Q4 2022 Verisign Inc Earnings Call
Okay.
Please standby.
Good day, everyone welcome to their science fourth quarter and full year 2022 earnings call. Today's call is being recorded recording of this call is not permitted unless preauthorized at this time I'd like to turn the.
The conference over to Mr. David actually Vice President of Investor Relations and corporate Treasurer. Please go ahead Sir.
Thank you operator, welcome to Verisign is fourth quarter and full year 2022 earnings call. Joining me are Jim <unk> Executive Chairman and CEO, Todd Truby, President and C O O 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, our own unaudited and our remarks include forward looking statements that are subject to the risks and uncertainties that we discuss in detail inner.
Documents filed with the 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.
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 EBIDTA 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.
Thank you David good afternoon to everyone and thank you for joining us I'm pleased to report another solid quarter of operational and financial performance for Verisign.
Throughout 2022, we delivered strong financial results, while continuing to strengthen our critical internet infrastructure, we complied with the high operational standards required by our ICANN agreements and extended our record of Dot com and dot net DNS availability to over 25 years.
Like to thank our team for their dedicated efforts, which enabled us to realize these results.
<unk> infrastructure, we operate provide to the domain name system navigation service, which people around the world depend on for Commerce worked from home education health care and much more.
During 2022, we acknowledge the uncertainty that macroeconomic and other challenges beyond our ability to influence presented and we said that we are focused on what was within our ability to control. We also indicated what that math first reliably maintaining operating and investing in our critical Internet infrastructure next exercising careful expense.
Troll, where appropriate and additionally, it meant keeping focused on long term value creation and efficient return of capital.
During 2022 revenue grew seven 3% year over year and operating income by eight 8% year over year. Additionally shares outstanding at the end of 2022 decreased by four 8% from those outstanding at the end of 2021.
Our financial and liquidity position remains stable with $980 million in cash cash equivalents and marketable securities at the end of the year.
During the full year of 2022, we repurchased five 5 million shares for $1 billion.
At year end 859 million remained available and authorized under the current share repurchase program, which has no expiration.
At the end of 2020 to the domain name base in Dot Com and Dot net totaled $173 8 million domain names with a year over year growth rate of 0.2%.
In the fourth quarter, there were $9 7 million, new registrations compared to $9 9 million last quarter and $10 6 million in a year ago quarter. While there are many factors that drive demand for domain names, we saw lower new registrations. During 2022 as a result of factors that I've already mentioned in prior calls these include.
That make driven acceleration of new registrations in 2020, and 2021 which has subsided.
Global macroeconomic headwinds reduced new registrations from China, and lower first time renewal rates.
We believe that the renewal rate for the fourth quarter of 2022 will be approximately 73, 2% compared to the 73, 7% final renewal rate last quarter, and 74, 8% a year ago.
For the full year 2022, the renewal rate for previously renewed names remained similar year over year. However, first time renewal rates were lower year over year with the largest single driver being names renewing from China, which for registered during 2021.
Looking to 2023, our expected 2023 domain name base growth rate is between zero and two 5%. This guidance reflects our knowledge about our domain name base, our channel and the broader macroeconomic backdrop.
As announced in today's earnings release, we have given notice of a price increase of 62 to the annual wholesale price for Dot com domain names, which raises the price from $8 97.
The $9.59 effective September .
Timber first 2023.
Even after this increase we believe dot com will remain highly competitive with other TLD choices. As a reminder, any of our domains may be registered for terms of up to 10 years at the current price.
While we do not guide to pricing changes I can say as I did last year that under the limited pricing flexibility. We have the wholesale price of a dotcom registration cannot exceed $10 and 26 until at least October of 2026.
Turning to Dot web the parties made their submissions to ICANN during Q3, and we are still waiting for ICANN to complete its process.
Now I'd like to turn the call over to George I will return with Georgia has completed his financial report with closing remarks.
Thanks, Jim and good afternoon, everyone.
For the year ended December 31, 2022, the company generated revenue of $1.425 billion up seven 3% and delivered operating income of 943 million up eight 8% from 2021.
