VeriSign Q3 2024 Earnings Call Transcript

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Provided by Quartr
October 24, 2024

There are 6 speakers on the call.

Operator

Good day, everyone. Welcome to VeriSign's Third Quarter 2024 Earnings Call. Today's conference is being recorded. Recording of this call is not permitted unless preauthorized. At this time, I would 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 Q3 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. Just an apology here before I start that I may sneeze so far along the way a little bit of allergy effect today. We delivered another quarter of operational and financial stability by focusing on our mission as a critical Internet infrastructure operator. Also, we extended our unparalleled 27 years of 100% uninterrupted availability for the common net domain name resolution system.

Speaker 2

For the Q3, revenues grew 3.8% year over year, operating income grew 5.9% year over year and earnings per share grew 13.1% year over year. At the end of September, the domain name basin.comand.net totaled 169,600,000 domain names. During the Q3, the domain name base decreased by 1,100,000 names. From a new registration perspective, the 3rd quarter ended with 9,300,000 new registrations compared with 9,900,000 names for the same quarter last year. The renewal rate for the Q3 of 2024 is expected to be approximately 72.3% compared to 73.5 percent a year ago.

Speaker 2

As we have previously reported, we continue to see U. S. Registrars prioritize ARPU over customer acquisition through higher retail pricing levels, increased focus on aftermarket sales and reduced spend on marketing to new customers compared with prior years. In addition, and as expected, China related weakness continues. These factors are impacting new registrations and renewal rates in 2024.

Speaker 2

During the Q3, the U. S. Region was lower by approximately 850,000 names. China related weakness contributed to most of the remaining sequential decline in the Q3. The domain name base from our EMEA region was up nearly 200,000 names during the Q3.

Speaker 2

As we've noted in our prior earnings calls, we have been developing and piloting new registrar marketing programs with our channel to support our goal of returning to domain name base growth. While we have seen good response to our new programs, it does take time for registrars to adopt and integrate them into their sales cycle. As a result, many are looking towards 2025 to engage more fully. Accordingly and with current trends persisting, returning the entire DNB to growth in the second half of twenty twenty five may be more challenging. With that being said, we're doing what we can to help refocus the registrars towards higher renewal rate cohorts with our new programs and we will provide full year guidance for 2025 during our February earnings call.

Speaker 2

With the current trends tracking in line with our forecast from last quarter, we are narrowing our expectations for the change in the domain name base to be between negative 2.9 percent and negative 2.3 percent for full year 2024, decreasing the midpoint by 10 basis points. Moving now to the company's contracts. On September 26, Icahn posted the revised dotcom registry agreement for public comment. The comment period runs through November 5. The current dotcom registry agreement expires November 30 and we expect the renewal process to be completed by that date.

Speaker 2

Also, as we previously disclosed, we have agreed to discussions with the NTIA regarding dotcom pricing and the health of the dotcom ecosystem. Dotcom ecosystem includes the retail and secondary markets as part of possible mutually agreed solutions that serve the public interest and benefit end users, especially businesses and consumers. These discussions are separate from the COM Registry Agreement renewal process with ICANN. We're engaged with the NTIA now in these discussions, but we have no further update at this time. Our financial and liquidity position continues to remain stable with $645,000,000 in cash, cash equivalents and marketable securities at the end of the quarter.

Speaker 2

During the Q3, we repurchased 1,700,000 shares for $301,000,000 At quarter end, dollars 1,280,000,000 remained available and authorized under the current share repurchase program. And now I'd like to turn the call over to George. I'll return when George has completed his report with closing remarks. George?

Speaker 3

Thanks, Jim, and good afternoon, everyone. For the quarter ended September 30, 2024, the company generated revenue of $391,000,000 up 3.8% from the same quarter of 2023 and delivered operating income of $269,000,000 an increase of 5.9% from the same quarter a year ago. Operating expense in Q3 2024 totaled $121,000,000 $368,000,000 for the 9 months ended September 30, which compares to $122,000,000 in Q3 2023 $368,000,000 for the 1st 3 quarters of 2023. Net income in the 3rd quarter totaled $201,000,000 compared to $188,000,000 a year earlier, which produced diluted earnings per share of $2.07 for the Q3 of 2024 compared to $1.83 for the same quarter of 2023. Operating cash flow for the Q3 of 2024 was $253,000,000 and free cash flow was $248,000,000 compared with $245,000,000 $217,000,000 respectively in the year ago quarter.

Speaker 3

I'll now discuss our updated full year 2024 guidance. Revenue is now expected to be between $1,554,000,000 $1,559,000,000 Operating income is now expected to be between 1,000,000,000,000 dollars $1,059,000,000 Interest expense and non operating income net, which includes interest income estimates, is now expected to be an expense of between $32,000,000 $42,000,000 Capital expenditures are now expected to be between $25,000,000 $35,000,000 and the GAAP effective tax rate is still expected to be between 21% 24%. Overall, VeriSign continued to demonstrate sound financial discipline during the quarter. Now I'll turn the call back to Jim for his closing remarks.

