VeriSign, Inc. (NASDAQ:VRSN) Q1 2024 Earnings Call Transcript

VeriSign, Inc. (NASDAQ:VRSN) Q1 2024 Earnings Call Transcript April 25, 2024

VeriSign, Inc. beats earnings expectations. Reported EPS is $1.92, expectations were $1.86. VRSN isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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 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, sir.

David Atchley: Thank you, operator. Welcome to VeriSign’s first 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 Web site, 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 Web site 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: 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 first quarter. These results show the continued financial strength of our business model. For the first quarter, 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. At the end of March, the domain name base in .com and .net totaled 172.5 million domain names, down 270,000 names from year end 2023. From a new registration perspective, the first quarter ended with 9.5 million new registrations compared with 10.3 million names for the same quarter last year.

The renewal rate for the first quarter 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 first quarter, this segment declined by 360,000 names. 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 US 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 first quarter results and current channel feedback, we now expect these conditions to persist through most of 2024.

That being said, we are in a 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 are now expecting the change in the domain name base to be between positive 0.25% to a negative 1.75% for the full year of 2024. As a modeling note, the decrease in domain name base is expected to be most pronounced during the second quarter 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 million in cash, cash equivalents and marketable securities at the end of the quarter. During the first quarter, we repurchased 1.3 million shares for $260 million.

At quarter end, $860 million remained available and authorized under the current share repurchase program. 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: Thanks, Jim. And good afternoon, everyone. For the quarter ended March 31, 2024, the company generated revenue of $384 million, up 5.5% from the same quarter of 2023 and delivered operating income of $259 million an increase of 7.3% from the same quarter a year ago. Operating expense in the first quarter totaled $125 million compared to $124 million last quarter and $123 million in the year ago quarter. Net income in the first quarter totaled $194 million compared to $179 million a year earlier, which produced diluted earnings per share of $1.92 for the first quarter of 2024 compared to $1.70 for the same quarter of 2023. Operating cash flow for the first quarter of 2024 was $257 million and free cash flow was $254 million compared with $259 million and $253 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 $1.555 billion to $1.570 billion. Our operating income is now expected to be between $1.047 billion and $1.062 billion. Interest expense and non-operating income net, which includes interest income estimates, is now expected to be an expense of between $25 million to $35 million. Capital expenditures are now 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 quarter. I’ll turn the call back to Jim for his closing remarks.

Jim Bidzos: 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 2024. We expect these programs to begin improving registration trends during 2024 and to contribute to a return to growth in 2025. 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.

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Q&A Session

Operator: [Operator Instructions]. Our first question comes from Rob Oliver with Baird.

Rob Oliver: 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 US-based, domestic based .com growth within 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 ’25? 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.

Jim Bidzos: Let’s see, your first question was on the US market. So basically, as we’ve 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. 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 .net and we plan to launch additional programs focused on com in the second half of the year. So basically, what I can generally say about these programs and what’s different, I think it helps to just understand that our channel is greatly varied. 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 Web site 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. So that’s the good generalization I can offer you.

Rob Oliver: And then just as a corollary to that, George, for you. We’re still running through the model here and obviously, the margin or profit coming down a little bit, that could be a result of the revenue. But is there — are there any additional expenses in that second half associated with this program that would — to drive — to restart that jump in .com growth for ’25? Any additional expenses captured in that change?

George Kilguss: I would say not a 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.

Rob Oliver: Last question for me, and then I’ll turn it over to Ygal. 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 three months ago. 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.

Jim Bidzos: 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. So I just think that, that is a different market for all the reasons that we typically mention. 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 that market is just sort of feeling a lot of different impacts.

Specific detailed insights into it, no. 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. The other, obviously, is two 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, certainly not in the last three months, there’s nothing I can point to that says we have a clear and better understanding. 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.

Operator: And we’ll take our last question from Ygal Arounian with Citi.

Ygal Arounian: 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 .com that you’re seeing? Meaning if we look at kind of total domains beyond .com, the softness isn’t necessarily as pronounced. So what are the dynamics? Why is it having a bigger impact on .com versus everything, are they promoting some of the other TLDs more than they are .com? Just to understand that a little bit better.