Operating expense totaled $482 million and was up four 6% from the prior year compared to a similar four 5% increase experienced in fiscal 2021.
The full year of 2022 operating margin was 66, 2% and free cash flow was $804 million.
For the quarter ended December 31, 2022, the company generated revenue of 369 million up eight 5% from the same quarter of 2021 and delivered operating income of $245 million up 10, 5% from the same quarter a year ago.
During the fourth quarter of 2022, we executed a transition of the Dot TV agreement to a new registry operator.
As the proposed contract terms in the new T Dot TV request for proposal no longer aligned with our strategic framework, we decided not to participate in the RFP.
Revenue related to this agreement during the full year of 2022 was approximately $19 million of which approximately $10 million was recorded in the fourth quarter.
Operating expense in Q4 totaled $124 million compared to $118 million a year earlier.
Net income in the fourth quarter totaled $179 million compared to $330 million a year earlier, which produced diluted earnings per share of $1 70 for the fourth quarter of 2022 compared to $2.97 for the same quarter of 2021.
As a reminder, net income for the fourth quarter of 2021 included the recognition of a deferred income tax benefit related to the transfer of certain non U S. Intellectual properties between wholly owned subsidiaries, which increased excuse me, which increased net income by $165 5 million and increased diluted.
Earnings per share by $1 49.
Operating cash flow for the fourth quarter of 2022 was $217 million and free cash flow was $209 million compared with $206 million and 193 million respectively for the fourth quarter of 2021.
I will now discuss our full year 2023 guidance.
Revenue is expected to be in the range of $1.485 billion to $1.505 billion.
This revenue range reflects our expectation that the domain name base will grow at a rate between zero percent and two 5% that Jim mentioned and is also impacted by the transition of the Dot TV agreement at the end of 2022.
Operating income is expected to be between $985 million and $1 billion 5 million.
Interest expense and non operating income net which includes interest income estimates is expected to be an expense of between 35 million to $45 million.
Capital expenditures.
Expenditures in 2023 are also expected to be in a range between $35 million to $45 million.
The GAAP effective tax rate is expected to be between 22% and 25%.
In summary, Verisign continued to demonstrate sound financial performance during the fourth quarter and the full year of 2022, and we look forward to continuing our focused execution in 2023.
Now I will turn the call back to Jim for his closing remarks.
Thank you George.
We believe our strategic focus and disciplined management has served us well during 2022, allowing us to deliver solid financial results in a challenging environment as the economy struggled to recover from disruption caused by the pandemic.
<unk> mission is about security and stability not only in the operation of our critical infrastructure, but financial stability is also important for our customers employees and shareholders.
Today, we reported profitable revenue growth for 2022, and we guided to profitable revenue growth for 2023. This was possible through modest domain name base growth limited pricing flexibility and responsible expense management, we believe that the long term fundamentals of our business remains strong as I said earlier our strategy prioritizes.
Reliable uninterrupted operation of our critical infrastructure, along with long term value creation, and it's sufficient return to shareholders with consistent efficient management.
We believe this strategy will serve all of our constituents well for the long term and you can expect us to maintain this focus 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.
I would like to signal with questions. Please press star one on your Touchtone telephone.
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Again that is star one if you would like to signal with questions.
And our first question will come from Rob Oliver with Robert W. Baird.
Great. Good afternoon can you guys hear me okay.
Just fine.
Okay, Great Hi, Jim Thanks.
The opportunity to ask a question first one for me is just.
Around the macro obviously second half of last year, you guys really focused on kind of what you can control operationally.
Well a lot of moving parts in the macro and I think that that approach really served you well looking out here into 'twenty three.
Also obviously tremendous amount of moving parts.
Arps macro uncertainty on the other hand, China reopening. So just curious if you could add a few final points to your thoughts relative to the outlook havent seen many cycles as well as.
The domain guide that you guys offered of the zero to 2.5, and then I had a quick follow up.
Okay. Thanks for that question well first for 2022.
Looking back on that year as soon as we recognize that the pandemic driven gross was subsiding, we began planning for what I've called responsible expense control, meaning that first and foremost we make all necessary investments in our infrastructure and then look everywhere for efficiencies.