Speaker 2

Thank you, George. In closing and especially for those who may be new to VeriSign, I'd like to say more about what we do and what it takes to deliver 27 years of uninterrupted DNS availability for CommonNet. We recently published a blog, Myths versus Facts about VeriSign. In it, we refer to our infrastructure, which is better described as a complex system comprised of many critical components. We often describe it as a proprietary purpose built network.

Speaker 2

Let me briefly describe and expand some of what's behind that. First, an important part of what makes our system unique is our multiple redundant data centers that can receive, process and immediately distribute globally millions of updates to registration data. All that can happen in under 20 seconds and arrive at our global resolution constellation. And then we can immediately reply to queries within milliseconds anywhere in the world. We also maintain to the maximum extent possible, control of the remote sites from hardware and firmware up, allowing for better security practices such as firmware, bootloader and code verification, single purpose proprietary and optimized DNS processing, which provides additional layers of protection against cyber attacks, elimination of shared services, meaning dedicated capacity and no multitenancy for networks or compute resources throughout the entire system, which is one reason we do not rely on public cloud services, but have developed our own purpose built private cloud infrastructure.

Speaker 2

Network compute and all other resources are dedicated to delivering on our core mission, registry resolution and root services. This allows us to mitigate risks such as collateral damage that arise in public cloud infrastructure. With service locations in more than 60 countries, in data centers we wholly own or secure co location spaces we lease, the entire system was designed with maximum diversity that includes operating systems, compute, network and security hardware, transit providers and more, and overcapacity measured in orders of magnitude. The most critical component of our system is the 600 plus skilled engineers, cybersecurity, infosec and DNS specialists that maintain, operate and protect it. That and a lot more that we don't talk publicly about is what it takes to achieve an unparalleled 100 percent availability record of 27 plus years spanning 4 decades.

Speaker 2

Processing on average 100 of billions of transactions per day. Critical infrastructure that has relying parties counted in the billions, users, devices and more around the world and it deserves no less. Every quarter you hear me thank our teams for their commitment and dedication to our mission. Delivering this level of performance and reliability is a source of pride and deep responsibility for our employees. Thanks for your attention today.

Speaker 2

This concludes our prepared remarks. Now we'll open the call for your questions. Operator, we're ready for the first question.

Operator

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

Speaker 4

Great. Thank you. Good afternoon. Jim, I want to touch on your comments relative to the channel marketing efforts that you guys are engaged in. The registrar's prioritization of ARPU in this environment is not new.

Speaker 4

And I know initially when you guys rolled out these or announced the rollout of these plans, your hope was to grow domains in 2025. It certainly sounds like you're less confident about that now. So just wanted to get an update from you on how those plans are going, if you've needed to tweak them at all or any color you could provide unless something's changed at the registrar end that we're missing, how you guys are pivoting or adjusting to try to reaccelerate that growth in 2025?

Speaker 2

Okay. Thanks, Rob. So correct me if I'm wrong, I think I heard 2 questions in there. One is, one was about ARPU and the other one is about, call it, slipping into 2025. Is that fair?

Speaker 2

Is that kind of your question?

Speaker 4

Well, I think you really it's more of the slipped beyond 2025 because I think the prioritization of ARPU is something that you guys have talked about. We've seen that the registrar is unless there's a change there, I guess. So that's half a question.

Speaker 2

Okay. If there's a change, please. Yes. Well, let me take them in reverse order then. When we're talking about the programs moving into 2025, the registrars are not able to engage quickly enough to put the programs into effect.

Speaker 2

So we see some of that slipping from 2024 into 2025 and therefore we're pushing out a little further and saying that could impact our goal of returning to growth in the second half of twenty twenty five. Your second question about ARPU is, we see clear indications of the registrars, that are public companies. They've been very clear about a lot of the their improvements and their performance coming from increased retail prices and higher average resale domains. GoDaddy disclosed recently that their resale revenue is in excess of $100,000,000 per quarter. So that's the kind of ARPU that certainly understandable that they're pursuing it, but we still believe that ARPU is cyclical and at some point a return to customer acquisition is important.

Speaker 2

And I'll invite George to add any more color if you care too, but

Speaker 3

Yes, I think that's right, Jim. Rob, as Jim mentioned in the prepared remarks, we were down about $1,100,000 in the quarter, dollars 850,000 from the U. S. Was the largest component there. And over the past few quarters, as you alluded to, we have seen U.

Speaker 3

S. Registrars focus shift towards improving their profitability and they're really doing that 3 ways. 1 is they've been raising retail prices. 2, they have, as Jim alluded to also, been focusing on the increased aftermarket sales, which they're basically marking up and selling currently owned inventory of premium names at premium prices. And so while that generates substantial revenue for them on a per domain name basis, the registry doesn't obviously get compensated in that environment.

Speaker 3

And lastly, they've been reducing their marketing spend there. So that's been really the headwind with ARPU in the U. S. Markets. As far as China is concerned, we continue to see a weak macroeconomic environment there.

