VeriSign Q2 2024 Earnings Call Transcript

Presentation

[Operator]

Good day, everyone. Welcome to VeriSign's Second uarter 2024 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.

[David Atchley, VP of IR and Corporate Treasurer at VeriSign]

Thank you, operator. Welcome to VeriSign second quarter 2024 earnings call. Joining me are Jim Bidzos, Executive Chairman, President, and CEO; 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, President and CEO at VeriSign]

Thank you, David. Good afternoon to everyone and thank you for joining us. Before we cover results, I'd like to note that last week we marked 27 years of 100% uninterrupted availability for the.com and.net domain name resolution system. This milestone represents an unparalleled achievement in our industry for operating secure, stable, and resilient DNS infrastructure for well over a quarter of a century amidst some of the most technologically significant changes the world has ever experienced.

Our teams have successfully built, maintained, operated and evolved the infrastructure that enables hundreds of billions of queries a day and supports trillions of dollars in global commerce. In fact, we answer, on average, 328 billion queries per day, billion with a b, 24 hours a day, seven days a week, 365 days a year. And that's over 3.7 million /second. We do this amidst ever increasing internet demand and resilience, evolving technology and a challenging global cyber threat environment.

Turning now to our results, we delivered another quarter of operational and financial stability by focusing on our mission as a critical Internet infrastructure provider. For the second quarter, revenues grew 4.1% year over year, operating income grew 7.1% year over year, and earnings per share grew 12.3% year over year. At the end of June, the domain name base.com and.net totaled 170.6 million domain names. During the second quarter, the domain name base decreased by 1.8 million names.

From a new registration perspective, the second quarter ended with 9.2 million new registrations compared with 10.2 million names for the same quarter last year. The renewal rate for the second quarter of 2024 is expected to be approximately 72.6% compared to 73.4% a year ago. As we have previously reported, we continue to see US registrars prioritize ARPU over customer acquisition through higher retail pricing levels and reduced spend on marketing to new customers compared with prior years.

These factors impacting new registrations are impacting new registrations and renewal rates and are leading to weaker trends in 2024 that are below our original expectations. During the second quarter, the US region was lowered by about 800,000 names. In addition, and as expected, China-related weakness continues and contributed to most of the remaining sequential decline in the second quarter. The domain name base from our EMEA region was up slightly during the second quarter. We have rolled out new registrar marketing programs over the past several weeks to support our registrars and our goal of returning to domain name base growth in the second half of 2025. However, given the ongoing impact of the factors we've mentioned, we now expect the change in the domain name base to be between negative 3% to a negative 2% for full year 2024.

Our financial and liquidity position continues to remain stable with $690 million in cash, cash equivalents and marketable securities at the end of the quarter. During the second quarter we repurchased 2.2 million shares for $388 million. Effective today, the board of directors has increased the amount authorized for share repurchase of VeriSign common stock by $1.11 billion to a total of $1.5 billion authorized and available under the share repurchase program, which has no exploration. Now I'd like to turn the call over to George. I'll return when George has completed his financial report with closing remarks.

[George Kilguss, Executive Vice President & Chief Financial Officer at VeriSign]

Thanks, Jim, and good afternoon, everyone. For the quarter ended June 30, 2024, the company generated revenue of $387 million up 4.1% from the same quarter of 2023 and delivered operating income of $266 million an increase of 7.1% from the same quarter a year ago. Operating expense in the second quarter of 2024 totaled $121million for the three months and $246 million for the six months ended June 30, which compares to $123 million in the second quarter of 2023 and $246 million for the first two quarters a year ago.

Net income in the second quarter totaled $199 million compared to $186 million a year earlier, which produced diluted earnings per share of $2.01 for the second quarter of 2024, compared to $1.79 for the same quarter of 2023. Operating cash flow for the second quarter was $160 million and free cash flow was $151 million compared to $145 million and $139 million, respectively, in the year ago quarter. I'll now discuss our updated full year 2024 guidance.

