Earnings Call Transcript - VRSN Q3 2025

Operator, Operator

Good day, everyone. Welcome to VeriSign's Third Quarter 2025 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.

David Atchley, Vice President of Investor Relations and Corporate Treasurer

Thank you, operator. Welcome to VeriSign's Third Quarter 2025 Earnings Call. Joining me are Jim Bidzos, Executive Chairman, President and CEO; and John Calys, 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 reports on Form 10-K and 10-Q. 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 John will now provide 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, Executive Chairman, President and CEO

Thank you, David. Good afternoon to everyone, and thank you for joining us. VeriSign delivered both growth in a domain name base and solid financial performance during the third quarter. We also continued our consistent return of value to shareholders through dividends and share repurchases. At the end of September, the domain name base for .com and .net totaled 171.9 million domain names, up 1.4% year-over-year. We had strengthened the quarter with 10.6 million new registrations. Revenue was up 7.3% year-over-year, and EPS is up 9.7% year-over-year. During the quarter, we returned $72 million through dividends and $215 million through share repurchases for a total return to shareholders of $287 million. The positive domain name base trends we saw during the first half of the year continued during the third quarter. Net registrations added during the third quarter were 1.5 million names. This was made possible by the strong volume of new registrations already mentioned and improvement in the year-over-year preliminary renewal rate. The renewal rate for the third quarter of 2025 is expected to be 75.3% compared to 72.2% a year ago. The domain name base grew sequentially in our three main regions, with the U.S. and EMEA being the strongest. We're seeing solid underlying demand for our domain names and continued registrar engagement with our programs, which together have enhanced the pace of growth in new registrations. Given these continued positive domain name base trends, we now expect the growth in the domain name base to be between 2.2% and 2.5% for 2025. Our financial and liquidity position remained stable, with $618 million in cash, cash equivalents, and marketable securities at the end of the quarter. At the end of the quarter, $1.33 billion remained available under the current share repurchase program, which has no expiration. As announced in today's earnings release, VeriSign's Board of Directors declared a cash dividend of $0.77 per share of VeriSign's outstanding common stock to stockholders of record as of the close of business on November 18, 2025, payable on November 25, 2025. VeriSign intends to continue to pay a cash dividend on a quarterly basis, subject to market conditions and approval by VeriSign's Board of Directors. And now I'd like to turn the call over to John. I'll return when John has completed his financial report with some closing remarks.

John Calys, Executive Vice President and CFO

Thank you, Jim, and good afternoon, everyone. For the quarter ended September 30, 2025, the company generated revenue of $419 million, up 7.3% from the same quarter a year ago. Operating expense in Q3 2025 totaled $135 million, which compares to $129 million last quarter and $121 million for the third quarter last year. The areas we saw increases include incentive compensation and legal costs. Net income in the third quarter totaled $213 million compared to $207 million last quarter and $201 million in the third quarter last year. Third quarter diluted earnings per share was $2.27 compared to $2.21 last quarter and $2.07 for the same quarter of 2024. Operating cash flow for the third quarter 2025 was $308 million and free cash flow was $303 million, compared with $253 million and $248 million, respectively, in the quarter a year ago. I will now discuss our updated full-year 2025 guidance. Revenue is expected to be between $1.652 billion and $1.657 billion. Operating income is now expected to be between $1.119 billion and $1.124 billion. Interest expense and nonoperating income net, which includes interest income estimates, is still expected to be an expense between $50 million and $60 million. Capital expenditures are still expected to be between $25 million and $35 million, and the GAAP effective tax rate is still expected to be between 21% and 24%. In summary, VeriSign continued to demonstrate sound financial discipline during the quarter. Now I will turn the call back to Jim for his closing remarks.

Jim Bidzos, Executive Chairman, President and CEO

Thank you, John. The improved domain name base trends that emerged at the end of 2024 continued through the first three quarters of 2025. We're seeing strength in demand for our domain names, which we believe are the results of the plans and expectations we laid out last year. Our adjustments to our channel programs, along with anticipated favorable cyclical shifts from ARPU to customer acquisition. Of note is that these improved trends are seen across our main three regions with strength in the U.S. picking up during the third quarter. Our 2025 programs have deepened our engagement with our channel and we use their feedback to improve our 2026 programs, which we have rolled out to our registrars. We look forward to finishing out 2025 from a position of strength with these positive domain name base trends. I would note that we also see increases in registration and resolution activity, which we believe increasing use of AI is a primary driver. Thanks 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.

Operator, Operator

And the first question comes from Rob Oliver with Baird.

Robert Oliver, Analyst

A couple of questions from me. Jim, I guess, first, I appreciate all the color on the domain base trends that you're seeing. I guess, going back to Q1 of last year, when you guys called out the changes you need to make in your marketing programs. We've seen a nice improvement in those domain-based trends from sort of the beginning of this year through now. You cited a few reasons, but I was wondering if you can give us a little bit more color, perhaps on how much of it is macro, how much of it is stuff that you guys are controlling with your marketing programs? Any other color you can provide in particular geos would be helpful. And then I had a couple of quick follow-ups.

