Q3 2021 Verisign Inc Earnings Call
Please standby were about to begin.
Good day, everyone welcome to the Vera Science third quarter 2021 earnings call. Today's conference is being recorded recording of this call is not permitted unless preauthorized. Thank you.
At this time I'd like to turn the conference over to Mr. David actually Vice President of Investor Relations and corporate Treasurer. Please go ahead Sir.
Thank you operator, welcome to <unk> third quarter 2021 earnings call. Joining me are Jim did dose executive Chairman and CEO.
Thats Truby, 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 Verisign 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 of the call will be posted.
Financial results in our earnings release are unaudited and our remarks include forward looking statements that are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC specifically the most recent report on Form 10-K.
<unk> does not update financial performance or guidance during the quarter unless it is done through a public disclosure.
The financial results in today's call and the matters, we will be discussing today include GAAP results and 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 call.
Jim and George will provide some prepared remarks and afterward, we will open the call for your questions with that I would like to turn the call over to Jim.
Thanks, David and good afternoon, everyone.
To report another solid quarter of operational and financial performance for Verisign.
During the quarter, we continued to deliver strong financial results, while maintaining and investing in and evolving our critical internet infrastructure and complying with the high operational standards required by our ICANN agreements.
Our critical infrastructure enables us to reliably and accurately provide the domain name system navigation service, which people around the world depend on for Commerce education health care and person to person connection.
During the third quarter, we processed $10 7 million, new registrations and the domain name base increased by 148 million names.
At the end of September the domain name base in Dot Com and Dot net totaled $172 1 million consisting of $158 6 million names for dot com and $13 5 million names for dot net with a year over year growth rate of five 1%.
Although renewal rates are not fully measurable until 45 days after the end of the quarter, we believe that the renewal rate for the third quarter of 2021 will be approximately 75%.
This preliminary rate compares to 73, 7% achieved in the third quarter of 2020 and.
75, 4% last quarter.
For the full year 2021, we now expect the domain name base growth rate of between four seven and five 5%.
This narrow range reflects the current pace of new additions to the base and our outlook for the remainder of the year.
Our financial and liquidity position remains stable with $1 $2 billion in cash cash equivalents and marketable securities at the end of the quarter.
Share repurchases during the third quarter totaled $172 million for 785000 shares.
At quarter end $565 million remained available and authorized under the current share repurchase program, which has no expiration.
We continually evaluate the overall liquidity and investing needs of the business and consider the best uses for our cash including potential share repurchases.
As it relates to the Dot web.
And as we stated last quarter. After the final RFP decision was issued in May affiliates filed in June and application requesting that the ERP panel interpret and amend its final decision.
Briefing on this application was completed in September and the panel has now taken the matter under advisement without oral argument, which means we're just waiting for the RP panel to respond.
I believe the affiliates as application is without merit and we continue to expect the panel to rule on it in the fourth quarter of 2021.
As we have said before we continue to look forward to becoming the top web registry, operator, and establishing yet as an additional option for businesses and individual end users worldwide.
And now I'd like to turn the call over to George.
Thanks, Jim and good afternoon, everyone.
For the quarter ended September 30th 2021, the company generated revenue of $334 million up five 1% from the same quarter in 2020 and delivered operating income of 221 million up seven 1% from the $207 million in the same quarter a year ago.
Operating expense totaled $113 million compared to 116 million last quarter and $111 million in the third quarter last year.
Operating margin in the quarter was 66, 2% compared to 64, 7% last quarter and 65% in the same quarter a year ago.
Net income totaled $157 million compared to $171 million, a year earlier, which produced diluted earnings per share of $1 40.
In the third quarter this year compared to $1 49 for the same quarter last year.
As noted in our earnings release net income for the third quarter last year included previously unrecognized tax benefits of $24 million, which increased diluted earnings per share by 21 sets.
Operating cash flow for the third quarter was $260 million and free cash flow was $245 million compared with $140 million and $125 million, respectively for the third quarter of 2020.
Cash flow this quarter benefited from an increase of $45 million of deferred revenue, which was primarily related to early domain name renewal activity before the dotcom price increase went into effect.
The main impact of these early renewals here's the pulling forward of cash flow from future quarters into the third quarter of this year.
Additionally, comparing year over year third quarter cash flow last year's third quarter cash flow was lower due to the permitted deferral of approximately $52 million of U S. Federal tax payments from the second quarter to the third quarter of 2020.
I will now discuss our updated full year 2021 guidance.
Revenue is now expected to be in the range of $1.325 billion to $1.330 billion.
This narrowed revenue range reflects the updated domain name base growth rate expectation of between four 7% and five 5% that you mentioned earlier.
The operating margin is now expected to be between 64, 8% and 65, 3%.
This range reflects our expectation of incremental spend on marketing programs and.
And continued investment in our operational infrastructure and personnel during the fourth quarter.
