Verisign Inc. (VRSN) Q4 2020 Earnings Call Transcript

Verisign Inc. (NASDAQ: VRSN) Q4 2020 earnings call dated Feb. 11, 2021

Corporate Participants:

David Atchley — Vice President, Investor Relations and Corporate Treasurer

James Bidzos — Chairman of the Board and Chief Executive Officer

George Kilguss — Executive Vice President and Chief Financial Officer

Analysts:

Rob Oliver — Robert W. Baird — Analyst

Nick Jones — Citigroup — Analyst

Sterling Auty — JPMorgan — Analyst

Presentation:

Operator

Good day, everyone. Welcome to VeriSign’s Fourth Quarter and Full Year 2020 Earnings Call. Today’s conference is being recorded. Recording of this call is not permitted unless pre-authorized.

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.

David Atchley — Vice President, Investor Relations and Corporate Treasurer

Thank you, operator. Welcome to VeriSign’s fourth quarter and full year 2020 earnings call. Joining me are Jim Bidzos, Executive Chairman and CEO; Todd Strubbe, President and COO; and George Kilguss, 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.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 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 in today’s call and the matters we will be discussing today include GAAP results and two 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.

James Bidzos — Chairman of the Board and Chief Executive Officer

Thanks, David. And good afternoon, everyone. This past year has presented challenges and uncertainties for all of us. There’s also been a year and our mission has never been more relevant. Like many of you, we spent the majority of the year with most of our teams working remotely. During this time, we continue to maintain, invest in and evolve our infrastructure, which enables us to reliably and accurately provide a critical DNS navigation service people around the world rely on more than ever with commerce, education, healthcare and person-to-person connection, while complying with our high operational standards as required by ICANN agreements.

Thanks to the dedication of our team and the resilience of the specialized network they operate and maintain. We extended our record of DNS availability to over 23 years during 2020 and we will continue our focus as it appears we will be working remotely well into 2021.

Turning to our results. I’m pleased to report another consistent quarter that concludes a solid year of operational excellence for the company. As I mentioned, in 2020, we marked more than 23 years of uninterrupted availability of the VeriSign DNS for.com and.net. We also processed 42.4 million new registrations, delivered revenue of $1.265 billion and generated free cash flow of $687 million.

During the full year 2020, we repurchased 3.7 million shares for $735 million. Effective today, the Board of Directors has increased the amount of VeriSign common stock authorized for share repurchase by approximately $747 million to a total of $1 billion authorized and available under the share repurchase program, which has no expiration.

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. At the end of December, the domain name base in.com and.net totaled 165.2 million, consisting of 151.8 million names for.com and 13.4 million names for.net with a year-over-year growth rate of 4%.

During the fourth quarter, we processed 10.5 million new registrations and the domain name base increased by 1.46 million names. 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 2.5% and 4.5%. As announced in today’s earnings release, we have given notice of a price increase of $0.54 for the annual wholesale price for.com domain names, which raises the price from $7.85 to $8.39 effective September 1st, 2021. This represents the first wholesale price increase of.com domain names since 2012 and is in alignment with a limited and 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 an increase in the wholesale price of.com domain names before October 25th, 2021. We believe this positions competitively in the marketplace.

And now, I’d like to turn the call over to George.

George Kilguss — Executive Vice President and Chief Financial Officer

Thank you, Jim. And good afternoon, everyone. For the year ended December 31st, 2020, the company generated revenue of $1.265 billion, up 2.7% from 2019. Operating expense totaled $441 million and it was up 3.6% from last year. For the fiscal year, the company delivered operating income of $824 million, up 2.2% from $806 million a year ago and a full-year operating margin of 65.2%.

Fourth quarter revenue came to $320 million, up 3.1% 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 is primarily a result of 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 of 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 as a result of the lapse of certain statutes of limitations. This income tax benefit increased Q4 diluted earnings per share by $0.11. Operating cash flow for the fourth quarter was $195 million and free cash flow was $189 million compared with $194 million and $185 million respectively for the fourth quarter last year.

I’ll now discuss full year 2021 guidance. Revenue is expected to be in the range of $1.300 billion to $1.320 billion. This revenue range forecast reflects the domain name base growth rate of between 2.5% and 4.5% 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 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 is expected 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 in our infrastructure as well as an expected 2020 capital spend that moved into 2021. The GAAP effective tax rate is 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 continue to demonstrate sound financial performance throughout last year and we look forward to continuing our focused execution in 2021.

