Q4 2020 Verisign Inc Earnings Call

Good day, everyone and welcome to Derek on fourth quarter and full year 2020 earnings call. Today's conference is being recorded recording of this call is not permitted unless preauthorized at this time I'd 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 bear signs fourth quarter and full year 2020 earnings call. Joining me are Jim <unk> Executive Chairman and CEO, Todd Stroup, President and CEO, and George Kilgus Executive Vice President and CFO.

This call and presentation are being webcast from the Investor Relations website, which is available under about their sign on Verisign Dot 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 up on the call will be posted finding.

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 SEC specifically the most recent reports on forms 10-K and 10-Q.

Verisign does not update financial performance or guidance during the quarter unless it is done through a public disclosure.

The financial results on today's call and the matters, we will be discussing today include GAAP results and to 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.

Carl.

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.

Thanks, David and good afternoon, everyone.

This past year has presented challenges and uncertainty for all of US. There's also been a yellow on mission has never been more relevant.

We expect the majority of the year with most of our teams working remotely.

During this time, we continue to maintain and bats D N and evolved their infrastructure, which enables us to reliably accurately provide the critical DNS navigation service people around the world rely on them more than ever.

Thomas Education health care and person to person connection.

While complying with the high operational standards as required on hard category. Thanks.

Thanks to the dedication of our team and the resilience of the specialized networks.

We extended our record of BNS availability to over 23 years during 2020.

We will continue on focus as it appears we will be working remotely well into 'twenty and 'twenty one.

Turning to our results I'm pleased to report another consistent quarter holds a solid year of operational excellence from the company.

As I mentioned in 2020, we marked more than 23 years without interrupting availability on the gas on DNS for Dot com and dot net.

We also processed 42 points one day.

Registrations.

There had been about $1.265 billion and generating free cash flow of 687.

During the full year 2020, we repurchased three 7 million shares for 735 million.

Effective today the board of directors has increased the amount of gas on common stock authorized for share repurchase by approximately 747 day to a total of 1 billion authorized.

And available on the share repurchase program, which has no exploration.

Our financial and liquidity position remain stable with 1.17 billion in cash 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 on.

At the end of December but the main line based in Dot com and Dot net.

Total $165 2 billion, consisting of 151.8 million names for that call on 13 4 million names for back net.

With a year over year growth rate of 4%.

During the fourth quarter, we processed $10 5 million, new registrations and the.

Maintain base increased by 146 Megabits.

Although renewal rates are not fully measurable until 45 days after the end of the quarter, we believe that the renewal rate for the fourth quarter of 2020 will be approximately 73, 5%.

This preliminary rate compares to 73, 8% achieved in the fourth quarter of 2019, and 73, 7% last quarter.

Looking to 2021, we expect the domain name base growth rate of between two 5% and four 5%.

As announced in today's earnings release, we have given notice of a price increase of 54 cents. So they hang on wholesale price for dot com domain names, which raises the price from $7 85 to $8 on 31 cents effective September 1st 2021.

This represents the first wholesale price increase of Dot com domain name since 2012, and there's an alignment with all of my day.

Regulated pricing flexibility permitted under our registry agreement.

This announcement is consistent with our statements over the last several months that we expected to effectuate a increase on a wholesale price of Com domain names before October 25th 2021.

We believe dispositions com competitively in the marketplace.

Now I'd like to turn the call over to George.

Thank you Jim and good afternoon, everyone.

For the year ended December 31 2020.

The company generated revenue of 1 billion 265 billion up two 7% from 2019.

Operating expense totaled $441 million and it was up three 6%.

From last year.

For the fiscal year. The company delivered operating income of $824 million up two 2% from $806 million a year ago and a full year operating margin at 65, 2%.

Fourth quarter revenue.

Came to $320 million up three 1% year over year.

Operating expense totaled $116 million compared to 111 million last quarter and $112 million in the fourth quarter a year ago.

The quarter over quarter increase in operating expense was primarily a result on increased sales and marketing expenses.

Fourth quarter operating income totaled $205 million compared with 199 million in the same quarter of 2019.

The operating margin in the quarter came to 63.9%, which was unchanged from the same quarter a year ago.

Net income totaled $157 million compared to 148 million a year earlier, which produced diluted earnings per share of $1.38 in the fourth quarter. This year.

Compared to $1.26 for the same quarter last year.

As noted in our earnings release.

Net income for the fourth quarter of 2020 included recognition of a $12 4 million of previously unrecognized income tax benefits.

Result of the lapse of certain statutes of limitations.

Income tax benefit increased Q4 diluted earnings per share by 11 sets.

