VeriSign, Inc.
Q4 2020 Earnings Call Transcript

Published: 11 Feb 2021

[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 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:]

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.

[Jim Bidzos:]

Thanks, David, and good afternoon, everyone. This past year has presented challenges and uncertainties for all of us. This has also been a year when 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 continued to maintain, invest in and evolve our infrastructure, which enables us to reliably and accurately provide the critical DNS navigation service people around the world rely on more than ever, for commerce, education, healthcare and person-to-person connection, while complying with the high operational standards as required by our 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.

[George Kilguss:]

Thank you, Jim, and good afternoon, everyone. For the year ended December 31, 2020, the company generated revenue of $1.265 billion, up 2.7% from 2019. Operating expense totaled $441 million and 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.

[Jim Bidzos:]

Thanks, George. I'd like to say again, that our priorities continue to be our mission of ensuring a secure, reliable and accurate operation of our critical Internet infrastructure and the safety of our people.

[Operator:]

We will take our first question from Rob Oliver with Robert W. Baird.

[Rob Oliver:]

Great. Thank you, guys. Thanks 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 2021? And then also I wanted to sort of 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 and certainly looked given the headlines that happened in December, but wanted 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 I believe?

[David Atchley:]

Hello?

[Rob Oliver:]

Yes. Were you guys able to hear my question?

[David Atchley:]

Yes, we heard your question. George, I don't know if you were on mute but just double checking.

[George Kilguss:]

I'm sorry. Yes I was. So yes, thanks for the question Rob.

[Jim Bidzos:]

Sorry to make you answer through brilliantly twice George.

[George Kilguss:]

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 cybersecurity 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, as 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 guided 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:]

Great. That's helpful. Thanks, George. 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 I just wanted to maybe get your thought process on that I guess probably understandable given a lot of macroeconomic puts and takes but just wanted to get your sense. And I think you said 2.5% to 4.5%. Appreciate that.

[Jim Bidzos:]

I'm sorry, did you just want clarification?

[Rob Oliver:]

Yes. Just -- right, I mean, would love some clarity on your thought process on that range?

[Jim Bidzos:]

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:]

Yes. So that -- that's, I mean at the low end of that range that's a growth number that would be below GDP growth. And just -- is there other elements of, when 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 at 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 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:]

Yes, Rob, 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 a year ago. And during the year as we talked about we have seen some increased demand in those regions from people looking to get online, new business starts and there's 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're being -- we typically do have a range this wide going into the year. January is off 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:]

Great. Thank you.

[Jim Bidzos:]

Yes. I understand your question. I guess I -- 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's obviously some uncertainty associated with how COVID is going to play out in 2021. There are a lot of ups and downs and gives and takes and that certainly is a factor that affected. But as George said there's a lot of factors that go into the range. But I would say if you wanted one macroeconomic indicator there's obviously some uncertainty around COVID. That's probably the single biggest influence in that range.

[Rob Oliver:]

Okay. Thank you again.

[Operator:]

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

[Nick Jones:]

Great. Thanks for taking the questions. I guess, first and this is probably splitting hairs. But could you have taken another $0.01 in the 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 -- go ahead.

[Jim Bidzos:]

I'm sorry. You've got it right. The problem is that if you apply -- we don't bill in fractions of $0.01. And the actual increase came in with a 0.9 on the -- to the right of the decimal points in pennies. And so even though the number was a nine we rounded down because otherwise we would be slightly over the 7%.

[Nick Jones:]

Got it. Got it. That's helpful. And then on COVID, kind of, threw a wrinkle I think into potentially how investors were thinking about the price increases. How should we think about the cadence from here? I mean, is it something that's like you, kind of, expect to happen annually? Is there room to compress the timeframe 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:]

Nick, this is George.

[Jim Bidzos:]

I'm sorry. I was on mute, George. I'm sorry. Mute is tricky. I will 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 fee, that's effective and begins on September 1 of this year. Beyond that, obviously, we don't guide. George, do you want to comment? Please go ahead.

[George Kilguss:]

Those are going to be my comments Jim as well.

[Jim Bidzos:]

Yes, sorry, I was on mute there for...

[Nick Jones:]

Okay. One last question just kind of as COVID restrictions may be loosened, 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? Is there any meaningful changes and trends kind of early in the year in certain regions, even 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:]

Yes. 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:]

Great, thanks for taking the question.

[Operator:]

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

[Sterling Auty:]

Yeah. Thanks. Hi, guys. When I saw that you announced the price increase, I'm like damn, what am I going to ask on the call now that you announced the increase?

[Jim Bidzos:]

Well, that -- is that the question?

[Sterling Auty:]

No. 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 be -- I noticed that over the last month, there was a couple of days

[George Kilguss:]

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 of 2019. So, relatively similar. We did have a very strong 2019 performance from China-based registrars. And as we talked before, as a group we tend to see 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, on 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:]

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?

[Jim Bidzos:]

Sterling I think -- I guess, with all of the process part of the IRP complete and we're waiting, I think I can say -- repeat what I have said earlier, which is that we're -- 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:]

Okay. And then last question from my side is, in the US if you look at the new business applications, they spiked late summer early fall. So, I think August, September time frame, 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 historical norms for a while now, is there a correlation there? And does that actually will 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 2021?

[George Kilguss:]

So, Sterling, we've seen that same data. And as you know we're a thin 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 domain name helps to facilitate that. I think that's been good for our business here in this work-for-home environment. As Jim mentioned, when the pandemic subsides and things start opening it up, I think it 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:]

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?

[Jim Bidzos:]

I guess, the mix of -- I am not sure I understood this.

[Sterling Auty:]

Well, to be more specific you're a thin 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?

[Jim Bidzos:]

I guess, I would just -- I think the best answer I can give you to that question is, one, that I think is just a simple fact which is .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:]

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. We rolled them out we announced them and we tend not to change them 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:]

Understood. Thank you so much.

[George Kilguss:]

Thanks.

[Operator:]

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

[David Atchley:]

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:]

This concludes today's call. Thank you for your participation. You may now disconnect.