Q2 2022 Verisign Inc Earnings Call
Good day everyone.
Welcome to <unk> second quarter 2022 earnings call. Today's conference is being recorded recording of this call is not permitted unless preauthorized, Andy Stein Mart.
So David Atchley, Vice President Investor Relations and corporate Treasurer. Please go ahead Sir.
Thank you operator, welcome to <unk> second quarter 2022 earnings call.
Joining me are Jim <unk>, executive Chairman and CEO , Todd <unk>, 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 assigned 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 <unk>.
SEC specifically the most recent report on Form 10-K, Verisign 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.
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.
Thank you David good afternoon to everyone and thank you for joining us.
As global reliance on online services continues to increase so does the importance of delivering uninterrupted inaccurate DNS resolution last week, we crossed a significant milestone by marketing 25 years of uninterrupted uptime for the Dot Com Dot net domain name resolution system, reaching this quarter century, Mark is a testament to the ongoing investments made in our.
Platforms processes and people.
During the second quarter, we grew our revenues by six 8% year over year, and our EPS by 17% year over year.
At the end of June the domain name base in Dot Com and Dot net totaled $174 3 million domain names consisting of 161 1 million names for Dot com and $13 2 million names for dot net with a year over year growth rate of two 2% and a sequential decrease of 354000.
Names.
The final renewal rate for the first quarter of 2022 was 75, 9% compared to 76.0% for the same quarter of 2021.
Although renewal rates are not fully measurable until 45 days after the end of the quarter. We believe that the renewal rate for the second quarter of 2022 will be approximately 73, 6%. This preliminary renewal rate compares to 75, 4% achieved in the second quarter of 2021 and 75, 9% last.
Quarter the decline in our second quarter preliminary renewal rate is primarily related to the proportion of names renewing from China registered in the year ago quarter, which weighed on first time renewal rates.
We do see continued strength in our renewal rates have previously renewed names.
In the second quarter, we processed $10 1 million, new registrations compared to $10 2 million last quarter and $11 7 million in a year ago quarter. While there are many factors that drive demand for domain names, we have seen lower new units in the first half of this year as a result of a few factors that I will now mentioned.
These include a pandemic driven acceleration of domain name registrations in 2020, and 2021, which has subsided.
Recent global macroeconomic headwinds and relative weakness in 2022 registrations from China.
While we're still early in Q3, we do see some signs with new registrations are stabilizing and we continue to see strong renewal rates. However, we agree with the consensus view that the current economic conditions are likely to prevail through 2022 and possibly beyond.
Therefore, we are adjusting our 2022 domain guidance and now expect the domain name base growth rate of between 5% and one 5%.
This range reflects our expectations that new registrations in Q3, and Q4 will be roughly similar to the levels. We saw in the first half of 2022, and which are similar to pre pandemic levels. This range also reflects our expectations for an improving renewal rate from the preliminary renewal rate we are seeing in Q2.
As announced in today's earnings release, we have given notice of a price increase of 90 cents to the annual wholesale price for Dot net domain names, which will raise the price from $9.02 to $90 92 effect.
Effective February one 2023.
Our financial and liquidity position remains stable with $997 million in cash cash equivalents in marketable securities at the end of the quarter.
During the second quarter, we repurchased 2 million shares for $349 million.
At quarter end $543 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.
Turning to Dot web as we noted in our last call I cans Board directed wanted it standing committees to review the independent review process panels final decision and provide the board with its findings. The committee then asked the parties to submit written summaries of their claims by July 29th That's Tomorrow, and then to submit responses.
By August 29, we.
We expect that the committee will conduct its review based on these submissions and will then provide its findings to the ICANN board.
Now I'd like to turn the call over to George I will return with Georgia has completed his financial report with closing remarks, including more about our areas of focus going forward George.
Thanks, Jim and good afternoon, everyone.
For the quarter ended June 30th 2022, the company generated revenue of 352 million up six 8% from the same quarter of 2021 and delivered operating income of $236 million up 10, 8% from $213 million in the same quarter a year ago.
Operating expense totaled $116 million down $6 million compared to last quarter and flat compared with the second quarter a year ago.
While we remain focused on driving profitable growth and optimizing our expenses. The sequential decrease in operating expense is primarily a result of the timing of expenses with slightly lower benefits and performance based compensation accruals in the quarter.
The operating margin in the quarter was 67, 1% compared to 64, 7% for the same quarter a year ago.
Net income totaled $167 million compared to $148 million, a year earlier, which produced diluted earnings per share of $1.54 for the second quarter of 2022 compared to $1.31 for the same quarter of 2021.
Operating cash flow for the second quarter.
Was $145 million and free cash flow was $139 million compared with $143 million and $125 million, respectively for the second quarter of 2021.
I will now discuss our updated full year 2022 guidance.
Revenue is now expected to be in the range of $1.415 billion to $1 billion of $430 million.
This updated revenue range guidance reflects our domain name base growth rate expectation between 0.5% and one 5% that Jim mentioned earlier.
The operating margin is now expected to be between $65, two 5% and $66 two 5%.