Jim Bidzos, Executive Chairman, President and CEO

Okay. Well, I think really, the story is pretty much the one that I talked about in my remarks. It's just basically blocking and tackling in a sense. We improved our programs and made them more adaptable for our channel. We got great engagement from our channel. We've been talking about a cyclical shift that we were hoping for and anticipating, and that came around. So that added to the growth. The registrar engagement with our marketing programs is also helping us sharpen our 2026 programs.

John Calys, Executive Vice President and CFO

Sure. Thanks, Jim. As Jim mentioned, we experienced good strength across all three of our main regions. EMEA has been the most consistent region over the last few quarters. However, in the third quarter, the U.S. showed significant improvement and performed strongly. The domain base in Asia Pacific, including China, did see growth again, but it was not as strong as the growth observed in the first half of 2025. Our programs appear to be contributing to the positive trend in demand for our domain names. We achieved success with our marketing efforts during 2025, and we have already introduced our programs to registrars for 2026. As Jim highlighted, we are continuously incorporating feedback from our registrars and have further refined our strategy for 2026. We plan to keep investing in programs that are performing well, and initial feedback from our registrars regarding the 2026 programs has been positive. As a reminder, the cost of our marketing initiatives is included in our updated guidance provided today, and all these initiatives are accretive. In addition to the strong volume of new registrations, the renewal rate has continued to improve, as indicated by the preliminary renewal rate in the third quarter of 75.3%, up from 72.2% a year ago; both first-time and previously renewed rates have improved year-over-year. Overall renewal rates are affected by the mix of first-time renewing names this year compared to last year. Specifically, last year we had fewer new registrations, leading to fewer first-time renewals this year, which tends to enhance the overall renewal rates. The midpoint of our improved DNB guidance for 2025 reflects a continuation of the trends observed in the first three quarters, and we plan to share our 2026 guidance during our February call after we assess how domain-based trends conclude in 2025 and begin in 2026. In summary, we are pleased with the improvements in both growth and renewal rates, and these positive trends are evident across our main regions.

Robert Oliver, Analyst

That's really helpful. Okay, thanks John, appreciate it. Jim, I want to ask specifically about changes that Google has made this year to their AdSense program and what, if any, impact you might be seeing or expect to see within your current domain base from those changes?

Jim Bidzos, Executive Chairman, President and CEO

Google's AdSense has been around for many years, and the adjustments made are part of a long-standing process. Since starting in 2011, Google has continually updated their algorithm, which has gradually diminished the presence of domain names that exist solely for ad monetization through AdSense. The recent changes to AdSense are part of an ongoing strategy to lessen dependence on this service for both advertisers and domain name owners. This trend is not new, and after a decade of these modifications, we see our risk as minimal. It's important to distinguish these domain names from those bought for resale. Some are parked merely because there is no cost involved, but the primary purpose and value of these domains are for resale and are unaffected by changes to AdSense.

Robert Oliver, Analyst

Yes, that helps. If I have time for one more, I'd like to ask about your perspective on how AI might impact your business. How do you see it affecting your business now and in the future? I understand that any technology that simplifies the creation and use of domains is beneficial for you, which seems to be the case given the current activity in that area. I'd appreciate your high-level thoughts on AI.

Jim Bidzos, Executive Chairman, President and CEO

Thanks for the question. AI is currently a hot topic, and understandably, we receive numerous inquiries about it. I will address this in two parts: first, the impact we are observing in our business, and second, how we are utilizing AI to manage our operations. Regarding the impact, it's still early, but the data from this year indicates that AI positively influences registrations and the use of our DNS resolution services. Currently, our infrastructure processes over 450 billion DNS transactions daily, and this figure is growing. This is a significant increase from 200 billion transactions per day just two years ago. AI companies require data, and they are actively retrieving it from the internet. Since data is dynamic, AIs, similar to search engines, continuously seek fresh information from websites to enhance their databases, supported by DNS. We believe this trend will increasingly gain importance and will contribute to the ongoing reliance on DNS. This is particularly relevant to agentic AI, which can accomplish tasks more effectively once objectives are set. An example is agentic browsers that enhance user interaction with websites, enabling users to summarize information across open tabs from various sources. This capability also relies on DNS. Additionally, AI can greatly assist with domain name suggestions, website provisioning, and content generation. We are leveraging AI in our domain name suggestion platforms to provide more advanced multi-keyword suggestions in natural language across several languages. Like many companies, we are looking for ways AI can bring efficiencies and enhance the protection of our services. Looking ahead, we anticipate that domain names will continue to play a vital role in delivering important services. They act as digital trust anchors, affirming trust and authenticity, which is crucial for agentic AI. Domain names offer unique, stable, and human-readable identifiers necessary for validating digital content, especially in the fight against misinformation and deepfakes, which is critical for AI. In terms of infrastructure for new protocols, since AI agents autonomously navigate the internet to execute complex tasks, we foresee a sustained demand for persistent and resolvable identities and endpoints. However, the traditional purposes of domain names will persist. Businesses will continue to need branding, discoverability, and credibility. Therefore, domain names and recognized, trusted top-level domains like .com and .net will maintain their value. Registrars within the DNS ecosystem are well-positioned to add new value-added services based on this infrastructure, all of which is supported by DNS. Overall, the trends we are observing today are very encouraging.