Interest expense and not in pretty operating income net is still expected to be an expense of between 83 million to $87 million.
Capital expenditures are now expected to be between $55 million and $60 million.
And the GAAP effective tax rate is still expected to be between 20% and 23%.
We expect the cash tax rate for 2021 to also be within the same guidance range.
In summary, Verisign continued to demonstrate sound financial performance during the third quarter and we look forward to continuing our focused execution.
Now I will turn the call back to Jim for his closing remarks.
Thank you George.
We open the call for your questions I would like to touch on some other things that we continue to do here at marathon.
I've updated you in previous earnings calls on our commitment to responsible corporate citizenship principally through our Verisign cares program.
During the third quarter, we established three new partnerships under the Verisign cares workforce retraining initiatives.
This greatly increases both the number of individuals', we can help and our geographical coverage.
Combined our partners now REIT scholars 17 states plus the district of Columbia with remote options accessible throughout the U S and our partner organizations have expansion plans on their own which we're pleased to support.
We're delighted to note that our launch partner for this initiatives, Virginia already recently passed the milestone of 3000 scholars who have graduated from their program and as a reminder, the objective of the Verisign cares program to address pressing economic and social needs in the communities in which we live and work we instituted this workforce REIT training initiative.
In 2020 to provide individuals whose employment has been adversely affected by the COVID-19 pandemic with access to training and other assistance to help them pivot into the technology sector.
Can learn more about these efforts on blog dot Verisign dot com.
And now we'll open the call for your questions operator, we're ready for the first question.
Thank you, ladies and gentlemen, if you'd like to ask a question on the phones. Please signal by pressing star one on your telephone keypad using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Please press star one to ask a question, we'll pause just a moment to allow everyone an opportunity to signal for questions.
We will take our first question from Rob Oliver with Baird. Please go ahead.
Great. Thank you good evening guys couple of questions for me first.
One for you Jim.
On the on the macro that you're seeing right now with business starts you mean, there's been some data this quarter I think our university of Michigan sentiment indicators rolling over a little bit a lot of small and medium sized business.
Our survey work, we've seen expressing some concern I think it's a mix of labor shortages as well as concerns heading into next year, what it what it seems that the reduction of the high end of the of the demand growth. David is just really a function of the timing here relative to Q4, and we think you guys have had a strong year, but can you talk a little bit about what you're hearing.
Seeing in the market relative to.
The prospects for domain activity going forward and kind of what you're saying.
Yeah.
Sure Rob I can I can say a few things about it I don't know if I can map with any specificity activity and a domain name space, specifically with any quarterly economic activity I can tell you that COVID-19 has certainly been a factor.
We've seen it up and down with Covid of course from early 2020 on through where things improved a bit and then we saw the delta variant and they've lived in a wrong direction now they're improving again.
Exactly how the timing maps to that but certainly that does have some effect and we can't tell you yet we havent studied it sufficiently to tell you exactly what that might do.
So certainly all of those things are factor business starts or factor, but essentially com is a strong brand people are branding themselves people are acquiring domain names or the preferred way to have their identity online and I think you see that the long term trend line is not only in a REIT direction, but I think generally consistent with our yearly performance.
And seasonality, there's just no doubt a COVID-19 influence that we can't map with any precision for you right now.
Got it got it Okay. That's fair. Thank you and then George one for you just on the <unk>.
Margin performance this quarter and I know you guys have made a series of investments you know.
Over the past year plus both in security.
The ones in as well as you know infrastructure and provisioning as well as people and just curious about the.
The margin expansion that we saw in sort of the durability of that or is it more of kind of a one time benefit. Thank you.
Yeah, Thanks, Rob so.
You know when you look at our operating expenses clearly the sequential decrease.
Is primarily due to a mix of the small decrease in G&A spending and in some market activity marketing activity in the quarter.
And as you mentioned year over year, we had a slight increase from our continued investment in our operational infrastructure and personnel.
I would I would say we are managing the total expenses of the business as best we can.
And we continue to to look at where we're spending money and making sure we're spending them in the right areas and if we're not we're redirecting that into the business.
We provided.
Our guidance on our operating margin for.
For the full year of 64, 8% to $65 three and we'll give you some additional guidance.
On our year end call as to what we think next year is but oh.
We do have up and downs each quarter, but we continue to make the investments that we feel are appropriate for the business.
Okay, great. Thank you guys.
Start one for questions. We will take our next question from Nick Jones with Citi. Please go ahead.
Great. Thanks for taking the questions I guess, one adopt web I guess could you maybe remind us on you know.
Assuming the Japanese delegated to you you can start registering at what is kind of a timeframe for when.
You're able to register to earn.
Zimmers could actually bought is that like a relatively quick turnaround or are we looking at a couple of quarters. Once you are able to win.
Dot web could start.
They're showing up.
Okay. Thanks, Nick if I understand your question correctly, you're not asking about the process. We're in now with the ERP, you're saying yes.