As far as layoffs, we did not as many companies did accelerate hiring during the pandemic driven growth period and I would also point out that the average employee tenure at Verisign is over nine years. So we're fortunate to have a loyal experienced and stable employee base.
I'll also point out we also tried to take advantage of opportunities to return value to shareholders with more effect as we did in 2022.
Retiring nearly 5% of our shares outstanding there. These are all the parts of our business that we can control. So that's where we focused in 'twenty. Two looking forward. We're hearing what youre hearing many economists and Ceos talking about 2023 say that the macroeconomic and geopolitical factors suggest some continued uncertainty.
I suppose it should be no surprise that the recovery from the pandemic with all the all the global impact in 2020 'twenty, one and it's going to take more than one year to fully recover so it seems prudent to factor that uncertainty into our guidance for 2023, which we did and as far as strategy. What you can expect from.
In 2023 is a continuation of our 2022 strategy, it's actually not that different from what we try to do every year.
Okay great.
Thanks, Jim and good.
On the road marketing for.
For the last couple of weeks in.
Particularly.
In the news now is <unk> and I just wanted to get your your thoughts relative to that it's obviously very early and we're in the highest stage around this new technology now and we've seen it.
Would you guys many times over the years, where there have been calls for the.
The demise of the domain, but I just wanted to get your preliminary thoughts relative to chat GBT and.
Potential risks it seems to.
To direct people towards information rather than directing them towards.
Websites at least at the outset and just wanted to get your thoughts. Thanks.
Oh, Okay, well, that's an interesting question well first of all I'll say this I mean, right now chat GPT it looks like a very interesting and potentially beneficial thing for US we are actually looking at it quite closely we have a product called named studio, which we use in some of our channel users to help them when they go to register a domain name if it's already take.
By somebody else, which happens.
At GPT.
Named studio will actually help you find is similar and equally good or maybe even better name and we're looking closely at that at GPT to see about using its capabilities to enhance what what named studio does so I see it as.
As actually a benefit to those efforts.
I would say Chad GPT similar I mean, I guess at one point a lot of people said well voice assistance are going to replace the DNS.
Just that one had me shaking my head voice assistance go out and collect data and report it to you and the data that they collect is found by searching the internet further relevant data that they seek and thats navigated using the DNS. So there.
Lately complementary.
Got it okay. That's helpful. Thanks, Jim I appreciate it thank you guys.
Sure Great. Thanks, Rob.
And we'll take our last.
Brian .
Gall Iranian with Citi.
Hey, guys. Good afternoon, thanks for taking the question.
Let me just starting on China.
Just mentioned it before a little bit but.
Given the reopening there and some of the factors.
Thinking about some of the puts and takes there.
Are kind of driving driving moving the needle there are impacting your expectations for next year.
Yeah.
Well I guess, just first of all just understanding what I'll just add.
Oh, I'm getting an echo there.
Okay.
You hear that I do yeah, I don't know if the audience has hearing my echo I'm hearing it.
It seems to be gone now okay.
Please proceed.
Participants flying while Youre responding that's all.
Okay, Okay, alright, maybe theres some feedback there.
So in 2022.
We did see a lot of that China names that were registered in 2021.
Renewing with lower first time renewal rates that was a factor in 2022 and also China.
As you know has treated the pandemic differently, it's somewhat unique unique in that sense and.
Those are the factors that contributed to their lockdowns, which are ongoing.
Covid policy increased regulation economic uncertainty.
Portion of names renewing from China the tire.
We mentioned last year that we did see some signs of returning I think I think my comments about.
About the what if theres any consensus about 2023, I think it's that debt.
That uncertainty still exists and that the recovery is maybe a little bit slower than people thought. So we're sort of just factoring that in China is certainly part of it.
But things are changing in China, I think it's too early to say exactly what that impact will be but certainly the economy seems to be moving in a different direction there with some of the COVID-19 restrictions restrictions lifting.