Revenue is now expected to be in the range of $1,553 million[Phonetic] to $1,563 million[Phonetic]. Operating income is now expected to be between $148 million[Phonetic] and $1,58 million[Phonetic]. Interest expense and nonoperating income net, which includes interest income estimates, is still expected to be an expense of between $25 million to $35 million. Capital expenditures are still expected to be between $30 million to $40 million. And the GAAP effective tax rate is still expected to be between 21% and 24%. Overall, VeriSign continued to demonstrate sound financial performance during the second quarter. Now I'll turn the call back to Jim for his closing remarks.

[Jim Bidzos, Executive Chairman, President and CEO at VeriSign]

Thank you, George. While we expect that the change in the domain name base for 2024 will be below prior year levels for the reasons we've discussed, we continue to believe our business fundamentals remain. As I mentioned earlier, we continue to introduce additional registrar marketing programs to target and support improvement in new registration trends once adopted and integrated into registrar go to market activities. Our goal is to fulfill our stewardship mission of providing secure and reliable infrastructure services, managing our business responsibly, and efficiently returning capital to our shareholders remain unchanged and support our commitment to deliver consistent financial results. Thank you for your attention today. This concludes our prepared remarks and now we'll open the call for your questions. Operator were ready for the first question.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] We will take our first question from Rob Oliver with Baird.

[Rob Oliver, Analyst at Robert W. Baird]

Great. Good afternoon. Thanks for taking my questions. I've got a few, and then I'll hop back onto the queue. Jim I guess the first question would be you talked a little bit about some of the activity at the registrars, particularly in North America, and the focus on ARPU. Can you talk about the view out there that perhaps newer gTLD's are taking share from.com and what you're seeing in the data that gives you either a concern there or that would dissuade you from that view and then I have couple of others.

[Jim Bidzos, Executive Chairman, President and CEO at VeriSign]

Okay. So, ARPU. Well, the primary -- ARPU is about the primary factor in the US weakness remains registrar focus -- registrar focus on ARPU and their reduced spend on marketing. Two components there. These factors are having a bigger impact and lasting longer than we originally expected earlier this year. The unregulated retail channel has increased prices more than twice our limited wholesale pricing flexibility, with some increasing three times or more. Also, we've seen some registrars focus on margin through price increases to the overall bundle. In addition, they've reduced marketing expenditures. So while our limited price increases on com may have had an impact we think the wholesale price impact is small relative to the overall price increases and other actions taken by the unregulated retail channel in the US.

In relation to the new gTLD taking market share question very loss -- very low cost new gTLD's seem to be picking up some of the monetization demand, primarily from China. I would just add that there's a thriving market of ccTLD's and new gTLD's. There are 33 million of them. But these names tend to have lower renewal rates and lower lifetime values compared to traditional cohorts. Some of these are the more speculative names that we're seeing a declining demand from our China registrar base. And let me remind you that new gTLD's operate under very different and more flexible contracts. They're allowed to offer special deals to individual registrars.

Some offer very low initial and renewal pricing. They can reserve and sell premiums anytime that they want. They're not as transparent. Very few are public companies and it's important to note that there's a difference between a registry operator like us and some registries which are really registry marketers, they basically don't run a registry, but they outsource those operations to a backend service provider who does it for them. So they tend to have very low overhead. Some of them have very, very few employees. They can sell these TLDs at very, very low prices and still be profitable. Again, they're not public companies, so we don't have much visibility, but we can -- we certainly understand that these are factors in the market. So you need to look a little bit closer to really get the accurate picture there.

[Rob Oliver, Analyst at Robert W. Baird]

Got it. Okay. Very helpful, Jim. I appreciate all the color. Two other from me if I may. The second would be something that just came out today. There was a congressional letter to the NTIA asking for them to review the contract for.com, it's been our understanding that they can ask all they want, but there's no legal ground. But that follows, I guess an earlier report from a think tank in New York also suggesting the same. So just wanted to get your reaction to that letter which came out today.

[Jim Bidzos, Executive Chairman, President and CEO at VeriSign]

We've seen the letter and the questions to NTIA, so I can't speak for NTIA, but our reaction was that questions do typically occur every six years around the renewal of the.com registry agreement. Some of the questions in the letter are about wholesale.com price increases. As you know, our pricing is completely transparent and regulated. Since 2018, the com wholesale price has gone up a $1.74. Our research shows that the benefit from our capped wholesale prices is not always passed on to consumers either in a retail market where, as I just mentioned, prices have gone up more than twice as much as the wholesale price increases or in a secondary market where the average price for a.com domain is estimated to be $1,600, or about 166 times today's wholesale price.