This increased range reflects our ongoing focus on expenses, while recognizing that the second quarter operating expense run rate was lower than the run rate. We are expecting for the second half of 2022.
Interest expense and non operating income net which includes interest income estimates is now expected to be an expense of between 62 million to $67 million.
Capital expenditures are now expected to be between 30 million to $40 million.
The GAAP effective tax rate is still expected to be between 22% and 25%.
We expect the cash tax rate for 2022 to also be within the same guidance range.
In summary, Verisign continued to demonstrate sound financial performance during the second quarter, and we look forward to continuing our focused execution in 2022.
Now I will turn the call back to Jim for his closing remarks.
Thanks George.
There is little if any disagreement in the statements made by many tech company leaders over the last few weeks on economic conditions.
They expect the uncertainty they see today to continue for the foreseeable future. This.
This macroeconomic uncertainty was a factor that influenced our revised domain base growth guidance.
While we can't do much to change the pace of economic recovery from the pandemic or the geopolitical and macroeconomic events enforces that contribute to the downturn, we can and we will focus on what is within our ability managing our business with the unconditional prioritization of delivering on our mission.
This includes exercising careful and responsible expense management some of which is evident in our Q2 results reported today.
<unk> seeing as described earlier, our price increase for Dot net registrations, which we've held flat for five years.
Identifying and pursuing new growth opportunities such as Dot web.
Safely transitioning our teams to a new hybrid and flexible work environment, which is currently underway.
Working to ensure their assigned remains a company that will attract and retain top talent.
And continually evaluating and optimizing our efforts to efficiently returned value to our shareholders.
This focus on what we can manage will continue to serve us well for the long term success of the business.
In closing, we're confident that the long term fundamentals of our business are unchanged and remains strong.
Thanks for your attention today. This concludes our prepared remarks and now we'll open the call for your questions. Operator, we're ready for the first question.
Thank you Sir if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow us to reach our equipment again breast star one to ask the question. We had pause for just a moment to allow everyone an opportunity to signal for question.
We will take the first question from Mr. Rob Oliver Your line is open. Please go ahead.
Great Hi, good afternoon, guys. Thanks for taking my questions.
So Jim first one for you just you know with domains decreasing here in Q2 can you talk a little bit about you know what what that means for the business in a medium to longer term view and then I wanted to dig in on some of the factors that have impacted that as well that you started.
Okay. Thanks, good question well.
First let me say that.
With respect to the sequential decrease while infrequent. This isn't the first time, we've seen a sequential decrease in the domain name base after an acceleration of registrations in the prior year.
Last time, we saw it several years ago within a few quarters registration of that normalized so we're keeping an eye on the current situation with that precedent in mind.
While we did see is an acceleration of the domain name base growth rate during the pandemic in 2020 and much of 2021.
That acceleration demand has now subsided I mentioned last quarter that one of the one of the factors to consider is that.
In our Q1 earnings was the.
The component of growth attributable to that attributable to the pandemic had subsided. That's this is confirmation that that is what we are saying 2020 'twenty. One the accelerated demand has now subsided. So we're seeing the year over year growth rates slow as a result.
However, if we look at the longer term trend, we're seeing that the current pace of new registrations look more similar to pre pandemic levels.
In addition renewal rates are strong and remains strong so while there is broad macroeconomic uncertainty we don't see any change in the underlying fundamental long term drivers that we think are positive for our business and there continues to be demand for domain names.
And on that on the renewal rates.
What is it that gives you guys the confidence that the renewal rates will remain strong is it something geographic anything else you're seeing there would be helpful.
Yes, sure. So we have seen a slight decline in the first time renewal rates in the quarter, but thats due to a higher proportion of names renewing from China This quarter.
So what we do see though is a continued strong renewal rate for previously renewed names. The previously renewed rate has stayed in the mid 80% range and it's actually improved over time.
And additionally, as a larger portion of the base becomes previously renewed that trend helps the overall renewal rate.
We're also seeing that cohort of names related to the accelerated demand that I referred to during the pandemic. Those names are renewing at strong rates. Those additional names have been positive for the business. So that's a strong point that underlines our underlines.
Underlines our confidence going forward in the core strength of the business renewal rates in particular.
Got it got it and that cohort that you're talking about dream is that North American cohort in other words goes Hitchcock domains for the first time now emerging from the pandemic.
Our renewing.
Well I think those are broad.
Modulo ease of Max term debt modulo the Chinese names that we had from the year ago quarter, which tend to renew at a lower first time renewal rate. So the the remaining are not limited to North America No real geographic specificity. There I think those are geographically very broad and they've got those renewal rates are strong.
So there's a call out at Ames.
Okay very helpful and.
On the timing of the Dot net price increase.
I just wanted to hear your reasoning behind the timing.
Yeah.
Just a curious time on the one hand, you guys have not raised prices. Eric you mentioned for five years on the other you know it hasn't been particularly strong in and just wondering if you could walk us through understanding why now and.
You hope to get a better sense of that.
Well we've.
As you know back in 2020 in the early stages of the pandemic, we froze all of RTL days, including Dot net dot net.