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

James Bidzos — Chairman of the Board and Chief Executive Officer

Thanks, George. I’d like to say again that our priorities continue to be our mission of ensuring the secure, reliable and accurate operation of our critical Internet infrastructure and the safety of our people. I also want to acknowledge once more the team here at VeriSign for their hard work in maintaining and operating our infrastructures, even during the challenges of working remote during the pandemic. Those efforts are undertaken almost entirely behind the scenes and are not well known, but there are many hundreds of dedicated professionals to develop, maintain and operate our purpose-built network and have done so without service interruption for over 23 years.

Even today, some people may think, we still operate an SSL certificate authority and PKI business, the VeriSign’s predecessor, RSA data security built going all the way back to 1986. That business was sold in 2010 and we have increasingly tightened our focus on our core mission of secure Internet directory and registration services ever since. More information on just what we do today can be found on our homepage at verisign.com.

Now, we’d like to walk through the 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.web? As we noted last quarter, a 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, VeriSign is not a party in these IRP proceedings but was granted the right to participate in certain limited aspects.

Also as a reminder, an IRP under ICANN’s bylaws is for the purpose of ensuring that ICANN followed its own policies and procedures when making decisions. Our expectation is that following the resolution of the IRP, the ICANN Board will make a final decision on the delegation of the.web TLD. And the guidance we provided today does not include revenue or expenses related to.web.

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

Questions and Answers:

Operator

[Operator Instructions] We’ll take our first question from Rob Oliver with Robert W. Baird.

Rob Oliver — Robert W. Baird — Analyst

Great. Thank you guys for taking my question. Appreciate it. George, I was just hoping we could walk maybe through a little bit more of the thought process on the expense structure for ’21. And then, also wanted to maybe get some color on that. I know you guys had talked a little bit in recent quarters about spending some more on the security side.

It certainly looked impression, given guidelines that happened in December, but want 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 came out of last year and into this year and just get a little bit more color on the capex, which is higher than in our model likely?

Where you guys able to hear my questions?

David Atchley — Vice President, Investor Relations and Corporate Treasurer

Yeah. We heard your questions. George, I don’t know if you’re on mute, but just double checking.

George Kilguss — Executive Vice President and Chief Financial Officer

I’m sorry. Yes, hi. So, yes, thanks for the question, Rob.

Rob Oliver — Robert W. Baird — Analyst

Sorry to make [Speech Overlap] brilliantly twice, George.

George Kilguss — Executive Vice President and Chief Financial Officer

That’s okay. I’ll do my best. But 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 hardware and software tools in those areas.

As far as 2021, we expect our expenses to be similar as a percent 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 percent of revenue for next year. As far as capital expenditures, I stated in my prepared remarks, capital expenditures are expected to be between $55 million and $65 million. And that again reflects ongoing investment in our infrastructure as well as some expected 2020 capital spend that slipped into 2021. We — as I mentioned, we guided between $55 million and $65 million last year, we got between $45 million and $55 million at this time. So this year’s range is slightly higher than last year, but we feel these investments are appropriate to continue to ensure the security and stability of our infrastructure.

Rob Oliver — Robert W. Baird — Analyst

Great. That’s helpful. Thanks. I Appreciate it. And then, Jim just one for you, if I may. Just obviously the price increases, so I’m glad you guys were able to get those through. On the domain outlook for the year, it’s a bit of a wide range and 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 2.5% to 4.5%. Appreciate that.

George Kilguss — Executive Vice President and Chief Financial Officer

I’m sorry. Did you just want clarification?

Rob Oliver — Robert W. Baird — Analyst

Yeah, right. I mean, just — want some clarity on your thought process on that range.

George Kilguss — Executive Vice President and Chief Financial Officer

I’m not sure I can give you any more detail beyond that, I guess. Maybe I don’t understand your question. Let me —

Rob Oliver — Robert W. Baird — Analyst

That get me to the low end of that range. That’s a growth number that would be forward GDP growth. And just — is there other elements of, and you saw some pull forward potentially or maybe we didn’t — due to COVID, where we saw some domain activity, where you guys ended up the year with the high end of your — above the range of your initial 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? And is that why the low-end would be factored and just any color there, if possible, would be great?

