Q3 2024 VeriSign Inc Earnings Call
Good day, everyone and welcome to very Science 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. David Atchley, Vice President of Investor Relations and corporate Treasurer.
Please go ahead Sir.
Thank you operator, welcome to <unk> third quarter 2024 earnings call. Joining me are Jim bid dose 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 Dot 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.
Filled with FCC 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 to non-GAAP measures used by Verisign adjusted EBITDA.
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.
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.
Thank you David good afternoon to everyone and thank you for joining us and just an apology here before I start that I.
It may sneezed somewhere 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 at 100% uninterrupted availability for the common net domain name resolution system for the third quarter revenues grew three 8% year over year.
<unk> operating income grew five 9% year over year and earnings per share grew 13, 1% year over year.
At the end of September the domain name base in Dot Com and Dot net totaled $169 6 million domain names during.
During the third quarter the domain name base decreased by $1 1 million names.
From a new registration perspective, the third quarter ended with $9 3 million, new registrations compared with $9 9 million names for the same quarter last year.
Renewal rate for the third quarter of 2024 is expected to be approximately 72, 3% compared to 73, 5% a year ago.
As we have previously reported we continue to see U S registrars prioritize ARPA 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 in renewal rates in 2024 during the third quarter. The U S region was lower by approximately 850000 names.
China related weakness contributed to most of the remaining sequential decline in the third quarter.
The domain name base from our EMEA region was up nearly 200000 names during the third quarter.
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 the domain name base growth.
We are seeing good response to our new programs. It does take time for registers 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 2025, maybe 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.
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 two 9% and negative two 3% for full year 2020 for decreasing the midpoint by 10 basis points.
Moving now to the Companys contracts on September 26th ICANN posted the revised Dot Com registry agreement for public comment the comment period runs through November 5th the current Dot Com Registry agreement expires November 30th and we expect a renewal process to be completed by that date.
So as we previously disclosed we have agreed to discussions with the NTIA regarding dot com pricing and the health of the dotcom ecosystem.
Dot com ecosystem includes the retail and secondary markets as part of possible mutually agreed solutions that serve the public interest and benefit and 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 at $645 million in cash cash equivalents and marketable securities at the end of the quarter during the third quarter, we repurchased one 7 million shares for $301 million.
At quarter end 1.28 billion 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 with Georgia completed his report with closing remarks George.
Thanks, Jim and good afternoon, everyone for the quarter ended September 30th 2024, the company generated revenue of $391 million up three 8% from the same quarter of 2023 and delivered operating income of $269 million, an increase of five 9% from the same quarter a year ago.
Operating expense in Q3, 2024 totaled $121 million and 368 million for the nine months ended September 30th which compares to $122 million in Q3, 2023 and $368 million for the first three quarters of 2023.
Net income in the third quarter totaled $201 million compared to $188 million a year earlier, which produced diluted earnings per share of $2.07 for the third quarter of 2024 compared to $1 83 for the same quarter of 2023.
Operating cash flow for the third quarter of 2024 was $253 million and free cash flow was $248 million compared with $245 million and $217 million, respectively in the year ago quarter.
I will now discuss our updated full year 2024 guidance.
Revenue is now expected to be between $1.554 billion and $1.559 billion.
Operating income is now expected to be between $1.054 billion and $1.059 billion.
Interest expense and non operating income net which includes interest income estimates is now expected to be an expense of between 32 million and $42 million.
Capital expenditures are now expected to be between $25 million and $35 million.
The GAAP effective tax rate is still expected to be between 21% and 24%.
Overall, verisign continued to demonstrate sound financial discipline during the quarter.
Now I will turn the call back to Jim for his closing remarks.
Thank you, George and closing and especially for those who may be new to verify I'd like to say more about what we do and what it takes to deliver 27 years of uninterrupted DNS availability for com and net.
We recently published a blog myth myths versus facts about verisign.
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.
Let me briefly describe and expand some of what's behind that.
An important part of what makes our system unique is our multiple redundant data centers that can receive process and immediately distribute globally.
<unk> of updates to registration data all of 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 maintained to the maximum extent possible control of the remote sites from hardware and firmware up allowing for better security practices, such as firmware boot loader and code verification single purpose proprietary and optimize DNS processing, which provides additional layers of protection against cyber attacks elimination of shared services.
This is meeting dedicated capacity and no multi tenancy for for networks, our compute resources throughout the entire system, which is one reason, we do not rely on public cloud services, but if developed our own purpose built private cloud infrastructure network compute and all other resources are dedicated to delivering on our core mission registry resolution and root server.
Yes.
This allows us to mitigate risks such as collateral damage that horizon public cloud infrastructure with service locations and more than 60 countries in datacenters, we wholly own or secured Colo location spaces. We leased 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 cyber security info SEC and DNS specialists that maintain operate and protect it that there are a lot more that we don't talk publicly about is what it takes to achieve an unparalleled 100% availability record of 27 plus year spanning four decades.
Surfing on average hundreds 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 as a source of pride and deep responsibility for our employees.
Thanks for your attention today. This concludes our prepared remarks now we will open the call for your questions. Operator, we're ready for the first question.
Thank you.
I'd like to ask a question.
<unk>.
On your telephone keypad.
If you are using a speaker phone. Please make sure your mute function is turned off.
Once your question has been stated please mute your line.
Jan please.
To ask a question.
We will take our first question from Rob Oliver with Baird.
Great. Thank you good afternoon.
Jim I wanted to touch on your comments relative to the channel marketing efforts that you guys are engaged in.
The register is prioritization of our pool.
In this environment is is not do and I know initially when you guys rolled out these or announced the rollout of these plans your hope was to grow domains and in 'twenty five.
