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

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 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.

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 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 first quarter results and current channel feedback, we now expect these conditions to persist through most of 2024. 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% to a negative 1.75% for the full year 2024. As a modeling note, the decrease in domain name base is expected to be most pronounced during the second quarter of '24 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.

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 nonoperating 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. Now I'll turn the call back to Jim for his closing remarks.

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 goals 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.

Our first question comes from Rob Oliver with Baird.

Great. Jim, my first question is for you. Could you clarify the conditions you've mentioned that are impacting growth for U.S.-based .com registrars? Additionally, if possible, could you provide some insight into any upcoming programs that might help us achieve growth in 2025? I know you have a strong history of collaboration with your registrars and I would like to understand your plans a bit better. I have a couple more questions afterward.

Sure. Let's see, your first question was on the U.S. 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 website builders and wholesale registrars who are selling to others. So our strategy is to broaden the options available to this sort of diverse group with diverse business models, geographic footprints, and 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 are also designed with feedback that we've received from the community, and multiple options are clearly desirable. So that's the good generalization I can offer you.

Great, that's helpful information. Now, George, as we continue analyzing the model, it seems that the margin or profit has decreased slightly. This might relate to the revenue. However, are there any additional expenses in the second half related to this program that could help boost .com growth for 2025? Are there any extra costs included in that change?

Yes, Rob, thanks for the question. 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.

Okay. Great. Helpful. 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 were 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. 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.

Sure. First, I want to remind you that I mentioned in my prepared remarks that we expect China to continue to be a challenge through 2024. Regarding better visibility, I don't really have anything substantial to share that provides clearer insights. The market is different for various reasons we often discuss. The regulatory environment has changed, and they are significantly impacted by costs, not just from price increases but also from the cost of purchasing dollars for those domains. The market is experiencing many different influences. As for specific insights, I can't provide any. Our view of China is that it represents about 5% of our overall domain name base and is declining, so the negative impacts will lessen as we progress through 2024. Another factor contributing to our outlook is the programs we are implementing for registrars to assist them in acquiring new customers, along with the cyclical nature of their average revenue per user. However, in the past three months, I can't point to anything that indicates we have a clearer understanding. The market remains affected by increased regulation and sensitivity, and there are likely additional factors we don’t fully comprehend. We study it closely, but that's the best information I can offer at this moment.

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

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.

It's certainly true that one thing I could have added is that we're seeing other TLDs filling some of the demand in China. These TLDs are priced very low, often under a dollar. That's definitely a factor. We don’t control retail pricing; different channels price our products like .com and .net in a broad range. Some are renewing above $20 while others are selling registrations and renewals closer to wholesale prices, so it varies. The focus on ARPU is likely a primary factor in the U.S., along with reduced spending on marketing. If I could point to something we could have recognized sooner, it would be adapting our marketing programs earlier, but we are getting them to market now, which should help address some issues. However, the significant competition in China comes from sub-dollar TLDs that are seeing some growth. This pattern has fluctuated over the years, with different TLDs spiking up and down, as shown in our DNIB report.

Ygal, it's George. We don't have as much flexibility in new gTLDs in certain markets. We treat all our customers the same, and sometimes fluctuations in exchange rates overseas can also influence demand.

Got it. So just a follow-up on that, then. With pricing focus 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 not retail $20 a year. It's not the highest consideration purchase. 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 flow through on how you think about the wholesale level?

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 .com 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 TLD that's supported with a 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.

Okay, helpful. And my last question is about the .com renewal. We receive numerous inquiries as the renewal date approaches, and while I understand there's not much new information, could you please help us understand the timeline for the renewal? What key timing factors should we consider, and what might the overall timeline look like? I understand you have the presumptive right of renewal, and that the contract details will remain the same, but are there any risks or other considerations for investors as we near that renewal date?

I’m not sure what you mean by risk. The contract includes a presumed right of renewal, and as long as we fulfill all service level agreements, the contract states it will be renewed. However, the actual renewal is not due until the end of November, so we still have some time. We are currently engaged with ICANN and are in the process of exchanging drafts for the .com renewal. It’s still early in that process, and the .com renewal is not expected until the end of November. The right of renewal has been applied in our dealings with .net, and we expect to renew it on time, as we did last year. ICANN applies this approach across all their thousands of gTLD contracts. There is a continuous review of this presumed right of renewal, and we anticipate that .com will renew similarly to .net and all other gTLDs.

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

Great. Jim, last quarter, you were asked about .web, so I think I'll bring it up again. I'm not sure if there have been any official updates, but have you heard or seen anything we should know about that indicates a change? Additionally, could you share your updated perspective on the possible timeline or evolution of .web?

Thank you, Rob. That's a good question. I would consider this an update. You mentioned movement, and this could qualify as that. The update is that Verisign and NDC have filed an application to participate in the second IRP, similar to our involvement in the first one. For context, last April, ICANN's Board of Directors unanimously voted to delegate .web to NDC. Following that, Altanovo filed a second IRP complaint against ICANN. This second IRP is seeking the same outcome that the first IRP panel rejected twice, with sanctions applied on the second occasion, which is exactly what ICANN's Board committee and full Board rejected last April. We maintain that ICANN and the IRP panel should swiftly address what we consider to be unfounded claims against ICANN. Additionally, Altanovo does not operate any existing registry business, and it is unclear who is actually funding this litigation. So, the update is that we have filed an application, and we'll observe the progress of the second IRP.

Great. That's helpful. I'll have to go back to the record to look at that again. But very helpful.

And that does conclude the question-and-answer session. I'll now turn the conference back over to Mr. David Atchley for final comments.

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.

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