do is cyber security, which is very difficult to predict the threat environment is constantly evolving it's generally always intensifying in increasing and so a lot of their concept.
The investments we make in training education, new hires people technology, a hardening our infrastructure is proving its resiliency, but are ongoing in addition, there are.
Sponsors that we have to make to meet threats that are anticipated. These just our routine and happen all the time, but the precise nature, but the precise response and therefore the price the precise budgetary aspect of those bonds is difficult to predict what you're saying is is our best estimates based on a long history of experience of doing these kinds of things in it.
It's generally been researching that research evolves that we recently identified for example, a huge number its clear that were that were out coming into the root servers, a massive spiky queries or what are the result of our intentional activity, which without browser a behavior that we were able to actually highlight why now.
And help rectify and eliminate a huge amount of volume that was that was it'd be a offered to other it services, there's quite a bit of this research that we do publish we've done work and then coolidge's I'm busy a lot of Buddhist rotation that helps manage and improve performance and security across the crossing that we have.
Outside the <unk> that are the source of block that's another sorts of cyber attacks, we share those with different companies government agency.
The teams that are working on that are always evolving growing training hiring additional folks. That's our primary mission, we addressed that many bought ways, but it's our top priority so that shouldn't be a surprise that at times, you're going to see increased spending on it. It's just the nature of the business that we're in and that's our expertise and that's our vision.
Makes sense. Thank you Jim I really appreciate that.
Sure.
Thank you and that concludes our question and answer session I would now like to turn the conference back over to Mr. Ashley for any additional or 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.
And that does conclude today's conference. Thank you all for your participation you may now disconnect.
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