Operating cash flow for the fourth quarter was $195 million and free cash flow was on $189 million compared with $194 million and 185 million respectively for the fourth quarter last year.

I will now discuss full year 'twenty 'twenty one guidance.

Revenue is expected to be in the range of 1.300 billion to $1 $320 million.

This revenue range forecast reflects the domain name base growth rate of between two 5% and four 5% that Jim mentioned earlier.

The operating margin is expected to be between 64% and 65%.

This guidance range reflects our expectation of incremental and continued investment in our operational infrastructure in 2021.

Also this range reflects the annual 4 million dollar payment to ICANN, which began this year to support activities to preserve and enhance the security stability and resiliency of the DNS and the Internet.

Interest expense and non operating income net.

You would expect it to be an expense of between 88 million to $92 million.

Capital expenditures are expected to be between $55 million and $65 million.

This range reflects our ongoing investment.

Infrastructure as well as some expected 2020 capital spend that moved into 2021.

The GAAP effective tax rate is expected to be between 20% from 23%.

We expect the cash tax rate for 2021 to also be within the same guidance range.

And suddenly.

Verisign continued to demonstrate sound financial performance throughout last year.

We look forward to continuing our focused execution in 2021.

Now I'll turn the call back to Jim for his closing remarks.

Thanks George.

Well I can say again that our priorities continue to be on mission of ensuring a secure reliable and accurate Appalachian about political on about infrastructure on the safety of our people.

I also want to acknowledge once more the team here at their sides of their hard work and maintaining and operating our infrastructure even during the challenges of working remote or on pandemic what was that.

So I have to take it almost entirely behind the scenes that are not well known but there are many hundreds of dedicated professionals to develop maintain and operate our purpose built networks and have done so without service interruption flow for 23 years.

Even today some people may think we still operate and that's that's all certificate authority on P. J I business of parasites predecessor, RSA data security built one all the way back to that.

Six that business was solid in 'twenty cash that we haven't frequently tightened I'll focus on our core mission of secure Internet directory on registration services ever sales more information on just what we did today can be found on our homepage at Verisign Dot com.

Now we'd like to walk through a question, which we believe is on your mind before opening the call for your additional questions.

Many of you have asked are there any updates on the status of that well.

As we noted last quarter on final hearing took place in early August 2020, we expect a decision from the panel in the coming weeks, but we don't control the timing and the panel is not operating under any deadline and as a reminder, bear sorry, it's not a party of Xyrem proceedings that was granted the right to participate in certain limited aspects also on.

As a reminder, in IOP under I guess bylaws for the purpose of ensuring that I can't fall of its own policies and procedures. They make these decisions. Our expectation is that following the resolution of the RFP. The Ikea on board to make a final decision on the delegation of about web T. L. D. The guidance. We provided today does not include revenue or expenses related to Dol.

Now, we'll open the call to your questions operator, we're ready for the first question.

If you are using a speaker phone. Please make sure your mute function is off to a mile you said not to reach our equipment on.

So in order to recruit the best signal. Please refrain from using their headset to ask a question, we'll take our first question from Rob Oliver with Robert W. Baird.

Great. Thank you guys for taking my questions I appreciate it.

George I was just hoping we could walk us maybe through a little bit more of the thought process on the expense structure.

Structure for 'twenty, one and then also I wanted to.

Maybe give some color on that I know.

You guys had talked a little bit in recent quarters about.

Getting some more on the security side.

Certainly look depression, given guidelines that happened in December but wanted to get a sense for where you are on that spend whether the bodies that you need to hire have been hired and then also on the Capex comment just wanted to understand what it was that they came out of last year and into this year.

Get a little bit more color on the on the Capex, which is higher than in our model Luckily.

Okay.

Hello.

Yeah on where you guys have.

Okay.

Yes, we heard your question George.

I don't know if you're on mute, but just double checking.

Oh, I'm sorry, yes.

So yes. Thanks, thanks for the question Rob.

Hey, congrats on brilliantly place George.

That's okay I'll be like that.

But.

Yeah, we've been talking about this most of the year that we've been making additional investments in both our infrastructure and our cyber security initiatives.

And you see this bearing out in our numbers as both R&D and G&A are up.

In those areas and we continue to invest in personnel and our hardware and software tools.

Those areas are.

As far as 2021.

We expect our expenses to be similar as a percentage of revenue next year for most of the categories that we report on with the exception of cost of revenue, which we expect will increase slightly as a percentage of revenue for next year.

As far as capital expenditures.

I stated in my prepared remarks, our capital expenditures are expected to be between $55 million and $65 million and that again reflects reflects ongoing investments in our infrastructure as well as some expected 2020 capital spend that slipped into 2021, we.

