VeriSign (VRSN) Q2 2022 Earnings Call Transcript

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VeriSign (VRSN 0.77%)
Q2 2022 Earnings Call
Jul 28, 2022, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, everyone. Welcome to VeriSign's second quarter 2022 earnings call. Today's conference is being recorded. Recording of this call is not permitted unless preauthorized.

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 of Investor Relations and Corporate Treasurer

Thank you, operator. Welcome to VeriSign's second quarter 2022 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 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 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.

Jim Bidzos -- Executive Chairman and Chief Executive Officer

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 and accurate DNS resolution. Last week, we crossed a significant milestone by marking 25 years of uninterrupted uptime for the .com, .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 6.8% year over year and our EPS by 17% year over year. At the end of June, the domain name base of .com and .net totaled 174.3 million domain names, consisting of 161.1 million names for .com and 13.2 million names for .net with a year-over-year growth rate of 2.2% and a sequential decrease of 354,000 domain names. The final renewal rate for the first quarter of 2022 was 75.9%, compared to 76% 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 the 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 the renewal rates of 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 the 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 mention. 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 that 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're adjusting our 2022 domain guidance and now expect the domain name base growth rate of between 0.5% and 1.5%. 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 $0.90 to the annual wholesale price for .net domain names, which will raise the price from $9.02 to $90.92 effective February 1, 2023. Our financial and liquidity position remained stable with $997 million in cash, cash equivalents, and 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 .web. As we noted in our last call, ICANN's board directed one of its standing committees to review the independent review process panel's final decision and provide the board with its findings. The committee then asked the parties to submit written summaries of their claims by July 29, that's tomorrow, and then to submit responses by August 29.

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 when George has completed his financial report with closing remarks, including more about our areas of focus going forward. George?

George Kilguss -- Executive Vice President and Chief Financial Officer

Thanks, Jim, and good afternoon, everyone. For the quarter ended June 30, 2022, the company generated revenue of $352 million, up 6.8% 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 benefit 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'll now discuss our updated full year 2022 guidance.

Revenue is now expected to be in the range of $1.415 billion to $1.430 billion. This updated revenue range guidance reflects our domain name base growth rate expectation between 0.5% and 1.5% that Jim mentioned earlier. The operating margin is now expected to be between 65.25% and 66.25%. 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 nonoperating 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'll turn the call back to Jim for his closing remarks.

Jim Bidzos -- Executive Chairman and Chief Executive Officer

Thanks, George. There's little, if any, disagreement and 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 macroeconomic uncertainty was a factor that influenced our revised domain-based growth guidance.

While we can't do much to change the pace of economic recovery from the pandemic or the geopolitical and macroeconomic events and forces 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, announcing, as described earlier: a price increase for .net registrations, which we have held flat for five years; identifying and pursuing new growth opportunities such as .web; safely transitioning our teams to a new hybrid and flexible work environment, which is currently underway; working to ensure VeriSign remains a company that will attract and retain top talent; and continually evaluating and optimizing our efforts to efficiently return 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 remain 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.

Questions & Answers:

Operator

[Operator instructions] We will take the first question from Mr. Rob Oliver.

Rob Oliver -- Robert W. Baird and Company -- Analyst

Great. So, Jim, first one for you, just with domains decreasing here in Q2. Can you talk a little bit about what that means for the business in a medium- to longer-term view? And then I want to dig in on some of the factors that have impacted that as well that you cited.

Jim Bidzos -- Executive Chairman and Chief Executive Officer

OK. 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.

And the last time we saw it several years ago, within a few quarters, registrations have normalized. So we're keeping an eye on the current situation with that precedent in mind. What 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 factors to consider is that in our Q1 earnings was the component of growth attributable to the pandemic had subsided.

That's -- this is confirmation that that is what we are seeing in '20 and 2021. 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 domains.

Rob Oliver -- Robert W. Baird and Company -- Analyst

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.

Jim Bidzos -- Executive Chairman and Chief Executive Officer

Yes. Sure. So we have seen a slight decline in the first-time renewal rates in the quarter, but that's 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 the 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 confidence going forward in the core strength of the business, renewal rates in particular.

Rob Oliver -- Robert W. Baird and Company -- Analyst

Got it. Got it. And that cohort that you're talking about, Jim, is that a North American cohort? In other words, those that got domains for the first time now emerging from the pandemic are renewing?

Jim Bidzos -- Executive Chairman and Chief Executive Officer

Well, I think those are broad modulo, these are math terms, term that 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 remaining are not limited to North America, no real geographic specificity there. I think those are geographically very broad. And those renewal rates are strong, yes, so are the quality names.

Rob Oliver -- Robert W. Baird and Company -- Analyst

OK. Very helpful. And on the timing of the .net price increase, I just would love to hear your reasoning behind the timing. It comes at a curious time on the one hand, you guys have not raised prices there as you mentioned for five years.

On the other, it hasn't been particularly strong. And just wondering if you could walk us through understanding why now and hope to get a better sense of that.

