Q2 2023 Verisign Inc Earnings Call
Good day everyone.
So there are signs second quarter 2023 earnings call. Today's conference is being recorded recording of this call is not permitted unless preauthorized at this time I would 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 Verisign second quarter 2023 earnings call. Joining me are Jim <unk> Executive Chairman and CEO , Todd <unk>, 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.
It 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 audited 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, Verisign does not update financial performance or guidance during the quarter unless it is done through a public disclosure.
Our 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.
Thank you David good afternoon to everyone and thank you for joining us.
We delivered another successful quarter by focusing on our mission as a critical infrastructure operator, the quarter included the renewal of the Dot net registry agreement and solid financial results. Additionally, last week, we marked 26 years of 100% availability in the Dot com Dot net domain name resolution system.
The various global challenges over the past 26 years from the pandemic the natural disasters to evolving cyber threats. Our purpose built network has got billions of people worldwide continuously connected to what matters. Most the work we do to operate protect an evolved key internet infrastructure has never been more important than it is today.
Reaching this mark is a testament to the ongoing investments made in our platforms processes and people.
On June 30th we announced the renewal of the Dot net registry agreement with ICANN as expected given the presumptive right of renewal in our agreement the business in terms of the agreements such as pricing the fees paid to ICANN, a renewal rights and a six year term of the agreement are unchanged. The next renewal for the Dot net registry agreement will be June of 2029.
In addition to delivering on our mission during the second quarter I'm pleased with the financial results would show the continued strength of our business. During this uncertain macroeconomic period.
Second quarter revenues revenues grew five 7% year over year, while EPS grew 16, 2% year over year.
At the end of June the domain name base in Dot Com and Dot net totaled 174.4 million domain names up from $174 3 million in Q2, 2022 and up from $1 $73 8 million names at the end of 2022.
During the second quarter the domain name base decreased by <unk> 3 million domain names offsetting some of the 1 million names we added during the first quarter.
From a new registration perspective, the second quarter delivered a one 5% year over year increase was $10 2 million, new registrations compared to $10 1 million last year we.
We believe that the renewal rate for the second quarter of 2023 will be approximately 73, 4% compared to 73, 8% a year ago.
While there are many factors that drive demand for domain names the core value proposition for domain names remains strong and we're seeing broad based engagement from our registrar channel. However, with these fundamentals and attacked low demand from China remains the primary source of drag on the overall domain name base growth with.
With this current traveling now expect the domain name base growth rate of between zero and 1% for the full year of 2023. This updated range reflects continued uncertainty, especially the weakness we continue to see related to China.
Our financial and liquidity position remains stable with $936 million in cash cash equivalents in marketable securities at the end of the quarter.
During the third quarter, we repurchased 1 million shares for $220 million.
Effective today the board of directors has increased the amount authorized for share repurchase of Verisign common stock by 1.14 billion to a total of 1.5 billion authorized and available under the share repurchase program, which has no expiration.
On Dot web as many of you have seen from our statement on May 3rd I can't as board of directors dismissed affiliates as objections regarding the dot web auction and directed that Andi sees dot web application move forward. This was a significant finding by the board and we're pleased that our role in the auction was proved to be consistent what I cant policies subsequently according to I can't.
Website affiliates as filed another I R. P complaint.
Similarly challenging the board's decision. This filing has not been posted nor has any response from ICANN I can't it's placed N D C Dot web application application.
Sorry on hold now.
Given the boards decision, we see no basis for any further delay and delegating that web, but this is an ICANN process and we're not yet involved in it.
Finally as announced in today's earnings release, we have given notice of a price increase of 99 cents for the annual wholesale price for Dot net domain names, which will raise the price from $9 90 to $10 91.
At February one 2024.
To turn the call over to George I'll return with Georgia has completed his financial report with closing remarks George.
Thanks, Jim and good afternoon, everyone.
For the quarter ended June 30th 2023, the company generated revenue of $372 million up five 7% from the same quarter of 2022 and delivered operating income of $249 million, an increase of five 4% from the same quarter a year ago.
