Good day, everyone. Welcome to VeriSign's 4th 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.
Thank you, operator. Welcome to VeriSign's 4th quarter and full year 2020 earnings call. Joining me are Jim Bizzos, Executive Chairman and CEO Todd Strube, President and COO 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.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 ks 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 2 non GAAP measures used by Verastign, 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 and 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.
Thanks, David, and good afternoon, everyone. This past year has presented challenges and uncertainties for all of us. It's 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 continue 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 for the dedication of our team and the resilience of the specialized network we operate and maintain. We extended our record of BMS 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 mark more than 23 years of uninterrupted availability of the VeriSign DNS for dotcom and dotnet. We also processed $42,400,000 new registrations, Delivered revenue of $1,265,000,000 and generated free cash flow of $687,000,000 During the full year 2020, we repurchased 3,700,000 shares for $735,000,000 Effective today, The Board of Directors has increased the amount of VeriSign common stock authorized for share repurchase by approximately $747,000,000 to a total of $1,000,000,000 authorized and available under the share repurchase program, which has no expiration.
Our financial and liquidity position remains stable with $1,170,000,000 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 for cash, including potential share repurchases. At the end of December, the domain name basin.comand.net totaled 165,200,000 During the Q4, we processed 10,500,000 new registrations and the domain name base increased by 1,460,000 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 Q4 of 2020 Will be approximately 73.5 percent. This preliminary rate compares to 73.8% achieved in the Q4 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 .comdomainnames, which raises the price from $7.85 to $8.39 effective September 1, 2021. This represents the 1st wholesale price increase of dotcomdomainnamesince2012 and is in alignment with the 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 comm domain names before October 25, 2021. We believe this positions comm competitively in the marketplace.
And now I'd like to turn the call over to George.
Thank you,
Jim, and good afternoon, everyone. For the year ended December 31, 2020, the company generated revenue of 1,265,000,000 up 2.7% from 2019. Operating expense totaled $441,000,000 and was up 3.6% from last year. For the fiscal year, the company delivered operating income of $824,000,000 up 2.2% from $806,000,000 a year ago and a full year operating margin of 65.2%. 4th quarter revenue came to $320,000,000 up 3.1% year over year.
Operating expense totaled $116,000,000 compared to $111,000,000 last quarter and 112,000,000 in the Q4 a year ago. The quarter over quarter increase in operating expense is primarily a result of increased sales and marketing expenses. 4th quarter operating income totaled $205,000,000 compared with $199,000,000 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 $157,000,000 compared to $148,000,000 a year earlier, which produced diluted earnings per share of $1.38 in the Q4 this year compared to $1.26 for the same quarter last year.
As noted in our earnings release, net income for the Q4 of 2020 included recognition of a $12,400,000 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 4th quarter was $195,000,000 and free cash flow was $189,000,000 compared with $194,000,000 and $185,000,000 respectively for the Q4 last year. I'll now discuss full year 2021 guidance. Revenue is expected to be in the range of $1,300,000,000 to 1,320,000,000 This revenue range forecast reflects the domain name based growth rate of between 2.5% and 4.5% that Jim mentioned earlier. The operating margin is expected to be between 64% 65%.
This guidance range reflects our expectation of incremental and continued investment in our operational infrastructure in 2021. Also, This range reflects the annual $4,000,000 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 $88,000,000 to $92,000,000 Capital expenditures are expected to be between $55,000,000 $65,000,000 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% 23%. We expect the cash tax rate for 2021 to also be within the same guidance range.
In summary, VeriSign continued 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.
Thanks, George. I'd like to say again that our priorities continue to be our mission at 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 entirely behind the scenes that are not well known, but there are many hundreds of dedicated professionals that 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 And the second question
is from the
line of the strategic authority
of PKI Business that 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 verasign.com. Now we'd like to walk through a 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, Vericelon is not a party in these IRP proceedings, but was granted the right to and will be recorded. Also as a reminder, an IRP under ICANN's bylaws is for the purpose of ensuring that Our expectation is that following the resolution of the IRP, The ICANN Board will make a final decision on the delegation of the .web PLB. 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.
We'll take our first question from Rob Oliver with Robert W. Baird.