George Kilguss — Executive Vice President and Chief Financial Officer

Yeah, this is George. Maybe I can jump in here 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 in the last few quarters. In that registrars from both North America and EMEA are performing very well and that growth has been slightly offset by some slower activity from registrars based in China.

But as you saw, yes, in the fourth quarter, we had a pretty solid quarter delivering about 10.5 million registrations, which was up from 10.3 million a year ago. And during the year, as we talked about, we had some increased demand in those regions from people looking to get online, new business starts and — as there has been new functionality created in 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 typically do have a range this wide going into the year. January is up to a pretty good start, but right now we sit here that’s our expectation between 2.5% and 4.5%. And as we go through the year, we’ll update you on that range.

Rob Oliver — Robert W. Baird — Analyst

Great. Thank you.

James Bidzos — Chairman of the Board and Chief Executive Officer

I understand your question, I guess — if the idea is to sort of associate some 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 is obviously some uncertainty associated with how COVID is going to play out in 2021. A lot of ups and downs and gives and takes and that certainly is a factor that affects it. But as George said, there is a lot of factors that go into the range. But I would say, if you want one macroeconomic indicator, there is obviously some uncertainty around COVID. That’s probably the single biggest influence in that range.

Rob Oliver — Robert W. Baird — Analyst

Okay. Thank you again.

Operator

We’ll go ahead and take our next question from Nick Jones with Citi.

Nick Jones — Citigroup — Analyst

Great. Thanks for taking the questions. I guess, first, and this is probably splitting hairs. But could you have taken another penny in price increase or is it because like it’s slightly over 7%, you can’t, I guess, any clarity there? And then, I guess, a follow-up is…

James Bidzos — Chairman of the Board and Chief Executive Officer

You’ve got…

Nick Jones — Citigroup — Analyst

Go ahead.

James Bidzos — Chairman of the Board and Chief Executive Officer

I’m sorry. I think you’ve got it right. The problem is that if you apply — we don’t bill in fractions of a penny. And the actual increase came in with a 0.9 on the — to the right of the decimal point in penny. And so, you don’t know, the number was 9, we rounded down because otherwise we would be slightly over the 7%.

Nick Jones — Citigroup — Analyst

Got it, got it. That’s helpful. And then, on COVID kind of through a rankle, I think, and potentially how investors are thinking about the price increases, how should we think about the cadence from here? I mean, that something is 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 you thinking about the cadence of the price increases over the next few years as the windows open?

George Kilguss — Executive Vice President and Chief Financial Officer

Nick, this is George.

James Bidzos — Chairman of the Board and Chief Executive Officer

I’m sorry, I placed on mute, George. I’m sorry. Mute is that tricky. I’ll let George weigh-in, but basically we don’t guide to future price increases and today’s announcement is only for an increase in com domain registration fees that’s effective and begins on September 1st of this year. Beyond that, obviously we don’t guide. George, do you want to comment? Please go ahead.

George Kilguss — Executive Vice President and Chief Financial Officer

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

James Bidzos — Chairman of the Board and Chief Executive Officer

Yeah. Sorry, I was on mute thereafter.

Nick Jones — Citigroup — Analyst

Okay. One last question, just kind of ask COVID restrictions maybe loosen in certain markets, vaccines are rolling out, are you seeing any change in kind of the trends we saw in 2020 in terms of people’s — SMBs switching to digital solutions, people leaning into online solutions. And is there any meaningful changes in trends kind of early in the year in certain regions. You mean just within the US in terms of registrations or anything to kind of give you pause as to kind of how the reopening may impact these trends? Thanks.

George Kilguss — Executive Vice President and Chief Financial Officer

Yeah, Nick, this is George. I don’t see any materially difference in the trends that we saw last quarter. Even through January, 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 late January last year and it’s in early February this year. But other than that, to answer your question, nothing yet that we’ve seen to change our views.

Nick Jones — Citigroup — Analyst

Great. Thanks for taking the question.

Operator

And we’ll take our final question from Sterling Auty with JPMorgan.

Sterling Auty — JPMorgan — Analyst

Yeah, thanks. Hi, guys. When I saw that you announced the price increase on dam [Phonetic], what am I going to ask on the call now that you announced an increase?

George Kilguss — Executive Vice President and Chief Financial Officer

Well, is that the question?