Operating expense in the second quarter totaled $123 million compared to $123 million last quarter and $116 million a year earlier.
Net income totaled $186 million compared to 167 million a year earlier, which produced diluted earnings per share of $1.79 for the second quarter of 2023 compared to $1 54 for the same quarter of 2022.
Operating cash flow for the second quarter of 2023 was 145 million and free cash flow was $139 million, both of which were at similar levels in the year ago quarter.
Operating cash flow and free cash flow for the six months period ended June 30th totaled $404 million and $392 million and were up from $352 million and $339 million respectively for the same six month period a year ago.
I'll now discuss our updated full year 2023 guidance.
Revenue is now expected to be in the range of 1 billion and $490 million to $1.500 billion. This updated revenue range reflects our expectation that the domain name base growth rate will be between zero and 1% as Jim mentioned.
Operating income is still expected to be between $990 million and $1 billion 5 million.
Interest expense and nonoperating income net which includes interest income estimates is now expected to be an expense of between 30 million to $40 million.
Capital expenditures are now expected to be between 45 million to $55 million.
And the GAAP effective tax rate is still expected to be between 22% and 25%.
In summary, Verisign continued to demonstrate sound financial performance during the second quarter of 2023, and we look forward to continuing to deliver on our mission and our objectives throughout the year.
Now I'll turn the call back to Jim for his closing remarks.
Thank you George we strongly believe our strategic focus and disciplined management continue to service well, allowing us to deliver another solid quarter in which we provided secure and reliable infrastructure services managed our business responsibly and efficiently returned value to our shareholders.
Thank our teams for their dedication and 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.
To ask a question please signal by pressing star one on your telephone.
If you are using a speaker phone please make sure your mute.
Fair enough.
No.
What's your question has been stated.
Yeah.
Our first question comes from the line of Rob Oliver.
Great Good afternoon guys.
My first question is for you I've got three.
Questions total, but first is for you and it's it's on Dot Com I think we all can kind of see real time some of the sluggishness.
In the market and I think.
It looks like.
We really really demand activity in dot com is not kind of come back to sort of pre pandemic levels. Maybe as you guys had hoped I know in your prepared remarks I appreciate the commentary relative to China, but would just love to hear a little bit more about your view there on on what's happening whether it be China or if there are other factors in you know.
I know.
Yellow was just over in China called for stimulus. It sounded like there was some coming so just would also love to hear.
You know what you think gets us it gets us out of this rock.
I wish I knew the answer that but let me let me let me do my best I'm happy to share what I can well first there is the obvious macro factors affecting the economy.
Extended COVID-19 recovery declining, but still high inflation rates.
Politics, and the growth rate of new business starts, which while still improving our still off their highs as far as specific factors for our business.
I don't know how to put it Rob there is China.
It's the largest single factor and it continues to remain soft in both new registration and renewal rates.
Stringent registration rules and a challenging COVID-19 recovery seem to be the main factors there in the U S channel focus as a factor as we've seen before.
Some channel partners shift their focus to our boot rather than new customer acquisition in times of slower economic activity that is cyclical at some point they.
Wire, new customers and so that will return to that.
Our revised guidance recognizes the uncertainty that all of these factors represent for the remainder of 2023.
I'll just add as far as things. We can control. These include meeting our contractual requirements, obviously practicing responsible expense management and focusing on our capital allocation strategy.
<unk> to focus on those areas that we can control that's the key for us to deliver long term value creation for our shareholders.
That's helpful.
Helpful.
Thank you.
And.
I also appreciate that you.
I went into some detail in your prepared remarks on Doug Webb.
I think just stepping back now it's been a six almost seven year journey now and that I think.
Investors are.
Fused the landscape and what's going on and it's very hard to know whether this sort of resets is back to the beginning of the process with the IOP or whether there is now a next step in the process, which would circumvent the need to do that.
If you could help us perhaps provide a little bit more color as to.
How you view that currently to the extent that you can.
Happy to do that.
Alright people a couple of notes here handy just for that purpose let me.
