VeriSign Q1 2024 Earnings Call Transcript

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Provided by Quartr
April 25, 2024

There are 6 speakers on the call.

Operator

Good day, everyone. Welcome to VeriSign's First Quarter 2024 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.

Operator

David Atchley, Vice President of Investor Relations and Corporate Treasurer. Please go ahead, sir.

Speaker 1

Thank you, operator. Welcome to VeriSign's Q1 2024 earnings call. Joining me are Jim Bidzos, Executive Chairman, President and CEO 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.

Speaker 1

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 ks. 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 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.

Speaker 1

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.

Speaker 2

Thank you, David. Good afternoon to everyone and thank you for joining us. In addition to continuing to deliver on our mission as a critical Internet infrastructure provider, we delivered solid and consistent financial results during the Q1. These results show the continued financial strength of our business model. For the Q1, revenues grew 5.5% year over year, operating income grew 7.3% year over year and earnings per share grew 12.9% year over year.

Speaker 2

At the end of March, the domain name base in dotcomand.net totaled 172,500,000 domain names, down 270,000 names from year end 2023. From a new registration perspective, the Q1 ended with 9,500,000 new registrations compared with 10,300,000 names for the same quarter last year. The renewal rate for the Q1 of 2024 is expected to be approximately 74% compared to 75.5% a year ago. As we discussed last quarter, we expect our domains under management from our China based registrars to contract in 2024. In the Q1, this segment declined by 360,000 names.

Speaker 2

For the reasons noted in prior quarters, this regional softness has been the primary source of the recent drag on the overall domain name base growth. We're also seeing some softness from our U. S. Based registrars primarily due to their increased focus on ARPU through higher retail pricing levels, which is impacting new registrations and renewal rates. While we had expected these same factors to gradually subside in 2024, Based on our Q1 results and current channel feedback, we now expect these conditions to persist through most of 2024.

Speaker 2

That being said, we're in the process of rolling out new registrar marketing programs to support and improve registration trends for the second half of this year to achieve our goal of returning the domain name base to growth in 2025. We're now expecting the change in the domain name base to be between positive 0.25 percent to a negative 1.75 percent for the full year of 2024. As a modeling note, the decrease in domain name base is expected to be most pronounced during the Q2 of 2024 due to a seasonally larger expiring base of domains during the first half of the year. Our financial and liquidity position continues to remain stable with $925,000,000 in cash, cash equivalents and marketable securities at the end of the quarter. During the Q1, we repurchased 1,300,000 shares for $260,000,000 at quarter end $860,000,000 remained available and authorized under the current share repurchase program.

Speaker 2

Now I'd like to turn the call over to George. I'll return when George has completed his financial report with closing remarks.

Speaker 3

Thanks, Jim, and good afternoon, everyone. For the quarter ended March 31, 2024, the company generated revenue of 384,000,000 dollars up 5.5 percent from the same quarter of 2023 and delivered operating income of $259,000,000 an increase of 7.3% from the same quarter a year ago. Operating expense in the Q1 totaled $125,000,000 compared to $124,000,000 last quarter and $123,000,000 in the year ago quarter. Net income in the Q1 totaled $194,000,000 compared to $179,000,000 a year earlier, which produced diluted earnings per share of $1.92 for the Q1 of 2024 compared to $1.70 for the same quarter of 2023. Operating cash flow for the Q1 of 2024 was $257,000,000 and free cash flow was $254,000,000 compared with $259,000,000 $253,000,000 respectively in the year ago quarter.

Speaker 3

I'll now discuss our updated full year 2024 guidance. Revenue is now expected to be in the range of $1,555,000,000 to 1,570,000,000 dollars Our operating income is now expected to be between $1,047,000,000 $1,062,000,000 Interest expense and non operating income net, which includes interest income estimates, is now expected to be an expense of between $25,000,000 to $35,000,000 Capital expenditures are now expected to be between $30,000,000 to 40,000,000 dollars And the GAAP effective tax rate is still expected to be between 21% 24%. Overall, VeriSign continued to demonstrate sound financial performance during the quarter. I'll turn the call back to Jim for his closing remarks.

