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

Thank you, operator. Welcome to VeriSign's third 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. I want to apologize in advance in case I sneeze at some point due to allergies 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. For the third quarter, 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 base for dot com and dot net totaled 169.6 million domain names. 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. The 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 ARPU over customer acquisition through higher retail pricing levels, increased focus on aftermarket sales, and reduced spending on marketing to new customers compared with prior years. In addition, and as expected, weakness related to China continues. These factors are impacting new registrations and renewal rates in 2024. During the third quarter, the U.S. region was lower by approximately 850,000 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 200,000 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 domain name base growth. While we have seen good responses 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 domain name base to growth in the second half of 2025 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. 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% and negative 2.3% for the full year 2024, decreasing the midpoint by 10 basis points. Moving now to the company's contracts. On September 26, ICANN posted the revised com registry agreement for public comment. The comment period runs through November 5. The current dot com registry agreement expires November 30, and we expect the renewal process to be completed by that date. Also, as we previously disclosed, we have agreed to discussions with the NTIA regarding dot com pricing and the health of the dot com ecosystem. The dot com 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 at $645 million in cash, cash equivalents, and marketable securities at the end of the quarter. During the third quarter, we repurchased 1.7 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 when George has completed his report with closing remarks.

Thanks, Jim, and good afternoon, everyone. For the quarter ended September 30, 2024, the company generated revenue of $391 million, up 3.8% from the same quarter of 2023, and delivered operating income of $269 million, an increase of 5.9% from the same quarter a year ago. Operating expense in Q3 2024 totaled $121 million and $368 million for the nine months ended September 30, 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'll 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, and 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'll turn the call back to Jim for his closing remarks.

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 common net. We recently published a blog about myths versus facts regarding 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. Let me briefly describe and expand on 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 of that can happen in under 20 seconds and arrive at our global resolution constellation, and 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 cyberattacks. We eliminate shared services, meaning dedicated capacity and no multi-tenancy 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. Network compute and all other resources are dedicated to delivering on our core mission: registry, resolution, and route 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 colocation space. As a result, the entire system was designed with maximum diversity that includes operating systems, computing, network, and security hardware, transit providers, and more, with 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% availability record of over 27 years spanning four decades, processing, on average, hundreds of billions of transactions per day. Critical infrastructure that relies on our services counts 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. This concludes our prepared remarks. Now we'll open the call for your questions. Operator, we're ready for the first question.

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

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 registrars' prioritization of ARPU in this environment is not new, and I know initially when you guys rolled out these or announced the rollout of these plans, your hope was to grow domains in '25. It certainly sounds like you're less confident about that now. So I 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 '25.

Okay. Thanks, Rob. So correct me if I'm wrong, I think I heard two questions in there. One was about ARPU, and the other one is about, let’s say, slipping into 2025. Is that fair? Is that kind of your question?

Well, I think really it's more the slip beyond '25 because I think the prioritization of ARPU is something that you guys have talked about, and we've seen at the registrars. Unless there's a change there, I guess so that's half a question, James, please.

Yeah. 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. So we see some of that slipping from '24 into '25, 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 2025. Your second question about ARPU is that we see clear indications from the registrars that are public companies. They've been very clear about a lot of 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 million per quarter. So that's the kind of ARPU that is certainly understandable that they're pursuing. But we still believe that ARPU is cyclical. And at some point, our return to customer acquisition is important. And I'll invite George to add any more color if you care to.

Yes, I believe you're right, Jim. Rob, as Jim mentioned in the prepared remarks, we experienced a decline of about 1.1 million in the quarter, with 850 from the U.S. being the largest portion. Over the past few quarters, as you noted, U.S. registrars have shifted their focus towards enhancing their profitability, which they are achieving in three main ways. First, they have been increasing retail prices. Also, as Jim pointed out, they are concentrating on boosting aftermarket sales by marking up and selling current owned inventory of premium names at higher prices. While this generates significant revenue for them, the registries do not receive compensation for each domain name in this scenario. Lastly, they've been cutting back on their marketing expenses. This creates a headwind for ARPU in the U.S. market. Regarding China, we are still facing a weak macroeconomic environment. There has also been a rise in regulations there. Although the sequential decline in Q3 was slightly less severe for China, we have not yet observed any significant improvement. Currently, we do not anticipate that market to have turned around just yet, but we are monitoring the situation.

That's helpful. My second question was about China. Can you provide an update on your expectations regarding potential benefits if there is a continued increase in economic activity in China? There seems to be both a cyclical aspect that you've been addressing and some regulatory challenges. Investors often discuss the difference between secular and cyclical trends. So, do you expect to gain from a rebound in economic activity in China?

Yeah. 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.

Got it. And then last one for me, George, also for you, just on that call that. So there was some outperformance on the operating income side relative to 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? Or are those rationalized certainly through the end of '24? And how we might think about them not asking you to guide the cost for '25, but how we might think about the potential for incremental costs on these channel 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 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 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 fourth quarter. 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 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.

That’s great. Appreciate all the time. Thanks.

Thank you.

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

Good afternoon, guys. Appreciate taking my question. Don't worry, they will be back next quarter. I guess just maybe looking at capital allocation and buybacks. This year is tracking, I think, to be one of your largest ever on buybacks. So just how should we think about 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 buyback?

Well, let me respond to your question and invite George afterwards as well. Part of it certainly about leverage — I think you can probably determine from my comments about our 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. We're not over-levered; there are a lot of reasons for that. We have financial stability and operational stability; security and stability and the infrastructure that we operate, all those things to us are the same thing — it's all part of the company's stability. We obviously are not as leveraged as we possibly could be, and we believe that's not a priority for us and that's not something we will do. We don't guide to buybacks. Obviously, historically, you've seen what we've done. George, I'd like you to comment further.

Yeah, 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, and I would just look historically at what we've done. If our philosophy changes, we'll communicate it to you.

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 are looking to implement, but if there's any color there you could share, that would be helpful.

Yeah. As we've mentioned, I think in summary, we've really been looking to give more choice to registrars that have potentially different 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 products or TLDs to existing customers. And then there are some programs that we're looking to appeal to registrars that may prefer new customer acquisition. But we're also trying to align these programs with registrars' goals of pursuing higher renewal rate cohorts. To the extent we can find those win-win opportunities, we think we'll be successful in that effort.

Okay, great. Thank you.

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.

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.