If that should be resolved at hand at the ICANN as the panel road before in this application fails in some point dot web as delegated to us youre asking what the process is to actually start registering domain names is that do I understand your question correctly.
Correct.
Okay. So yeah. It it's more like I think your latter in the latter part of your assumption there that there are some a couple of quarters because there are.
Periods of activity that are mandated by the process, we have to run a sunrise.
Sunrise period, we have to do some security things, we have to let people who have trademarks come in and get their first so it's a bit early to speculate exactly when but the answer is closer to a couple of quarters. It's I'm getting from delegation to actually beginning to registered domain names are theres. Just some process work that's required to do for safety.
Security and respect for our trademarks.
Got it and then I guess a follow up to that is when you think about.
Brands that have tried to protect their trademarks do you have any proxy as to whether people are buying like dot shops or other TLD is at which rate is it is it common for people to kind of protect their trademarks by buying all the TLD is or are there just certain ones any any color or visibility you have into how our brands behave.
Yeah. It varies a lot that I don't think Theres any general single real you could make it is certainly true that people buy.
I called defensive registration is to protect their marks are many of them buy variance of them lots of them by multiple registrations in com net and other TLD.
In order to protect things that are even similar to their mark so that occurs in that and other TLD as not all of them. Yeah. It just varies I would refer you.
Two our domain name industry and I think you can get some sense just looking at that the lay of the land so to speak the landscape of <unk> I think that would give you some insights and help you understand that.
Got it great. Thanks for taking the questions.
Sure.
We'll take our final question from Sterling Auty with Jpmorgan. Please go ahead.
Yeah. Thanks, Hi, guys. So maybe we'd start with $10 7 million new names that were processed in the quarter can you give us some color as to what you saw on a geographic basis, where was the strongest growth and where perhaps where there are areas of softness.
Yeah Sterling. So this is George so as you mentioned, we had $10 7 million of new registrations in the third quarter and that was pretty similar to what we did in the third quarter a year ago. So it's still a healthy level of Oh, the registrations for the company as far as regional performance goes.
We saw year over year, new registration strengths from registrars in areas, such as EMEA, APAC and China during the quarter and North American registrars.
New registrations were a bit lower during the third quarter compared to the year ago quarter.
Okay, and then when you look at the.
Sure.
The base that was up for renewal how was the mix of names that were up for renewal for the first time as a percentage of the total as compared to what you experienced in in the other quarters of the year.
Well again, when you talk about renewal rates, we had a total renewal rate of about 75% in the third quarter and that was similar to the first and second quarter. They were both in the mid 70% range. What I think you're alluding to is a year ago, our renewal rate was 73, 7%.
And so when you look at the year over year improvement a lot of that does come from the mix of the names coming up for renewal.
As we talked about last quarter.
If you look back at 2019, we had a lot of a higher percentage of names coming out of registrar from China and other areas that typically have lower first time renewal rates in 2020, we had more demand coming out of more mature markets like the U S and EMEA, which had higher renewal rate.
And so those names obviously last year the ones that are renewing this year and so you're seeing a slightly higher renewal rate trend this year compared to last year, because the first time in the previous renewed rates are are increasing because of the mix and thats been consistent both in the first quarter in the second quarter. This year.
And when you look at the renewal rate for names renewing for the first time other than kind of China, which typically has lower rates has anything changed in those kind of first time renewal rates.
Again, they vary by country. Our first time renewal rates are still around 50% and our previous renewed rate is still around the mid Eighty's 80, 586% range.
Alright, great.
And then finally you know as.
When we talked about hypothetically if you were to to go live with we got wet post that process the timing to revenue.
How should we think about wane, either technology investment for any type of incremental infrastructure or any marketing programs would actually go into effect under that scenario.
So sterling I guess, it's a bit early to speculate specifically I know you didn't ask specifically about revenue, but oh I would say that.
What I can say to you is that first of all that web is of course different from dot com and net and that it's not a price control T. L D.
And.
I think at this point, it's just really too early to speculate how the how revenue would roll in or what it would look like but we do have flexibility with it that we don't have we would have flexibility with it but we don't have with other T.
T L D's and premiums there are available.
Other sorts of options.
Our available there certainly the infrastructure that we have.
It is is in a sense since we operate multiple T. L. D's Dot web is in a sense another T L D.
But there certainly will be some sort of.
Marketing launch that will occur, but I just think it's too early to really talk about what that would look like and what the expense impact will be but we certainly intend to market and promote that web our plan our desire as we stated and I'll say again is to offer our customers more choice and to make that web, but very successful TLD.
Makes sense. Thank you guys.
Sure.
Ladies and gentlemen. This concludes today's question and answer session. At this time I'd like turn the conference back to David Atchley 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.
Ladies and gentlemen, this does conclude today's conference. We appreciate your participation you may now disconnect.
[music].
Yeah.
Okay.