Great. Thank you guys for taking my question. I 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 wanted to submit to 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 pressured 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.
Hello?
Yes. Were you guys able to take my question? Yes, we heard
your question. George, I don't know if you're on mute, but just double checking.
Well, I'm sorry. Yes, I was. So yes, thanks for the question, Rod.
Sorry to make you answer it brilliantly twice, George.
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 and D and G and A are up in those areas, and we continue to invest And 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 $55,000,000 $65,000,000 and that again reflects Ongoing investments in our infrastructure as well as some expected 2020 capital spend that slipped into 2021. As I mentioned, we guided between $55,000,000 $55,000,000 Last year, we guided between $45,000,000 $55,000,000 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.
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 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.
I'm sorry, did you just want clarification? Yes.
Just right. I mean, just Would love some clarity on your thought process on that range.
I'm not sure I can give you any more detail beyond that. I guess, maybe I don't understand your question. Let me
Yes. So That's I mean, at the low end of that range, that's a growth number that would be And just is there other elements of when we 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 So 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, is that why the low end would be factored? And just any color there, if possible, would be great.
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 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 Q4, we had a pretty solid Quarter delivering about 10,500,000 registrations, which was up from 10,300,000 a year ago.
And during the year, as we've talked about, we have saw 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 slide 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.
Yes. I understand your question. I guess, if the idea is to sort of associate some macroeconomic considerations And somehow relate then 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 affects it.
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.
Good. Thank you again.
We'll go ahead and take our next question from Nick Jones with Citi.
Great. Thanks for taking the questions. I guess First, and this is probably splitting hairs, but could you have taken another penny in the price increase or is it because like it's slightly over 7%. You can't. Do you guys have any clarity there?
And then I guess the follow-up is
Go ahead. I'm sorry. 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 pennies. And so even though the number was a 9, we rounded down because otherwise we would be slightly over the 7%.
Got it. Got it. That's helpful. And then on COVID kind of threw a wrinkle, I think, into Potentially how investors are thinking about the price increases. How should we think about the cadence from here?
I mean, is 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.
Nick, this is George. I'm sorry. We got
on mute, George. Sorry. Mute is 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 That's effective and begins on September 1 this year. Beyond that, obviously, we don't guide.
George, if you want to comment, please go ahead.
Those are going to be my comments, Jim, as well.
Yes, sorry, I was on mute there.
Okay. One last question, just kind of as COVID restrictions maybe loosen In certain markets, vaccines are rolling out. Are you seeing any change in kind of the trends we saw in 20 2020 in terms of people's SMBs switching to digital solutions, people leaning into online solutions. Is there any meaningful changes in trends kind of early in the year in certain regions, even just within the U. S.
In terms of Registrations or anything to kind of give you pause as to kind of how the reopening may impact these trends? Thanks.
Yes, Nick, this is George. I don't see any material 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.
Great. Thanks for taking the question.
And we'll take our final question from Sterling Auty with JPMorgan.
Yes. 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?
Well, is that the question? 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, one where I think the domain base was down 93,000, another one that was down like 102. Sometimes I usually equate that to Some of the registrar is going through and doing some purges. So anything like that that may have impacted the renewal rate in the quarter?
I'm showing as you pointed out, the renewal rate was relatively flat year over year, I think 73.5 In the Q4 versus 73.8 percent in the Q4 of 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, on our first time Renewing rates for the international group as a whole. But again, I think overall 73.5% was a pretty good Pretty good result.
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 it at launch?
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 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.
Okay. And then last question from my side is, in the U. S, if you look at the new business applications, Despite late summer, early fall, so think August, September timeframe, but they're still elevated in the 4th 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 2021.
So Sterling, we've seen that same data. And as you know, we're a FIN registry. 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 a 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 excites 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.
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?
I guess the mix of 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 dotcom Because they're just not seeing the traction that perhaps they expected in the new TLDs.
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 that Calm 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?
Yes, 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 roll them out, we announce them, and we 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
I'd like to now turn the call back to Mr. David Atschley for any final comments.
Thank you, operator.
This concludes today's call. Thank you for your participation. You may now disconnect.