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

Thank you for joining us for VeriSign's second quarter 2024 earnings call. I am joined by Jim Bidzos, Executive Chairman, President and CEO; and George Kilguss, Executive Vice President and CFO. This call is being webcast from our Investor Relations website, where you can also find our earnings release. The presentation will be available on the site after the call, and a replay will be posted within a few hours. Please note that the financial results in our earnings release are unaudited and our remarks contain forward-looking statements subject to risks and uncertainties detailed in our SEC filings, particularly the most recent Form 10-K report. VeriSign does not update financial performance or guidance during the quarter unless through public disclosure. Today's discussion will include GAAP results as well as two non-GAAP measures: adjusted EBITDA and free cash flow. Reconciliation information for GAAP to non-GAAP is included in the slide presentation, available in our Investor Relations section after this call. Jim and George will now share some prepared remarks, and afterward, we will open the floor for questions. I will now turn the call over to Jim.

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, .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, that’s 24 hours a day, 7 days a week, 365 days a year, and that’s over 3.7 million per 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, .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 U.S. registrars prioritize ARPU over customer acquisition through higher retail pricing levels and reduced spend on marketing to customers compared with prior years. These factors 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 U.S. region was lowered by about 800,000 names. In addition, 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 expiration. And 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 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 $121 million for the 3 months and $246 million for the 6 months ended June 30, which compares to $123 million in the second quarter of 2023 and $246 million for the first 2 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 with $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 billion to $1.563 billion. Operating income is now expected to be between $1.048 billion and $1.058 billion. Interest expense and non-operating 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.

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 strong. 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 our registrars' go-to-market activities. Our goals to fulfill our stewardship mission of providing care and reliable infrastructure services, managing our business responsibly and efficiently returning capital to our shareholders remain unchanged. Thank you for your attention today. This concludes our prepared remarks. And 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. I've got a few, and then I'll hop back into 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 gTLDs are taking share from .com and what you're seeing in the data that gives you either a concern there or that would persuade you from that view? And then I have a couple of others.

The primary factor behind the weakness in the U.S. remains our registrars' emphasis on average revenue per user and decreased marketing spending. These elements are having a more significant and prolonged effect than we initially anticipated earlier this year. The unregulated retail channel has raised prices substantially, exceeding our limited wholesale pricing flexibility, with some increasing prices by three times or more. Additionally, we have observed some registrars prioritizing margin through price hikes on the overall bundle and cutting back on marketing budgets. While our limited wholesale price increases may have had some effect, we believe the impact of wholesale pricing is minor compared to the overall price hikes and other measures taken by the unregulated retail sector in the U.S. Regarding new generic top-level domains gaining market share, it appears that very low-cost new gTLDs are attracting some monetization demand mainly from China. It is important to note that there exists a vibrant market for country code top-level domains and new gTLDs, totaling 33 million. However, these tend to have lower renewal rates and lifetime values than traditional cohorts. Some of these names are more speculative, with declining demand from our registrar base in China. Furthermore, new gTLDs are governed by distinctly different and more flexible contracts, allowing them to provide special offers to individual registrars, including very low introductory and renewal prices. They can reserve and sell premium names at any time, and their operations lack transparency, as very few are publicly traded companies. It's essential to distinguish between a registry operator like us and some registries that function mainly as marketing entities, outsourcing registry tasks to back-end service providers, resulting in low overhead and minimal employee counts. They can sell TLDs at very low prices and still operate profitably. While we lack visibility into many of these private entities, we recognize these dynamics are relevant to the market, necessitating a closer examination for a more accurate understanding.

Got it. Okay. Very helpful, Jim. I appreciate all the insights. I have two more questions if I may. The second is about a congressional letter to the NTIA that was released today, which requests a review of the .com contract. Our understanding is that while they can make requests, there is no legal basis for it. This follows an earlier report from a think tank in New York that had similar suggestions. I wanted to get your thoughts on the letter that came out today.

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 6 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 $1.74. Our research shows that the benefit from our cap on 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 the secondary market, where the average price for .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 annually, which exceeds VeriSign's revenue. And unlike any actor in the secondary market, you know that 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 the secondary market. 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 it fast by NTIA, the issue of retail, especially secondary market pricing is an important part of the discussion of the .com domain name market that hasn't been sufficiently addressed yet.

Okay, that's extremely helpful. I guess the ultimate question we get most often from investors would be: Is there a risk the .com contract and your most recent thoughts on that would be great?

There is no provision in the cooperative agreement to rebid .com. We believe that Amendment 35 clearly states that if the Department of Commerce decides to end the cooperative agreement, which we are not pursuing, VeriSign would still operate the .com registry under the ICANN contract, which, like all ICANN agreements, has a presumed right of renewal.

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

We've recently been receiving a lot of questions regarding the agreements with NTIA and the Cooperative Agreement with the Department of Commerce. I just wanted to clarify that these are two separate contracts. Are they related in any way? Is the date when the Department of Commerce needs to notify you about the cooperative agreement August 2? Additionally, there seems to be confusion among investors about where the pricing aspect of the contract falls. Is it the Department of Commerce that handles pricing, or is it part of the ICANN contract? If the Department of Commerce decides to end the cooperative agreement, what happens to the pricing and where would that be negotiated? Thank you.