As I mentioned, we guided.

Between 55% to $55 million last year, we got at between $45 million to $55 million at this time. So this year's weighted is slightly higher than last year, but.

We feel these investments are appropriate to continue to ensure the security and stability.

Of our infrastructure.

Great. That's helpful. Thanks, George appreciate it and then Jim just one for you if I may.

Just.

Obviously, the price increases so I'm glad you guys are able to get those through.

On the demand outlook for the year.

Wide range.

Just wanted to maybe get your thought process on that I guess, probably understandable given a lot of macro economic puts and takes but just wanted to get your sense and I think you said two and half to four and a half I appreciate that.

I'm sorry did you just one clarification.

Right.

Sure.

Love some clarity on your thought process on on that range.

Yeah.

I'm not sure I can give you any more detail beyond that I guess.

Maybe I don't understand your question, let me Oh, yes.

Yes.

Got you got you mean at.

The low end of that range.

That's a growth number that would be.

Low GDP growth.

Yes.

There are other elements.

We saw some pull forward potentially or maybe we didn't have due to COVID-19.

We saw from domain activity, where you know.

You guys ended up the year.

With the high end of your you're above your range of your initial goal.

So big guidance.

Which I think nobody would have expected probably in the spring so.

Is there a sense that we have a bit of a hangover on that from that on domains on does that why the low end would be factored in just any color there if possible would be great.

Yes, George somebody maybe I can go ahead, and Europe, a little bit.

So I would say in general the trends that we're seeing in the domain name base are similar to the trends we've been seeing the last few quarters on that registrars from both North America and EMEA.

Are all performing very well and that growth has been slightly offset by some slower activity from registrars based in China, but as you saw in the fourth quarter, we had a pretty solid quarter, all delivering about $10 five.

$5 million legislations, which was up from 10.3, a year ago and.

And during the year as we talked about we have saw some increased demand in those regions from.

People looking to get on line.

New business starts and introduce new functionality, creating the registrar community from website builders as we look into next year.

We still see those trends continuing however.

We're not sure how the market will react as we come out of this work from home environment.

And so we're being we typically do have a range just physical cause why going into the year a.

January is off to a pretty good start but.

Right now we sit here, that's our expectation between do it halfway toward on a per cent and as we go through the year, we'll update you on the on that range.

Yes.

Yes.

I understand the question I guess I D.

If the idea is to sort of associates on macroeconomic considerations.

And somehow relate them to the guidance that we gave I think.

Probably the only thing I can really say about that is that there's obviously on some.

Some uncertainty associated with how Covid is going to play out in 2021 day.

A lot of ups and downs and gives and takes on that that certainly is a factor that affects it but as George said.

There's a lot of factors that go into the range.

But I would say if you wanted one macroeconomic indicators, there's obviously some uncertainty around COVID-19, that's probably the single biggest influences on that range.

Okay. Thank you again.

Yeah.

Well go ahead and take our next question from Nick Jones with Citi.

Great. Thanks for taking my questions I guess first and this is this is probably splitting hairs.

But could you have taken another penny on the price increase or is it because like it's slightly over 7% you can't get any.

Clarity there.

And then I guess a follow up.

Oh go ahead I'm sorry.

Got it right.

The problem is that if you apply Oh, we don't we don't we.

We don't Bill in fractions of a penny and the actual increase came down but they 0.9 on that to the right of the decimal point in petites and so even though the number was a ninth we rounded down because otherwise we'd be slightly over 7%.

Got it got it that's helpful.

And then on.

Covid kind of threw a wrinkle I think.

To touch on how all of US as we're thinking about the price increases how should we think about the cadence from here I mean.

It's just something it's like you kind of expect to happen annually is there room to compress the time frame and take them earlier I guess, just how are how are you thinking about the cadence of the price increases over the next few years as the you know the Windows open.

And Nick This is this is George.

We are on mute sorry.

Viewed as a tricky.

I'll, let George where you end up basically we don't guide to the future price increases on today's announcement is only for an increase in com domain registration fees.

That's effective and began on September one of this year beyond that obviously, we don't guide George do you want to comment. Please go ahead.

Those are going to be my comments, Jim as well.

Yes, sorry, I was on mute there.

Okay on one.

One last question just kind of as you know COVID-19 restrictions maybe loosen.

Certain markets vaccines are rolling out are you seeing any change in kind of the trends we saw on 'twenty 'twenty in terms of people.

F N b's, especially on the digital solutions people moving into online solutions.

Is there any meaningful changes in trends kind of early in this early in the year and in certain regions.

Just for the U S in terms of.

Registration or anything to kind of give you pause.

As to kind of how the reopening may impact these trends. Thanks.