Speaker 2

Thank you, George. While we expect that the change in the domain name base for 2024 will be below historic levels for the reasons we've discussed, we continue to believe our business fundamentals remain strong. As I mentioned earlier, we're introducing additional registrar marketing programs to target quality growth in the domain name base. These programs will become active during the second half of twenty twenty four. We expect these programs to begin improving registration trends during 2024 and to contribute to a return to growth in 2025.

Speaker 2

Our goal is to fulfill our stewardship mission of providing secure and reliable infrastructure services, managing our secure and reliable infrastructure services and our business responsibly and efficiently returning capital to our shareholders remain unchanged and support our commitment to deliver strong financial results, including steady growth in revenue, operating income and EPS. Thank you for your attention today. This concludes our prepared remarks. Now we'll open the call for your questions. Operator, we're ready for the first question.

Operator

Thank you. And our first question comes from Rob Oliver with Baird.

Speaker 4

Great. Good afternoon, guys. Thank you for taking my question. Jim, first one is for you. Could you just put a finer point on some of those conditions that you discussed, which are weighing on U.

Speaker 4

S.-baseddomesticbased.comgrowthwithin the registrars? And as a follow-up to that, I don't know how much detail you can provide, but maybe if you could give us any color around what sorts of programs we can expect which could help drive that return to growth in 2025? I know you guys clearly have a long operational history of working well with your registrars and would be curious to know, get a little sense of what it is that you had in mind? And then I had a couple of follow ups. Thanks.

Speaker 2

Sure. Let's see, your first question was on the U. S. Market. So basically, as we discussed, what we see is the recent registrar focus on ARPU has led to some higher retail pricing and a reduction of their promotional offers.

Speaker 2

And of course, just as a reminder, we don't control the retail pricing, the registrars do. And when you combine that with decreased marketing and advertising outlays from the channel, we think this is a factor leading to less demand for products at present as well as some lower registration volumes and lower renewal rates. As to the marketing programs, obviously, I can't really go into a lot of detail, but I can say that in addition to the existing programs that we have, we've got some new ones coming to market. We have one currently launched that is focused on dot net and we plan to launch additional programs focused on comm in the second half of the year. So basically, what I can generally say about programs and what's different programs and what's different, I think it helps to just understand that our channel is greatly varied.

Speaker 2

First of all, through COVID and afterwards, they've all gone through changes as we have, but we also have a channel that's evolved to include people like website builders and wholesale registrars who are selling to others. So our strategy is to broaden the options that's available to this sort of diverse group with diverse business models, geographic footprints, different installed bases. So by offering a broader selection, our goal is to increase engagement with our TLDs for the registrars and their customers. Clearly, one size doesn't fit all like it has in the past many years ago that worked better. So these programs are really designed to address that diversity and they're also designed with feedback that we've received from the community and multiple options is clearly desirable.

Speaker 2

So that's a good generalization I can offer you.

Speaker 4

Great. That's really helpful color. And then I just as a corollary to that George for you. We're still running through the model here. Obviously, the margin or profit coming down a little bit that could be a result of the revenue.

Speaker 4

But is that is there are there any additional expenses in that second half associated with this program that would to drive to restart that jump in dotcom growth for 2025, any additional expenses captured in that change?

Speaker 3

Yes, Rob, thanks for the question. I would say not necessarily direct expense associated with those programs. We do have expense already budgeted and that is reflected in the current guidance that we're already putting out there for you.

Speaker 4

Okay, great. Helpful. Last question for me and then I'll turn it over to Yigal. On China, Jim, last quarter you mentioned that the situation was I think you used the word opaque and that there was just so many moving parts and you guys have been a strong partner and provider in China for so many years. I'm curious how if at all that visibility has changed from 3 months ago?