Well first of all it's easy to get confused I completely understand that Theres a lot of you know we talk about this every quarter and there are a lot of terms that we use.
Acronyms like ERP and C. P that even even experienced lawyers I wouldn't be familiar with if they didn't operate in the ICANN world. So maybe yes.
Maybe I can simplify with a little bit of background what's.
What's happened.
Maybe even to find some of these terms. So first when we talked about in I R. P. Independent review panel, that's a lawsuit not in court, but more like an arbitration demand that someone can bring against ICANN.
However, the only claims allowed are those based on a violation by I can of its bylaws.
A C E P. You've heard us use that or cooperative engagement process is a discussion between a potential ERP filer and ICANN ahead of an IRB.
And all actions associated with the issue.
Behind the IRB or automatically put on hold during the CEB and Thats kind of what we've been in for the last few weeks. You've also heard another acronym N. D. C. That's that stands for new Dot co and Thats a company that verisign entered into an agreement with about Dot web. So let me let me try to simplify just how we got here.
I don't want to speculate about whats going to happen going forward.
Not just because it's pending litigation, but much of it is I can't process, that's not ours, but let me just give you a really brief history now that some of the terms are easier to understand without web. So in 2016, there was an auction for dot web M. D. C. One that auction with our backing in 2018, a company called affiliates the planes.
<unk>.
Filed an IRB seeking to have the RP panel disqualify N D C into award Dot web to them because of affiliates objected to the auction.
Our <unk> participation with M D C.
A few years later in 2021 after a lengthy legally manoeuvrings.
The <unk> panel said no. The panel said I can't owns the issue and the panel tells I can to go review and decide the issue.
But if earliest doesn't like that answer and filed a followup motion asking the panel essentially for a do over and the panel. Once again tells affiliates no but this time they call affiliates as request frivolous and they sanction affiliates ordering it's all he has to pay I, Kansas attorney fees.
During 2022 and early 'twenty three.
I can then followed the panels recommendation they undertook a thorough 16 months review process in early may.
Of this year I can't announced that it had completed its review and had concluded by a board vote that was without objection that affiliates exactly accusations were wrong and that the board and then the board directed ICANN staff to proceed with processing Mdc's Dot web application.
Affiliates, then filed the C P, which then automatically pause the processing of Dot web.
So now affiliates as filed another ERP, that's true, but at this time, theres, something new and substantial vintage.
Definitive an affirmative ruling from the ICANN board of directors again without objection about that dot web should be awarded to M. D. C above resulting from a 16 months process that included work by ICANN staff, who reviewed new submissions by Verisign and affiliates working with their law firms, who were allowed to use and even supplement the entire Lee.
<unk> record from the earlier two year RFP a vote that resulted in finding the dot web should be awarded to M. D. C. So that's new and that's not trivial.
We believe that affiliates has been and is still litigating for delay.
Now in terms of next steps, we'll have to see whether I can continues with the hold on dot web the dot web delegation or not during the IOP.
I cant could continue processing the dot web TLD during the ERP, although that decision could be challenged.
I believe there should be any further delay, but this is I can't process and that we will continue to work within that system.
So what happens next.
I don't want to comment on as I said, it is pending litigation, but I hope that bit of background and history was helpful.
Yes.
It was really helpful. I appreciate that.
Sorry, Jim and I'm glad it's on the transcript because I know I for one I'm going to need to look back at that.
Although there's a lot of it.
There, but yes.
Really even having lived through a lot of it really appreciate it.
I know I'm not the only one anymore. So I'll squeeze in one.
Last question and that is just on dot net I just wanted to ask so it's the second year anywhere where you guys are availing yourself of the opportunity to raise price on dot net and that's coming off for a long period, where you did not.
What's changed for you guys relative to your view.
To take price now on that one.
What if anything in terms of your mindset mentality.
They're in a relative to dot net pricing. Thank you.
Yeah. Thanks, Rob This is George I mean, if you look back at Dot net I mean, we had not taken a price increase for a quite a period of time I think the last price increase we took was in 2018 and obviously we announced.