Speaker 3

We've also seen some increased regulation over there as well. And while Q3 was the sequential decline was a little bit less in Q3 from China, We still haven't seen any material change that. So right now, we don't expect that market to have turned the corner just yet. So but we're keeping an eye on it.

Speaker 4

That's helpful. My second question was on China. So if I could just pick that up, George, that's helpful. Do you guys expect or can you update us on your thought relative to how or if you stand to benefit if we do see kind of continued uptick in economic activity in China. In other words, certainly there's a cyclical element that you guys have, I think, felt the pain from.

Speaker 4

There's also, Ben, as you pointed out, some regulatory issues, regulation. But I guess one thing we hear from investors often is sort of secular versus cyclical. So do you guys expect to benefit in China as or if we see economic activity in China rebound?

Speaker 3

Yes. I can just tell you historically, when the China economy was doing better, we also benefited. As far as how that dynamic has changed, we're keeping an eye on it. Some of our registrars did pilot a few of our programs last quarter, and we're pleased with the results. So we're engaging with them and other registrars into 2025 to engage with our programs and we hope that those will benefit us in 2025.

Speaker 4

Got it. And then last one for me, George, also for you just on the cost side. So there was some outperformance on the operating income side relative to the at least the two estimates that are out there. But just curious as you look at what potentially is these ongoing efforts on the marketing side? How we should think about the potential impact to costs?

Speaker 4

Or are those rationalized certainly through the end of 2024 and how we might think about them not asking you to guide the cost for 2025, but how we might think about the potential lead for incremental costs on these channel marketing efforts? Thanks.

Speaker 3

Yes, a couple of things. I mean if you look at the midpoint of our guidance, it would imply that we're going to probably spend a little bit more here in Q4. If you look at our headcount trends, we were able to hire about 12 people in the quarter. Finding the right people to align with our mission and the skill sets that we need takes a little bit of time, and we've been looking for those people. So some of the investments that we've been trying to make this year have been pushed a little bit into the Q4.

Speaker 3

We expect I would expect expenses to grow more in 2025 than they have in 2024, and we'll give you guidance next quarter on that. As it relates to marketing programs, we're always trying to make sure that the marketing programs are accretive to our business. And so to the extent that we're finding success in our programs, we're probably going to lean more into them and invest more in those programs, but we believe they'll be accretive. If you find they're not accretive, then you'll probably see us pull back on a few of those programs. So clearly, we're trying to drive profitable growth as we have been for a number of years for the company.

Speaker 4

That's great. I appreciate all the time. Thank you, guys.

Speaker 5

Thank you.

Operator

We will take our last question from Max Moore with Citi.

Speaker 5

Hey, good afternoon, guys. Appreciate taking my questions. And don't worry, I'll be back next quarter. I guess just maybe looking to capital allocation and buybacks, this year is tracking, I think, the one of your largest ever on buybacks. So just how should we think about kind of the pace of buybacks from here?

Speaker 5

And then also would you consider just given the amount of free cash you have consider anything on the leverage side maybe lever up to increase the pace of buyback?

Speaker 2

Well, let me respond to your question and invite George afterwards as well. On a part of it certainly about leverage, I think you could probably determine from my comments about the operations that I've provided a little bit more color on. We're very careful and conservative about our approach to cybersecurity. That also applies to financial stability. We're very cautious.

Speaker 2

We're not over levered. There's a lot of reasons for that. There are a variety of factors. We just financial stability and operational stability, security and stability in the infrastructure that we operate. All those things to us are the same thing.

Speaker 2

But it's all part of the company stability. We obviously don't that we are not as leveraged as we possibly could be and we certainly that's not a priority for us and that's not something that we're going to do. We don't guide to buybacks. Obviously, historically, you've seen what we've done. George, I'd like you to comment further.

Speaker 3

Yes, Max. I mean, I think, look, we're trying to return excess cash to shareholders in the most efficient way possible. We've been doing that for a number of years. We'll continue to evaluate the methods and the ways to do that and the appropriate amounts based on our plans and our investment strategy. So, as Jim said, we don't guide to it, but we try to, I would just look historically what we've done.

Speaker 3

And if our philosophy change, we'll call it communicated to you.

Speaker 5

Okay, great. That's helpful. And then maybe just on some of the marketing initiatives. I don't know if you've given some examples of some of the programs you're looking to implement, but if there's any color there you could share, that'd be helpful.

Speaker 3

Yes. As we've mentioned, I think in summary, we've really been looking to give more choice to registrars that have potentially differing go to market strategies. While I'd rather not provide specifics for competitive reasons, an example of choice could be offering multiple programs that should appeal to registrars that are looking to sell more product or TLDs to existing customers. And then there are some programs that we're looking to appeal to registrars that maybe prefer new customer acquisition. But we're also trying to align these programs with registrars' goals of pursuing higher renewal rate cohorts.

Speaker 3

And to the extent we can find those win win opportunities, we think we'll be successful in that effort.

Speaker 5

Okay, great. Thanks guys.

Operator

This concludes today's question and answer session. I would now like to turn the call back to David Atchley for any additional or closing remarks.

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

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

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VeriSign Q3 2024
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