Speaker 4

Is there a chance we see a bottom here? Has there been any evolution in your view and any color around what's happening in China would be helpful? Thank you. Sure.

Speaker 2

Well, I guess first of all, I would just remind you that in my prepared remarks at least I mentioned that we do expect China to continue to be a drag through 2024. So that's the first thing. In terms of better visibility, less opacity, I'm not really. There's nothing really substantial that I think I can point to that gives us better insights. I just think that that is a different market for all the reasons that we typically mention.

Speaker 2

The regulatory environment is a little bit different. They are much more adversely affected in terms of cost of goods, not just by price increases, but also by the cost of buying dollars to pay for those domains. So they've that market is just sort of feeling a lot of different impacts, specific detailed insights into it. Now, I think our view of China is that of course at about 5% of our overall domain name base and moving downward, the negative impacts will of course ease as we move forward. That's one factor that will help us through 2024.

Speaker 2

The other obviously is 2 things really. It's our programs that we're targeting at the registrars to help them focus on new customer acquisition. And the fact that we think that their ARPU is sort of cyclical, we've seen that before. But specifically to China, I certainly not in the last 3 months. There's nothing I can point to that says we have a clear and better understanding.

Speaker 2

I think it's just simply affected as being a market that's more regulated and more sensitive. There are probably other factors that we don't fully understand. We study it closely, but that's the best answer I can give you right now.

Speaker 4

Okay, very helpful. I appreciate it guys. Thank you. I'll hop back in the queue. I may have another one.

Speaker 4

Thanks again.

Speaker 2

Okay.

Operator

And we'll take our last question from Ygal Arounian with Citi.

Speaker 5

Hey, good afternoon guys. I think if we could dig into the registrars and the focus on pricing and the impact that's having, just a little bit more. Is there anything within the pricing that's specific to dotcom that you're seeing? Meaning if we look at kind of total domains beyond dotcom, the softness isn't necessarily as turnouts. So what are the dynamics?

Speaker 5

Why is it having a bigger impact on.com versus everything? Are they promoting some of the other TLDs more than they are dotcom? Just to understand that a little bit better.

Speaker 2

Well, it's okay, it's Jim. It's certainly true that one thing I guess maybe I could have added, I didn't, so I'm glad you asked this question. To Rob's last question about China is that, that's where we're seeing other TLDs filling some of the demand there. These are TLDs that are priced extremely low. We're talking about sub-one dollar in many cases.

Speaker 2

So that's certainly a factor. Again, we don't control the retail pricing. The channel is pricing our products.com.net sort of in a broad range. Some are pricing renewals above $20 others are selling registrations and renewals much closer to the wholesale price, it varies. I think that focus on ARPU is probably a primary and a factor in the U.

Speaker 2

S. Along with the reduced spend on marketing. And I guess if I wanted to point to anything that we maybe could have done sooner or recognize a little better would be adapting these marketing programs sooner, but we're getting them into market now. So I think that will address some of the issues. But I think the place where you're seeing others make a huge dent is definitely in China.

Speaker 2

Are literally sub dollar TLDs that are being sold there that are experiencing some growth that's gone on and off over the years with different TLDs spiking way up and way down. You can see that in our D and I B report.

Speaker 3

Yigal, it's George. We don't have the flexibility, as much flexibility as I would say new gTLDs in certain markets. So we treat all our customers the same. And so sometimes when we have differences in exchange rates overseas that can also be a factor in demand.

Speaker 5

Got it. So just a follow-up on that then. With pricing focused with Amendment 35 and the structure of the current contracts, Do you think that there's maybe less pricing power in the domain? I mean, I would think still at retail $20 a year. It's not the highest consideration purchase.