Sterling Auty — JPMorgan — Analyst

No, of course not. All right. So, let’s start with renewal rate. The down 20 bps year-over-year, anything that you saw in particular this year, whether it would be — I noticed that over the last month, there was a couple of days, one where I think the domain base was down 93,000, another one that was down like 102,000. Sometimes I usually equate that to some of the registrars going through and doing some purchase. So anything like that that may have impacted the renewal rate in the quarter?

James Bidzos — Chairman of the Board and Chief Executive Officer

Sterling, as you pointed out, the renewal rate was relatively flat year-over-year, I think 73.5% in the fourth quarter versus 73.8% in the fourth quarter 2019, so relatively similar. We did have a very strong 2019 performance from China-based registrars. And as we’ve talked before, as a group, we tend to see their first-time renewal rates come out a little bit lower. And as that cohort was renewing this year, that did put a little downward pressure, I would say, in our first-time renewing rates for the international group as a whole. But again, I think overall 73.5% was a pretty good result.

Sterling Auty — JPMorgan — Analyst

Now that makes sense. You made the comment that.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 to get it launched? And perhaps some of your thoughts around the marketing muscle in terms of spend that you might put behind at launch?

George Kilguss — Executive Vice President and Chief Financial Officer

Sterling, I think, I guess, with all of the process, part of the IRP complete renewal rating, I think I can say, repeat what I said earlier, which is that, where we hope that we’re weeks away from something from the panel. We’re certainly closer as time moves on, but I think it’s just too early to give any indication of a timeline from there to the launch of.web or any of the costs associated with it. It’s just kind of early.

Sterling Auty — JPMorgan — Analyst

Okay. And then, last question from my side is, in the US, if you look at the new business applications, they spike late summer early fall, so I think August/September timeframe. But they’re still elevated in the fourth quarter, especially on a year-over-year basis. If I think about that relative to your new domain registrations, the 10.5, new registrations have been up relative to kind of historical norms for a while now. Is there a correlation there? And does that actually give you some confidence that hopefully the economy opens back up on the back of vaccines and perhaps we could see even faster domain growth in ’21?

George Kilguss — Executive Vice President and Chief Financial Officer

So, Sterling, we’ve seen that same data. And as you know, we are a FIN registry. So we do get some insights from our registrar partners and from what we hear from them. Yes, new business starts and companies finding that they can better serve their customers by having a website and ergo [Phonetic] 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 exit and things are opening it up, I think you could probably go either way, either it could accelerate or it could slow a little bit. We’re just not sure how the market would react, just as we were somewhat uncertain when this whole pandemic started, but that clearly is a possibility.

Sterling Auty — JPMorgan — Analyst

And maybe just a follow-up to that. On mix of domains, the new TLDs, I think, have given back some of the share that we saw them — saw that category gain in years past. Are you seeing that mix having any impact on your business?

James Bidzos — Chairman of the Board and Chief Executive Officer

I guess the mix of…

Sterling Auty — JPMorgan — Analyst

Also to be more specific, you’re a FIN registry, but you work with hundreds of registrars on a global basis. Are registrars coming back to you given that you do marketing programs and suggesting that they want to put more muscle behind.com, because they’re just not seeing the traction that perhaps they expected in the new TLDs?

James Bidzos — Chairman of the Board and Chief Executive Officer

I guess, I would just — I think the best answer I can give you that question is; one, that I think is just a simple fact which is the.com is a recognizable brand that helps people get found online, it’s a popular well established brand. I don’t know, I’m not aware of any specific deliberate effort that we’ve been informed of any kind of a shift like you’re describing.

George, do you want to add anything to that?

George Kilguss — Executive Vice President and Chief Financial Officer

Yeah, I think that’s right, Jim. I mean, I think that’s probably a great question for one of the registrar’s earnings calls, but as to what they’re seeing specifically. But our programs tend to be relatively set at the beginning of the year and we roll them out, we announced them and we tend not to changing too much year-over-year or intra-year, I would say. But I don’t think I have anything more to add than what Jim commented on.

Sterling Auty — JPMorgan — Analyst

Understood. Thank you so much.

James Bidzos — Chairman of the Board and Chief Executive Officer

Thanks.

Operator

I’d like to now turn the call back to Mr. David Atchley for any final comments.

David Atchley — Vice President, Investor Relations and Corporate Treasurer

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.

Operator

[Operator Closing Remarks]