Academic research sizes the secondary market at over $2 billion, that's with a b, $2 billion per year which exceeds VeriSign's revenue. And unlike any actor in the secondary market, you know, that VeriSign as all of you know, VeriSign operates critical infrastructure which helps to enable the global digital economy. We understand that one of these secondary market players has warehoused about 4.8 million.com domains for resale on a secondary market. The businesses that buy these.com domains on the secondary market at high prices, pass the cost on to consumers. So while we expect questions about wholesale prices and we'll do our best to assist if asked by NTIA the issue of retail and especially secondary market pricing is an important part of the discussion of the com domain name market that hasn't been sufficiently addressed yet.

[Rob Oliver, Analyst at Robert W. Baird]

Okay. That's extremely helpful. I guess the ultimate question that -- we get most often from investors would be is there a risk to the.com contract and your most recent thoughts on that would be great. Thanks, Jim.

[Jim Bidzos, Executive Chairman, President and CEO at VeriSign]

Well in a word, no. There's not -- there's no provision in a cooperative agreement to rebid.com and we believe that amendment 35 is clear, that should the [Indecipherable] decide to sunset the cooperative agreement, which we're not seeking. Then VeriSign would continue to operate the com registry under the ICANN contract, which, like all ICANN agreements, has a presumptive right of renewal.

[Rob Oliver, Analyst at Robert W. Baird]

Okay, that's really helpful. If have [Indecipherable] two other, but I'll hop back in the queue, so thank you guys very much. I appreciate it.

[Jim Bidzos, Executive Chairman, President and CEO at VeriSign]

Thank you.

[Operator]

We will take our next question from Ygal Arounian with Citigroup.

[Ygal Arounian, Analyst at Smith Barney Citigroup]

Hey, thanks, guys. Good afternoon. Similarly, we've lately been getting most of our questions around the agreements, both the registry agreements with ICANN, and the cooperative agreement with the Department of Commerce. So maybe just an opportunity to clarify. These are two separate contracts. Are they interrelated at all? The date that DOC would have to give you notice on whether -- if they're not renewing the cooperative agreement, is that August 2? Just to clarify. And then the part that people, I guess, investors are most confused about lately is where the pricing part of the contract sits. Does that sit with the Department of Commerce? Does that sit within the ICANN contract meeting. If the Department of Commerce sunsets the cooperative agreement what happens to the pricing? Where does that get negotiated or dealt with? Thanks.

[Jim Bidzos, Executive Chairman, President and CEO at VeriSign]

Okay. Thanks, Ygal. So maybe it would just be helpful if I briefly covered what the two contracts are at a very high level and briefly, in the interest of time and what their interrelationship is, I think that was the first thing that you asked me. So the cooperative agreement is between VeriSign and the NTIA Department of Commerce. And that contract in the past prior to 2018 was a contract that oversaw the conditions of renewal with our registry agreement with ICANN. So after we negotiated with ICANN to exercise our presumptive right of renewal the NTIA had to approve what we did.

In 2018 amendment 35, basically gave ongoing a priority[Phonetic] consent to do that, provided that we didn't change certain provisions of the registry agreement with ICANN. The first one was that we not change the termination provisions, not change the performance requirements that we had to deliver, and not change the pricing. And so that pricing in 2018 was a limited ability to raise prices and through amendment three to the contract with ICANN that new pricing that was permitted in 2018 is now part of the com registry agreement.

So therefore the cooperative agreement has three outcomes. One is that as it's coming up for renewal here, renewal is sort of a different road. It's not quite like the ICANN agreement. The Department of Commerce has the unilateral right to sunset the cooperative agreement if it chooses to, and that has to give notice that it intends to do so. We don't seek by the way, the sunset. I think renewal is sort of a [Indecipherable]. It's an evergreen renewal. If nothing is done the contract automatically renews under the exact same provisions that it has, which is that we can get our business done with ICANN and renew the com agreement, provided we don't change those three things which we never seek to do.