It certainly sounds like you're less confident about that now so just wanted to get an update from you on how those plants are going if you've needed to tweak them at all or any color you could provide unless something's changed at their registrar radnet that we're missing.
How you guys are pivoting or adjusting to.
To try to Reaccelerate that growth in 'twenty five.
Okay. Thanks, Rob So correct me if I'm wrong, I think I heard two questions. In there. One is one was about <unk> and the other one is about that.
Call it slipping into 2025 that fare.
But.
Is that kind of to your question yet.
I think you will you really it's more of that slippage beyond 25, because I think the prioritization of <unk> you.
It's something that you guys have talked about we've seen that the registrars unless there's a change there I guess so that's half a question James Please yes well.
Let me take them in reverse order then when we're talking about the program is moving into 2025.
The registrars are not able to engage quickly enough to put the programs into effect. So we see some of that slipping from 24 into 'twenty five and therefore, we're pushing out a little further and say that could impact our goal of returning to growth in the second half of 2025 your.
Your second question about <unk> is we see clear indications of the registrars.
That are public companies they have been very clear about and a lot of their.
They are improvements in their performance coming from increased retail prices and higher average.
Resale domains.
Data disclosed recently that there <unk>.
<unk> revenue is in excess of $100 million per quarter. So that's the kind of ARPA that certainly understandable that they are pursuing it but we still believe that our pillar cyclical and at some point a return to customer acquisition is important now invite George to add any more color.
<unk>.
Yes, I think that's right Jim Rob as Jim mentioned in the prepared remarks.
We were down about $1 1 million in the quarter.
850 from the U S was the largest component there and.
Over the past few quarters as you alluded to we have seen U S registrars focused shift towards improving their profitability and they are really doing that three ways. One is there they've been raising retail prices to they have as Jim alluded to also been focusing on.
The increased aftermarket sales, which they are basically marking up in 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.
And lastly, they have been reducing their marketing spend there. So that's been really the headwind with <unk> in the in the U S markets.
As far as China is concerned.
We continue to see a weak macroeconomic environment there.
We've also seen some increased regulation over there as well and while.
Q3 was a.
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.
That's helpful. My second question was on China. So if I could just pick that up George Thats helpful.
The.
Do you guys expect or can you update us on your thoughts 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 have have I think felt the pain from there has also been as you pointed out some regulatory.
Issues regulation.
But.
I guess, one thing we hear from investors often is sort of secular versus cyclical.
Versus cyclical so do we do we do you guys expect to benefit.
Or if we see economic activity in China rebound.
Yes, I can just tell you historically when the China Mcadams, who is doing better. We also benefited as far as how that dynamic has changed we're keeping an eye on it.
Some of our registrar as did pilot a few of our programs last quarter.
And we're pleased with the results. So we're engaging with them in other registrars into 2025 to two.
Engage with our programs and we hope that those will benefit us.
In 2025.
Got it and then last one for me George also for you just on the on that cost side. So there was some outperformance on the operating income side.
<unk> 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.
Costs or are those rationalized certainly through the end of 'twenty four.
And how we might think about that I'm not asking you to guide your costs were 25, but how we might think about the potential for incremental costs Omnichannel marketing efforts. Thanks.
Yeah, 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 head count 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.
And we've been looking for those people. So some of the investments that we've been trying to make this year had been pushed a little bit into the fourth quarter. We.
We expect I would expect expenses to grow.
More than 2025 than they had been in 2024, and we will give you guidance next quarter.
On that as it relates to marketing programs.
Hi.
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.
<unk>.
Clearly, we're trying to drive profitable growth as we have been for a number of years.
For the company.
That's great I appreciate it all the time, thank you guys.
Thank you.
Well take our last question.
With.
Hey, Good afternoon, guys. Appreciate you taking my questions.
Don't worry I'll be back next quarter.
I guess, just maybe looking to our capital allocation and buybacks.
The Sirius tracking I think one of your largest ever on buybacks. So.
Just how should we think about.
Kind of the pace of buybacks from here 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 buybacks.
Well, let me let me respond to your question and invite George afterwards as well.
Part of it certainly about leverage.
I think you could probably determined from my comments about the offer our operations that I've provided a little bit more color on.
We're very careful and conservative about approach to cyber security that also applies to financial stability. We're very cautious we're not over levered. There is a lot of reasons for that.
We believe that there are a variety of factors, we just we just financial stability and operational.
Operational stability security and stability in the infrastructure that we operate all of those things to us at the same thing.
It's all part of the company's stability, we will obviously add don't don't that we're not as leveraged as we possibly could be and we've certainly that's not a priority for us and that's not something that we're going to do and we know we don't guide to buybacks, obviously historically you've seen what we've done.
Georgia.
Comment further.
Yes, Max I mean, I think look at 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 will 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 and if our philosophy change we'll call it communicated to you.
Okay.
Okay, Great Thats helpful.
And then maybe just on some of the marketing initiatives.
Getting some examples of some of the programs youll implement but if there is any color there you could share that would be helpful.
Yes, as we've mentioned.
In summary, we really been looking to give more choice to registrars that have potentially different go to market strategies.
Speaker Change: Well I'd, rather not provide specifics for competitive reasons, and example of choice could be offering multiple programs that should appeal to registrars that are looking to sell more product or TLD to existing customers and then there are some programs that we're looking to appeal to register or is that maybe prefer new customer acquisition.
But we're also trying to align these programs with the registrars goals of pursuing higher renewal rate cohorts and to the extent we can find those win win opportunities. We think will be successful in that effort.
Speaker Change: Okay, great. Thanks, guys.
This concludes today's question and answer session I would now like to turn the call back to David Atchley for any.
Any additional or closing remarks.
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.
This concludes today's call. Thank you for your participation you may now disconnect.
[music].
Speaker Change: Yeah.
Okay.
[music].
Yeah.