Okay.

Yeah, Nick this is George.

I don't see any materially difference in it.

Thank God that we saw last quarter.

Even through January are the only thing I'll just mention is we do have a little seasonality in our business from time to time, and we do get impacted by holidays.

And the Chinese new year. This year is a little bit later I think it was in.

In late January last year, and it's in early February of this year, but other than that to answer your question nothing yet that we've seen to change our views.

Okay.

Great. Thanks for taking the question.

And we'll take our final question from Sterling Auty with Jpmorgan.

Yeah. Thanks, Hi, guys. When I saw that you announced the price increase on like damn what am I going to ask on the call now that you announced the increase.

Yeah.

[laughter] well that is that the question.

Of course that alright, so let's.

Let's start with renewal rate be.

Down 20 bps year over year anything that you saw in particular this year, whether it be I noticed that over the last month. There was a couple of days, one where I think the main base was down 93000. Another one day was down like 102, sometimes I, usually equate that you saw.

The registrars going through and doing some purges. So any anything like that that may have impacted the renewal rate in the quarter.

Yeah.

So as you pointed out when he was right.

It would be flat year over year, I think 73, 5% in the fourth quarter versus 73, 8%.

In the fourth quarter 2019, so.

So relatively similar.

We did.

Have a very strong 2019, our performance from China based registrars.

And as we've talked before as a group we tend to see that first time renewal rates come out a little bit lower and as that cohort with renewing this year that did.

Put a little downward pressure I would say on our first time renewing rates for dinner.

On the international group as a whole, but again I think overall 73, 5% was a pretty good.

A pretty good result.

No that makes sense you made the comment that dot web neither the revenue or expenses are factored into the guidance. If we just say hypothetically that you get the approval and you can move forward to getting it up and running what should be some of the cost.

Levels that investors should expect.

Get it launched and perhaps some of your thoughts around the marketing muscle in terms of spend that you might put behind that at launch.

Sterling I think.

I guess.

With all of the the process part of the ERP completing over weighted.

I think I can say and I'll repeat what I said earlier, which is that where we hope that what weeks away from something from the panel will certainly closer as time moves on but I think it's just too early to give any indication of a time line from there to the launch of lab or any of the cost associated with it.

It's just kind of early.

Okay and then last question from my side is.

In the U S. If you look at the new business applications. They spiked late summer early fall. So think August September timeframe, but they are still elevated in the in the fourth quarter, especially on a year over year basis, if I think about that relative to your new domain registration from 10 five.

New registrations have been up relative to kind of historical known norms for for a while now is there a correlation there and is that actually gives you some confidence that you know.

With the economy opens back up on the back of vaccines, and perhaps we could see even faster domain growth in 'twenty one.

Yeah.

So we've seen that same data.

And as you know, we're a scene registry so.

We do get some insights from our registrar partners and from what we hear from them, yes, our new business starts and companies.

Finding that day, they can better serve their customers by having a website and ergo a domain name helps to facilitate that.

I think that's been good for our business here in this work from home environment.

As Jim mentioned.

When the pandemic subsides and things are opening it up.

I think you could probably go either way either it could accelerate or could slow a little bit. We're just not sure how the market would react just just as we were somewhat uncertain. When this whole pandemic started.

But that clearly is a possibility.

And maybe just a follow up to that on.

Mix of domains.

New T. L. D. I think have given back some of the share.

That we saw then saw that category gain in years past.

Are you seeing that mix, having any impact on your business.

Uh huh.

I guess the mix of.

Well, so that you understand more specific.

Thin registry, but you worked with hundreds of registrars on a global basis.

Our registrars coming back to you given that you do do marketing programs and suggesting that they want to put more muscle behind dot com, because they're just not seeing the traction that perhaps they expected in the new T. L D.

I.

I guess I would just.

I think the best answer I can give you that question. This is.

One day I think is just a simple fact, which is that com is a recognizable brand that helps people get found online it's.

Popular well established brand I I don't know I'm not aware of any specific deliberate effort.

We've been informed of.

Are there any kind of a shift like you're describing George do you on it.

Add anything to that.

Yeah, I think that's right Jim I mean, I think that's probably a great question for one of the registrars are on these calls but as.

As to what they're seeing specifically, but.

Programs tend to be relatively set at the beginning of the year, we roll them out we announce them.

And and we.

We tend not to change on too much.

Year over year or intra year, I would say, but I don't think it on a more of a head on with that with Jim commented on.

Understood. Thank you so much.

Thanks.

Yeah.

I'd like to now turn the call back to Mr. David Atchley for any 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.

This concludes today's call. Thank you for your participation you may now disconnect.

Yeah.

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