Level unchanged level of pricing without price increases does go back five years, we studied the market and we make those decisions. There is nothing specific to the current conditions that that that decision is based on it's just just the result of our studying the market.
Dot net still represents a lot of value. The other so called legacy T. L. D's are all priced at slightly above dot net so it's very competitive in the market.
And as you noted the price increase takes effect February one of next year.
Got it got it okay and on <unk>.
Thank God web you touched on it and I'm not sure that there's more that you can say, but.
No labyrinthine and seemingly unending process is now.
So I guess by your comments.
And for that you guys have filed or will be filing by tomorrow everything that was requested here weaker quarter in terms of both parties having to like you know.
Resubmit all of their material is there anything new that was that was asked of you guys. You know and and then any other comment around potential timing I got well would be helpful.
Okay, Let me parse that a little bit. So yes, we certainly will make our filing on time tomorrow no doubt about that.
And yes, you're right. This is a this is a slightly different part of the process I think it might be fair to characterize everything that's gone up or gone on until now.
Basically a process that was held in front of.
The <unk> panel the independent review process panel, which is sort of a close close to arbitration form of arbitration.
That panel made its ruling and send it back to ICANN and had I can make a decision I cant took this step in our board meeting earlier this year to direct this existing committee.
To address the issue and follow the instructions of the panel with just for ICANN to decided these issues.
Their process that that committee that's.
Assigned the task of of resolving this issue.
Asks for these filings so of course that will make our so we are in a stage where ICANN is now at the direction of the panel after years of litigation been given the responsibility to resolve these issues. These are these are this is all tied to ikea policies and procedures and they are going about it in this manner, So where we are.
We're hopeful that we're in a different phase and we're optimistic that there are some some assigned timeframes here, we'll certainly comply with them.
As to any details of our filing or anything of that nature that this is a pending legal process. So obviously, we wont make any comments on that but.
We've always said that we look forward to being the registry operator for Dot web we see it as an opportunity to introduce a new T. L D and offer our customers more choice that is unchanged.
I think at this point, that's ni cans hands and they have a process and we look very much forward to hearing from them.
Okay.
Okay, Great that's helpful. Kevin.
George I had one for you you did mentioned that.
<unk> expenses were lower in the quarter and that was due.
Due to the timing of certain expenses is that normal normal course timing or can you talk a little bit about.
What if any of the expenses you know.
Varied.
And I know you suggested or said that expenses would return back to the normal run rate in the back half of the year for you. If you could just help us understand a little bit more about what went into that variability.
Yes sure Rob.
We do have some programs.
That we try to execute in a year and sometimes those slip a little bit I would say those were more of a minor case that the larger components are really oh, we're.
Were related to a lower benefit and the performance based compensation accruals in the quarter.
As you know or maybe you don't know where we're self insured for a number of benefits and our expenses related to some of our health care expenses came in lower in the quarter.
Okay.
Okay. That's helpful.
Last question, Jim I'll, just come back to you I mean you.
You've gone through.
A lot of different cycles.
No.
And your career and your.
Some of your commentary in your prepared remarks, certainly was.
Relatively cautious about the macro and <unk>.
Just love to hear a little bit more about you know what it is youre seeing what what data sets you're watching I know you cited some of the commentary of other tech companies.
That gives you that debt aside from the actual kind of numbers what gives you that more cautious banton and how you think this.
This might play out.
Okay.
Yeah, well, you're right I I referred to comments that other tech leaders, who may just simply to point out that we're in we're in sort of an unprecedented situation here economically I mean, there is obviously a lot going on I just wanted to separate that from things that we really can't directly impact the things that we can't control.
I guess another way to look at it is to say.
Say again, what I said last quarter that.
I don't want to trivialize, the pandemic and Theres, absolutely no intent to do that but we do see this as a bump in the road in the long term effort to build this business. That's what our efforts are really about we have our eye on the long term.
And it's unchanged.
There's certainly some uncertainty and we factored it in but to your question about the confidence we have or the guidance or other things that we said well first of all we have three months more data we have a substantial amount of data we track a tremendous amount of data not just about the zone, but other things.
But some of those other macro economic factors I mean, obviously, there's a bit of a slowdown in things like online advertising and E. Commerce and those are certainly factors that impact domain name. So there's consideration given to those factors that may be we cant control, but we recognize them in and we make some assessments about them, but in terms of our own.
So we have a lot of data and that certainly plays a huge role in putting our forecasts and guidance together and I'll just reiterate again that our confidence in the fundamentals of our business is strong.
Our business is strong the renewal rates are strong and we see this we see we do expect that things will normalize at some point, we're just being cautious about when that will be and we're focusing on what we control and that's what I really wanted to focus my final prepared comments on there are things, we can control and we're going to focus on it but we're going to run that business for the for the long term.
Absolutely what were here to do where you know where we are undeterred by everything thats going on in that focus. So I think the intent there was to just make it clear what you can expect from us.
Great. That's really helpful. Thank you guys very much I appreciate it.
Thank you.
It appears that there is no further question at this time.
I'd like to turn the conference back to you 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.
Yes.
This concludes today's call. Thank you for your participation you may now disconnect.
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