Operator, Operator

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

Ygal Arounian, Analyst

I would like to follow up on some of Rob's questions, particularly regarding the marketing programs. We have received numerous inquiries about this from investors. Could you clarify which marketing strategies have been effective, and whether there has been significant discounting in this area? Has the timing and frequency of discounting changed at all? Additionally, noted in your SG&A line, there was a considerable increase, which you mentioned included some legal expenses. If you exclude those, it seems like there was a slight increase in your overall spending. Could you help us understand that better?

John Calys, Executive Vice President and CFO

Yes, Ygal. This is John. We believe our marketing programs have played a role in the growth we've experienced in 2025. It's important to note that from a cost perspective, these programs are reflected as a reduction in revenue. Therefore, there isn't a significant change in marketing expenditures within the SG&A line item. The main factors impacting that line are the incentive compensation and legal costs I mentioned earlier. We've aimed to steer our programs towards those that generate higher quality and more renewing names, and we think those efforts are showing positive results so far. We've also made adjustments to these programs for 2026, and the initial feedback from registrars regarding our new offerings has been encouraging. We're reviewing our programs continually, assessing their effectiveness, and taking input from registrars. We will keep investing in successful initiatives. Lastly, consider our programs as part of an ongoing evolution rather than something limited to 2025 or 2026. We've recently emphasized providing more choices to better respond to market changes. You can expect us to keep learning, adapting, and making appropriate changes to our programs as we move forward.

Ygal Arounian, Analyst

Okay. I'd like to follow up on the Google AdSense issue. There seems to be a lack of clarity in this industry, and there may be aspects that investors don’t fully grasp. Jim, you mentioned that many parked domains are classified as deferred for resale, and a lot of them are held for defensive reasons. Can you provide some insight into how you view the division between advertising monetized and aftermarket monetized domains that are held defensively? Additionally, I've noticed that a few key public players in the market have felt some impact from this, which might explain the spreading concern. It seems to be affecting certain areas, so if you could share your thoughts on this, I would appreciate it.

Jim Bidzos, Executive Chairman, President and CEO

Sure. When you say it's impacting somewhere, meaning not in our zone, you're not talking about that. I want to make sure I understand the question.

Ygal Arounian, Analyst

I'm talking about like some public players that have seen an impact to ad revenue from this change on advertising on park domains.

Jim Bidzos, Executive Chairman, President and CEO

If your revenue model relies on monetizing traffic from parked domains through AdSense, you've been experiencing a decline for 15 years. In 2011, Google made notable changes to their search algorithm, including updates called Panda and Penguin. During earnings calls, we discussed the effects of these changes, which is what I meant when I said that business has been declining for 15 years. Regarding the other aspect of the business, domains purchased for resale can be parked easily. I discovered that a registrar parked a domain of mine that I wasn't using because I hadn't opted out. They can generate a small amount of revenue, or at least they could back then. This occurred around 9 years ago. The domains intended for resale are available on registrars, and now almost every major registrar lists an aftermarket for premium .com domains. While they differ in nature, some of those could be relevant to my point. I don’t have detailed segment breakdowns available, though we conduct some analysis, but we do not disclose that information.

John Calys, Executive Vice President and CFO

Okay. Can you provide an update on the timeline or expectations for .web? Specifically, will any ongoing loophole in this process affect things? Also, could you share your thoughts on the new model for TLDs and how you see that developing later next year and into 2027?

Jim Bidzos, Executive Chairman, President and CEO

Okay. First of all, there is nothing significant that has changed since our last discussion about .web. The final hearing is still scheduled for mid-November 2025. For anyone new on the call, I want to emphasize that we plan to become the registry operator for .web and hope to launch it to our customers as soon as possible. We believe that Altanovo's approach in this legal matter is an abusive tactic aimed at preventing .web from entering the market. We are just weeks away from the start of that process, and we will keep you updated on any developments as they arise. I'm sorry, did you have a second part to your question?

Ygal Arounian, Analyst

Yes, just on the upcoming domain auctions and on that process, yes, for later next year and into, I think, 2027?

Jim Bidzos, Executive Chairman, President and CEO

ICANN is planning to open its 2026 round of new gTLDs in the second quarter, which is their goal. Unlike the 2013 round, this time there will not be auctions; they will implement a different process, although details have not been fully rolled out yet. Like many other companies, we are exploring opportunities within this round. Our teams are studying various options, but we don't have any updates to share at this time. If everything goes according to plan, the earliest deployment might be in 2027 due to the involved processes. The round is expected to start in Q2 2026, per ICANN's timeline.

Operator, Operator

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

David Atchley, Vice President of Investor Relations and Corporate Treasurer

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.

Operator, Operator

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