Speaker 5

Does that give you any pause or thoughts on how you think about pricing at a wholesale level? I know you don't control the retail level, but how does that filter and how you think about the wholesale level?

Speaker 2

Well, I think the registrars have to make their own decisions on pricing. I think some of the higher renewal prices are in my opinion a testament to the stickiness and the high quality of the comp product and that the largest segment we have is people who brand themselves on it and those enjoy particularly high renewal rates. So I think it's just easy if you have a product, a subscription product that has strong stickiness like this, a functional PLD that's supported with the 26 year uptime record and all the other benefits that come with it, I think that's not particularly surprising. I'd attribute it more to the cyclical nature of ARPU and new customer acquisition. And some of our programs are designed to accommodate the different business models that will get them more focused on new customer acquisition.

Speaker 5

Okay, helpful. And last one for me. Maybe we get a lot of questions as we get closer to the date on the dotcom renewal and I'm assuming there's nothing new per se to say about it, but maybe just help us walk through the timeline of the renewal. What are some of the key timing things to think about or what the time line might look like? And understanding, I think, you've been through the idea that you have the consumptive right of renewal here and how the contract works, if you're keeping details the same.

Speaker 5

But any risks or other things for investors to think about as we get closer to that renewal date? Thank you, guys.

Speaker 4

I don't know

Speaker 2

what you mean by risk. I mean, the contract has a presumptive right of renewal. And as long as we're meeting our SLAs, the contract says it shall be renewed. But the contract is not due for actual or the deadline date is the end of November. So it's a ways out, but we are now engaged with ICANN or in the process of exchanging drafts to the common renewal.

Speaker 2

So it's early in that process and common isn't, like I said, not due until the end of November. So and the presumptive right of renewal of course was used with dot net and we had an on time we anticipate an on time renewal as we had last year for dotnet. So I think these ICANN has this in all of their thousands of DLT contracts. There's a rolling constant exercise of this presumptive right of renewal and we expect come just like net and just like all the other gTLDs to renew.

Speaker 5

Great. Thank you.

Operator

And we'll take an additional question from Rob Oliver with Baird.

Speaker 4

Great. I'm pulling a Sterling Auty here to hop in for another question, an honorary. Jim, last quarter you got a question on DotWeb. So I think we'll I'll ask it again. I'm not sure that there's been know this doesn't seem like there's been any official update, but anything you guys have heard or seen or anything we should be aware of that constitutes any change?

Speaker 4

And could you just provide us your updated perspective on what you see as the possible new timeline or evolution of .web here? Thank you.

Speaker 2

Thanks, Sterling. Just kidding, Rob. Feel free anytime to jump in for another question. You're quite welcome. Good question.

Speaker 2

I guess I would call it an update. You said MVMT, I guess this could qualify as that as well. So the one update I have is that VeriSign and NDC have just filed an application to participate in this second IRP like we did the first one as you know. We had that for context, we had this process where last April, ICANN's Board of Directors voted without objection to delegate .web to NDC. AltaNovo then filed the 2nd IRP complaint against ICANN.

Speaker 2

This 2nd IRP is looking for the same relief to award. Webtaltenovo that the first IRP panel rejected twice, sanctioning them the second time. And it's exactly what ICANN's Board Committee and full Board also rejected last April. So we continue to believe that ICANN and the IRP panel should dispense as quickly as possible. It's what we believe to be baseless claims against ICANN.

Speaker 2

And by the way, Altanova has no existing registry business. And as far as we can tell, whoever actually owns and is funding this litigation remains a secret. So the update is that we filed an application and we'll see where the second IRP goes.

Speaker 4

Great. That's helpful. I'll have to go back to the record to look at that again, but very helpful. Thanks, Jim. Thanks, everyone.

Speaker 4

Appreciate it.

Speaker 3

Thank you.

Operator

And that does conclude the question and answer session. We will now turn the conference back over to Mr. David Atchley for final comments.

Speaker 1

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

Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent

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