And just took one here in February to 90 92, so as we think about the net would look at the industry, we look at where.
Hey, its position within the marketplace and we think the price that we're raising it too that we just announced is keeping dot net competitive with the other tld's within it which would you compete with.
Great. Thanks, guys I appreciate it.
Thanks Robert.
We'll take our last question from the line.
Okay great.
Hey, good afternoon, guys I'll come back to the.
Overall growth in domains.
Hum.
Two parts on that first I want to dig into that.
The comment about China being the Oh.
I'm trying to get a much smaller part of your board.
So just wanted to stand.
Yeah.
What's driving that.
So are you, saying that the main growth.
Oh absolutely.
Is there any color you can give.
And in the U S.
Might be so what I know it looks like and then the.
Comment on the omni channel focus.
And then on our net adds.
That was really interesting.
Can you just elaborate on that.
Little bit.
Our responsible our channel partners are driving the growth there.
Their marketing and it.
For sure for domain.
What is what is their role and how much of it.
And is there enough demand.
Oh, Yeah sure Yigal this is George.
So your first question was from kind of a domain name base perspective, we have seen growth here in Q2.
I would say the regions that we report out on the U S EMEA and our all other segments.
From a year over year domain name base have all been growing but China, we've seen that the domain name base segment decline I think if you wanted to get some relative terms you probably can look in our 10.
<unk> 10-Q, that's filed this afternoon and look at the revenue growth rates of those segments, you'll see that.
China in the quarter was down about 10%.
EMEA was up about 1% in the U S was up about 7% and our all other category was up about 15% and that really comprised the weighted average of that comprised of.
Hum.
Five 7% so.
We're still seeing growth you know as far as new units.
I'd say, China again is down.
The U S was relatively flat here in the second quarter from a new unit perspective.
But.
But the other markets that we report on where we are up so I'm still seeing some.
Some growth here in the market, but China has really been as Jim mentioned, the drag on net new unit growth here in a little bit on revenue growth as well.
Yes, Jim.
Question about <unk>, let me just say one thing upfront.
To clarify the question. After this if you want but I just wanted to say that we.
I think you know, but we have sort of limited visibility into the end user obviously sell only through registrars.
So I think.
The point is is that <unk> is a sort of phenomenon. It's typical of any business.
Certain economic conditions that becomes more efficient for them.
<unk> focus on <unk>, rather than customer acquisition as the cost of those activities vary and the results are different and more advantageous in certain economic conditions. So the observation is based on a phenomenon that affects our channel just like everybody else not on anything thats, particularly unique that we see or understand about it and we can just to preserve this bill.
Youre, obviously through our own registrations and monitoring their websites and looking at how they they bundle their products, but this is something that every business does not unique to do registries registrars or the DNS just to clarify.
So there's there's a limit to what theirs.
Not a great insight there that it's just an observation of factual observation based on what we see and observe and it tends to be cyclical we see that obviously they go through cycles, you focus on ARPA for a while and then you go back into new customer acquisition.
So we see that I think it was in 2014, we had we had a very visible cycle of this that we went through.
Okay.
I'm asking because I think it was.
It was really interesting.
Hi.
Partners.
Some of the others.
You talked about marketing.
Pulled back materially on on their marketing spend.
And then maybe.
Got it.
Nathan.
Yes.
I'm not sure what do you think about that.
Sure.
Yeah.
Marketing.
Yes.
I had some difficulty hearing the last part of that marketing spend certainly is another factor and various economic guy.
Circumstances, obviously any retailers are going to vary their marketing spend and that has an effect on us and obviously.
During the pandemic and recently, we've seen some of that behavior that affected registrations as well if I missed anything in the last part of your question I apologize. Please please ask again lines a bit fuzzy.
No.
You know that the question.
Really helpful.
I haven't thought about it that way.
Okay, Great I'm glad it was helpful.
Great. Thanks Hugo.
This concludes today's question and answer session I will now turn the call back to David.
Okay.
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.
Yeah.
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