Maybe after a quarter next quarter, we'll be able to tell you more about what that's doing to the 2023 outlook and obviously, we'll we'll update our guidance if we see something meaningful that we consider worthy of reporting and representing a trend at this point I think it's just too early to say.
Okay. Thanks.
No I'm not.
Any part but.
Walmart.
Tom.
Can you guys hear me.
Yes, we're hearing youre not on mute go ahead, yes.
Okay.
One one.
A couple of questions we got.
One is.
I know the environment was different.
The early part of the pandemic, but there.
Got a question on counter cyclicality that we're seeing a lot of layoffs in the tech World right now.
And often that can beat you kind of new business formations people starting projects.
Are there any indications.
Of that that are you seeing that is that factored into your guidance at all and then yeah.
I think people kind of ask.
Ask us about regularly is how we think about normalized organic growth.
Going forward right got some macro headwinds here, but prior to the pandemic the lines are growing that.
4% plus 5%.
Eric Let's just call it 4% growing around 4%, we've been well below that now for sure.
For the duration of this year your guidance is well below that for next year, how do you guys think about nor.
Normalized normalized growth rate for domains.
Turn back to the levels of pre Covid or are there other factors to think about.
Well lets see there I think there's a couple of questions in there, but I guess.
First of all we will have to answer directly part of your question. We have not tried to assess and factor in the impact that layoffs and new business starts might have although that is a data point that we do track I think you can you can map new business starts going back to 2020 with that are.
Fairly good sized jump then and some elevated activity in 2021, and then Youll see it declining in 2022, so that does tend to correlate a bit too to the domain name.
Activity and registration activity that we saw what that's going to mean for the future I'm not sure. It's not it's not a planned part of our.
Our guidance for two.
<unk> 2023, I will just say and I'll invite George to comment as well, but.
We think that the fundamentals of our business in the long term prospects for the business are fundamentally strong domain names are established have tremendous utility and tremendous value.
And registrations.
We think long term, it's a <unk>.
<unk> business to be and we think it will return to pre pandemic levels.
2023 is a trickier to predict so we haven't we haven't gone as far as predicting a return at that point.
I do think one of.
The overriding sort of macro factors and all of this is just a complicated longer recovery from COVID-19 than people thought I think it's pretty clear that we're seeing that.
Some of the ups and downs in the bumps that were encountering George you want to add anything to that.
Only thing I'd add.
You all is that when you look at our business and what we've previously indicated.
We look at factors, such as Internet adoption of Internet penetration and the growth of E Commerce.
Influencing our business and I think if you look back during 2020 in 2021, clearly we saw.
A lot of those statistics increase significantly and while they have come down.
There is still I think a longer growing trend that I think bodes well for domain names, yes, I would just add one statistic one trend is that even the names that Deb that we registered in 2020 in 2021 exclusive of some of the China names.
That are now renewing.
For the second time or even the third time are renewing at the traditional previously renewed rate, which is in the mid <unk>. So I think thats a good indicator about the long term strength of the business.
Great that's helpful and.
I agree on the trends on e-commerce and all that.
And last question.
The operating margins.
And so I'm looking at it correctly since I've come in better than where the guidance implied for <unk>.
Can you just talk about what what is driving that and how that fits into the expense controls that youre talking about or is it a separate bank. Thanks.
Yeah. Thanks, I think a couple of things as I mentioned in my prepared remarks.
We did during the year.
Actually late in the fourth quarter transition out of a dot TV.
Management that TLD.
And in doing so we as we complete all of our obligations. There we did recognize about $8 $4 million of deferred revenue in the fourth quarter again total revenue for that contract in 2021 was about $19 million.
But as Jim mentioned, we in the beginning.
I would say in the second quarter, we started looking pretty closely at our expenses and.
Did more responsible management of those expenses and we were able to get those expenses down overall, our expenses grew by about four 6%.
In the fourth quarter and so some of the increase there sequentially was a result of some of those marketing activities.
Great. Thanks, so much.
Great. Thanks, Scott.
And that does conclude the question and answer session I will now turn the conference back over to Mr. David actually.
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.
Thank you and that does conclude today's conference. We do thank you for your participation and have a niche.
Good day.