However, as I said, they could sunset it and they have to give notice and I believe that's the right date[Phonetic]. I don't -- haven't looked at that part of the contract in a while, but I think that's -- that August date is the right one, so if they choose to sunset it, they have to give notice, and I believe that's the date by which they must give notice so that the contract which will either expire or renew that would be at the end of November. So if they want to sunset it. They would give notice by August 2. If they do nothing, the contract will automatically renew for another six years with all of its provisions intact.

Those are the outcomes that can't be changed unless we mutually agree to whatever changes. So that's the cooperative agreement, the ICANN agreement. Although separate, as you can see, now requires that we don't change those three things, which we never seek to do and with ICANN like every one of the hundreds, actually, thousands of registry agreements they all contain a presumptive right of renewal and that we've exercised most recently with.net, a relatively straightforward renewal. And I think we got a question on the last call, so maybe I'll anticipate that you're thinking it. We are engaged with ICANN. We are very much engaged in preparing the.com registry renewal, which comes up for renewal by November 30. So we're well in advance of that and we're working on it. I hope that answers your question.

[Ygal Arounian, Analyst at Smith Barney Citigroup]

It does. I know it was a multi parted question. Just to be clear. Again the wholesale pricing component right now sits between VeriSign and ICANN in the registry agreement, is that correct?

[Jim Bidzos, Executive Chairman, President and CEO at VeriSign]

Well, it was negotiated with the Department of Commerce in 2018, and through amendment three in 2020, it was moved into the com agreement as it's required to do. Those changes in the corporate[Phonetic] agreement pass on yet. And we can't change them in our negotiations with ICANN, so they stay as does the performance requirements and as do the termination provisions, and you can see how all those work together.

[Ygal Arounian, Analyst at Smith Barney Citigroup]

Yeah, understood. There's a lot of legal elements here. So [Speech overlap].

[Jim Bidzos, Executive Chairman, President and CEO at VeriSign]

It's a bit tricky. Yeah, no, I understand, but if you look carefully at the different components, the outcomes sort of are pretty straightforward.

[Ygal Arounian, Analyst at Smith Barney Citigroup]

Yes. Understood. And that's really helpful clarification. Thank you. I want to ask about the marketing that you're doing with the registrars in the US. I know you're saying it's just a couple of weeks, and The outcome is not going to come until next year, but maybe there's a little bit that you can -- a little bit of color that you can add on what you're doing there or what the receptiveness has been from the registrars. Anything that would be helpful. Thanks.

[Jim Bidzos, Executive Chairman, President and CEO at VeriSign]

Sure. George has taken a lead on that. So, George.

[George Kilguss, Executive Vice President & Chief Financial Officer at VeriSign]

Well, thanks, Jim. So Ygal, as we mentioned last quarter, in addition to the annual marketing programs that we launched, at the beginning of the year, we have rolled out some new programs during late Q2. We launched some new programs on.net and this quarter we've rolled out some programs to the registrar community on.com. Again our strategy is really to broaden the options that registrars can choose from depending on their different business models, geographic footprints, and installed bases. I would say the initial feedback has been positive to those programs. But it is early and of course while we've had, I think, some good registrar engagement there. It will take a little bit of time to registrars to work those programs into their go to market strategies. So still early days, but we've gotten some initial feedback, and as you may also know we will start working here in the fourth quarter to modify and enhance and target additional programs[Phonetic] for 2025.

We tend to gear that up in the fourth quarter and begin to talk to registrars about those programs as well. So any of the programs that we've rolled out that we get feedback on will look to try to tweak those to make sure that they work best for the registrar community.

[Ygal Arounian, Analyst at Smith Barney Citigroup]

All right, thanks. And I'll ask one last one. Just an updated domain guidance or you're giving down 3% at the low end based on the first half, the current trends that would seem to imply, trends get worse, not continue at the current level, so just want to know how to think about that number. Is it just incremental caution around the trends? Is it something you're seeing or what needs to happen to go from down two to down three? What's contemplated there? Thank you, guys.

[George Kilguss, Executive Vice President & Chief Financial Officer at VeriSign]

Yeah, sure. So if you look -- simply, if you look at the first half of the year, or for the first six months, we're down about 2 million names. And so the midpoint of our guidance suggests that that trend is probably going to continue here for the second half. Having said that on the upside, if some of our marketing programs start taking root or is, as Jim mentioned, if registrars stop being as aggressive in the marketplace with ARPU or there has been some recent news out of China, where the Chinese government has put some stimulus in to that marketplace if those things start to take root, I think those are positive and can close that gap a little bit for us.