Thanks, Ygal. It might be helpful to briefly outline the two contracts at a high level and their interrelationship to address your question. The Cooperative Agreement is between VeriSign and the NTIA Department of Commerce. Previously, this contract managed the conditions for renewing our registry agreement with ICANN. After negotiating with ICANN to exercise our presumptive right of renewal, we needed NTIA's approval. In 2018, Amendment 35 provided ongoing priority consent for this process, as long as we didn't alter certain provisions in our registry agreement with ICANN. Specifically, we couldn't change the termination provisions, the performance requirements, or the pricing. The pricing from 2018 allows for a limited ability to raise prices, and Amendment 3 to the ICANN contract has incorporated this new pricing into the .com registry agreement. As the Cooperative Agreement approaches renewal, it's important to note that the renewal process differs from the ICANN agreement. The Department of Commerce can unilaterally choose to allow the Cooperative Agreement to expire but must provide notice if they decide to do so. We don't anticipate this happening. Renewal operates differently, as the contract will automatically renew under the same provisions unless action is taken, allowing us to continue our business dealings with ICANN and renew the .com agreement without changing those three key provisions. If the Department of Commerce wishes to allow it to expire, they need to give notice by August 2, which would lead to either its expiration or renewal at the end of November. If they take no action, the contract will remain valid for another six years with all provisions unchanged. That's the situation regarding the Cooperative Agreement. The ICANN agreement, while separate, also mandates no changes to those three provisions, which we intend to uphold. Like many other registry agreements, it includes a presumptive right of renewal. We recently exercised this with .net, which was a straightforward process. As for .com, we are actively preparing for its renewal due by November 30, well ahead of schedule. I hope this clarifies your questions.

It does. I understand it’s a multi-part question. Just to clarify, the wholesale pricing component currently lies between VeriSign and ICANN in the registry agreement. Is that correct?

Well, it was negotiated with the Department of Commerce in 2018, and through Amendment 3 in 2020, it was moved into the .com agreement as it's required to do. Those changes in the Cooperative Agreement passed on. So, and we can't change them in our negotiations with ICANN. So they stay as do the performance requirements and termination provisions. And you can see how all those work together.

Yes, understood. There's a lot of legal elements here; so that's…

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

I want to ask about the marketing you are doing with registrars in the U.S. I know you mentioned it has only been a couple of weeks, and the results will not be available until next year, but could you provide some insights on what you are doing and how the registrars have responded? Any information you can share would be appreciated.

Sure. George is taking a lead on that. So, George?

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 for registrars to work those programs into their go-to-market strategies. So still early days, but we've gotten some actual feedback. And as you may also know, we will start working here in the fourth quarter to modify and enhance and target additional programs 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, based on the feedback we get, we'll look to try to tweak those to make sure that they work best for the registrar community.

All right. I'll ask one last question about the updated guidance. You're indicating a decline of 3% at the lower end, which, based on the first half and current trends, suggests that things might worsen rather than remain stable. I would like to understand how to interpret that figure. Is it simply a matter of being more cautious regarding the trends? Are there specific observations driving that change, or what conditions would lead to a shift from a decline of 2% to 3%? What is included in that assessment?

Yes, sure. If you look at the first half of the year, we're down about 2 million names. The midpoint of our guidance suggests that this trend is likely to continue in the second half. However, if some of our marketing programs begin to take effect or, as Jim mentioned, if registrars become less aggressive in the marketplace regarding ARPU, or if the recent stimulus from the Chinese government has a positive impact, those developments could help to close the gap for us. On the other hand, if trends worsen, such as the Chinese market failing to improve or if renewal rates continue to decline due to pricing flexibility, that could bring us closer to the bottom of our range. Currently, the midpoint of our guidance indicates that the second half will be similar to the first half of this year.

This is Jim. There are a few elements in the Cooperative Agreement that are fixed and typically not highlighted for investors. One key point is that we can't be vertically integrated for .com, and we cannot act as our own registrar for .com. As noted in Amendment 35, this restriction only pertains to .com. We currently have no intention of becoming a registrar for anything, but we must adhere to the restriction that prevents us from being our own registrar for .com for several years. Additionally, there is a WHOIS function for querying registrations, which involves specific requirements that we need to support. For the sake of clarity, there's another technical detail covered in Amendment 35, which is easily accessible. However, the main aspects relevant to investors include pricing, the service level agreement, performance, and termination, and we do not intend to change any of these. Since we clarified our stance on vertical integration, there’s nothing in the Cooperative Agreement that we plan to amend, and we don't foresee any issues with termination or sunset clauses.

Got it. Thanks for the clarification.

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

Thanks for squeezing me in for one more. Jim or George, just a question on capital allocation. I saw you guys re-up to the buyback. I guess, Jim, just thinking about your time since returning to VeriSign, you 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 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 M&A or getting more aggressive with the new gTLD market or in any other way?

That's a valid question. We don't provide guidance on those matters, so I'm hesitant to comment further. However, as you know, we are actively pursuing growth through the new TLD .web, which is still in litigation, and there are no updates this quarter. I believe that introducing a new TLD and offering our customers more options is a solid growth strategy for us. It's also important to remember that our main mission is managing 328 billion queries a day, a commitment we've maintained for 27 years. We have a strategic framework that balances our growth initiatives with fulfilling our service level agreements, which are crucial. We have the capability to become a registrar for .web if we choose. Regarding the other elements you mentioned, we have no plans to pursue them, and they are quite complex. However, looking at our history of capital allocation, as reflected in our financial results today, it appears to be working in our favor.

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 does conclude today's call. Thank you for your participation. You may now disconnect.