Jim Bidzos -- Executive Chairman and Chief Executive Officer

Well, we've -- as you know, back in 2020, in the early stages of the pandemic, we froze all of our TLDs, including .net. .net's current level -- unchanged level of pricing, without price increases, does go back five years. We studied the market and we make those decisions. There's nothing specific to the current conditions that, that decision is based on.

It's just the result of our study in the market. .net still represents a lot of value. The other so-called legacy TLDs are all priced slightly above .net, so it's very competitive in the market. And as you noted, the price increase takes in fact, February 1 of next year.

Rob Oliver -- Robert W. Baird and Company -- Analyst

Got it. Got it. OK. And on .web, you touched on it, and I'm not sure that there's more that you can say, but this lab renting is seemingly an unending process is now in another phase.

So I guess by your comments, we could -- I guess, infer that you guys have filed or will be filing by tomorrow. Everything that was requested here bigger quarter in terms of both parties having to like resubmit all of their material? Was there anything new that was asked of you guys? And then any other comments around potential timing on .web would be helpful.

Jim Bidzos -- Executive Chairman and Chief Executive Officer

OK. Let me parse that a little bit. So yes, we certainly will make our filing on time tomorrow, no doubt about that. And you're right, this is a slightly different part of the process.

I think it might be fair to characterize everything that's gone on until now, basically a process that was held in front of the IRP panel, the Independent Review Process panel, which is sort of close to arbitration, the form of arbitration. That panel made its ruling and send it back to ICANN and had ICANN make a decision. ICANN took the step in a board meeting earlier this year to direct this existing committee to address the issue and follow the instructions of the panel, which is for ICANN to decide these issues. Their process, that committee that's assigned a task of resolving this issue asked for these filings.

So of course, we'll make ours. So we are in a stage where ICANN has now at the direction of the panel after years of litigation, been given the responsibility to resolve these issues, these are -- this is all tied to ICANN policies and procedures, and they're going about it in this manner. So we're hopeful that we're in a different phase, and we're optimistic that there are 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 won't make any comments on that. But we've always said that we look forward to being the registry operator for .web. We see it as an opportunity to introduce a new TLD and offer our customers more choice. That is unchanged.

I think at this point, it's in ICANN's hands and they have a process, and we look very much forward to hearing from them.

Rob Oliver -- Robert W. Baird and Company -- Analyst

OK. Great. That's helpful, Jim. George, I had one for you.

You did mention that operating expenses were lower in the quarter, and that was due to the timing of certain expenses. Is that normal course timing? Or can you talk a little bit about what if any of the expenses 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. But if you could just help us understand a little bit more about what went into that variability.

George Kilguss -- Executive Vice President and Chief Financial Officer

Yes. Sure, Rob. We do have some programs that we try to execute in the year and sometimes those slip a little bit. I would say those were more of a minor case.

The larger components really were related to lower benefit and performance-based compensation accruals in the quarter. As you know, we're -- maybe you don't know, we're self-insured for a number of benefits and our expenses related to some of our healthcare expenses came in lower in the quarter.

Rob Oliver -- Robert W. Baird and Company -- Analyst

OK. OK. That's helpful. Last question, Jim, I'll just come back to you.

I mean you've been through a lot of different cycles in your career. And some of your commentary in your prepared remarks certainly was at least relatively cautious about the macro and I would just -- just love to hear a little bit more about what it is you're seeing, what data sets you're watching? I know you cited some of the commentary, whether tech companies that gives you that -- besides from the actual kind of numbers, what gives you that more cautious bent and how you think this might play out?

Jim Bidzos -- Executive Chairman and Chief Executive Officer

Yes. Well, you're right. I referred to comments that other tech leaders have made just simply to point out that we're in sort of an unprecedented situation here economically. I mean there's 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 again what I said last quarter that I don't want to trivialize the pandemic, and there's absolutely no intent to do that. But we do see this as a bump in the road in a 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 macroeconomic 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 maybe we can't control, but we recognize them, and we make some assessments about them. But in terms of our own zone, we have a lot of data, and that certainly plays a huge role in putting our forecast and guidance together. And I'll just reiterate again that our confidence in the fundamentals of our business is strong. The business is strong.

The renewal rates are strong. 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.

We're going to focus on it, but we're going to run the business for the long term. That's absolutely what we're here to do, where we are undeterred by everything that's going on in that focus. So I think the intent there is to just make it clear what you can expect from us.

Operator

It appears that there is no further question at this time. Mr. Speaker, I'd like to turn the conference back to you for any additional or closing remarks.

David Atchley -- Vice President of 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 signoff]

Duration: 0 minutes

Call participants:

David Atchley -- Vice President of Investor Relations and Corporate Treasurer

Jim Bidzos -- Executive Chairman and Chief Executive Officer

George Kilguss -- Executive Vice President and Chief Financial Officer

Rob Oliver -- Robert W. Baird and Company -- Analyst

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