On the downside, to the extent any of those trends worsen, i.e. the China market continues to not turn around or worsens and renewal rates from some of the registrar activities continuing to exercise their pricing flexibility weaken that could potentially get to the bottom of that range. But right now, I think the simplest thing, the midpoint of our guidance suggests that the second half will be similar to the first half of this year.

[Ygal Arounian, Analyst at Smith Barney Citigroup]

Great. Thank you, guys.

[Jim Bidzos, Executive Chairman, President and CEO at VeriSign]

Hey, Ygal, this is Jim. There's a couple of other things in the cooperative agreement that can't be changed. We normally don't think of them because they aren't generally of interest to investors. But I think everybody's aware of them. But one is that we cannot be vertically integrated for.com. We cannot be our own registrar for.com. And I think you might recall that an amendment 35, we got clarification that, that only applies to.com. So we don't have any plans to become a registrar for anything. But there is a restriction and a cooperative agreement has been forever that we cannot for quite a few years that we cannot be our own registrar for.com. And there's a function called [Indecipherable] where people can query registrations and there are some requirements to continue to support that.

Just for all clarity, I think there's one more technical one, but it's all in amendment 35. Pretty easy to find, but I think the important ones for investors are pricing SLA, the service level agreement, the performance and termination and we don't see by the way, we don't seek to change any of the other ones either. Since we got clarification on the vertical integration, there's really nothing in the cooperative agreement that we would seek to change, and we don't seek its termination or sunset.

[Ygal Arounian, Analyst at Smith Barney Citigroup]

Got it. Thanks for the clarifications.

[Jim Bidzos, Executive Chairman, President and CEO at VeriSign]

Sure.

[Operator]

We will take our last question from Rob Oliver with Baird.

[Rob Oliver, Analyst at Robert W. Baird]

Great. Thanks for squeezing me in for one more, guys. Jim or George, just question on capital allocation. I saw you guys re-up[Phonetic] to the buyback. I guess Jim just thinking about your time. Since returning to VeriSign you've essentially unwound and so many of the non core businesses which our view has been, this is a tremendous competitive advantage for you guys. However, it was interesting in response to Ygal's question, what you just said about vertical integration because, yes, clearly you can't do that with.com. But I'm just wondering the extent to which the current malaise in.com growth and some of the activity with new gTLDs coupled with a very strong financial position that you guys have, might cause you to rethink your capital allocation strategy either via MNA[Phonetic] or getting more aggressive with the new gTLD market, or in any other way. Thank you.

[Jim Bidzos, Executive Chairman, President and CEO at VeriSign]

It's a good question. We don't guide to any of those things. So I'm reluctant to say anything about it. Now we do. I will say, though, that as you're aware we have pursued growth through the pursuit of a new TLD.web and that continues, of course in litigation and there's no update, unfortunately, this quarter. But I think that adding a new [Indecipherable] and giving our customers more choice was a good plan, a good growth plan for us. But also do remember that our primary mission, the 328 billion queries a day in delivering that and having delivered it for 27 years is a primary mission. We have a strategic framework that balances growth against meeting our SLAs, which is obviously a very important thing. So we certainly have the flexibility to become a registrar for.web if we wanted to, but all the other things that you mentioned. We have no intention of doing that, but the other things that you mentioned we wouldn't guide to and our complicated processes. All I can say is that if you look at our long track record of capital allocation, as you can see from our financial results today, it's serving as well.

[Rob Oliver, Analyst at Robert W. Baird]

Great. Thanks, Jim. I appreciate it. Thank you guys.

[Operator]

This does conclude today's question and answer session. I would now like to turn the call back to David Atchley for final remarks.

[David Atchley, VP of IR and Corporate Treasurer at VeriSign]

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]

Participants

Corporate Executives

• David Atchley, VP of IR and Corporate Treasurer
• Jim Bidzos, Executive Chairman, President and CEO
• George Kilguss, Executive Vice President & Chief Financial Officer

Analysts

• Rob Oliver, Robert W. Baird
• Ygal Arounian, Smith Barney Citigroup