VeriSign, Inc. (VRSN) Earnings Call Transcript & Summary

Good day, everyone. Welcome to VeriSign's Third Quarter 2026 Earnings Call. Today's conference is being recorded. Recording of this call is not permitted unless pre-authorized. 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 2026 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 plan to update financial performance or guidance during the quarter. The financial results in today's call and the matters we will be discussing today include GAAP results and free cash flow a non-GAAP measure used by VeriSign. 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 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. We're pleased to report that VeriSign delivered strong results in the third quarter of 2026, both operationally and financially. The combined .com and .net domain name base now totals 182.5 million names up 6.1% year-over-year, with a record 13.1 million new registrations processed during the third quarter. On the financial side, revenue was up 5.7% year-over-year. We have returned $1.14 billion to our shareholders in the last 12 months through share repurchases and dividends. As announced in today's earnings release, VeriSign's Board of Directors approved a cash dividend of $0.81 per share of VeriSign's outstanding common stock to shareholders of record as of the close of business on November 17, 2026, payable on November 24, 2026. The VeriSign intends to continue to pay a cash dividend on a quarterly basis. At quarter end, $1.36 billion remained authorized for share repurchases. VeriSign's performance in the third quarter shows continued robust demand for domain names. During the quarter, the domain name base for .com and .net grew by $3.4 million from the prior quarter end. New registrations for the third quarter totaled $13.1 million. This compares with 12.7 million new registrations last quarter and $10.6 million for the third quarter of last year. The renewal rate for the third quarter of 2026 is expected to be 74.3% compared to 75.4% a year ago. The primary driver of this year-over-year decrease in renewal rates relates to the mix of first-time and previously renewed names with a higher percentage of first-time renewing names due to last year's strength in new registrations. As in recent quarters, the U.S. and EMEA were the regions in which we saw the strongest growth during the third quarter. The factors driving the solid domain name base trends in the past several quarters further accelerated during the third quarter. Registrars have successfully engaged with our marketing programs and are focused on customer acquisition, plus AI tools are making content and website creation faster and easier. The ongoing strength in new registrations attest to the vital role of the domain names play in discovering content and establishing digital credibility. With the trends we've observed in the first 3 quarters of 2026 and our expectations for the rest of the year, we're increasing and narrowing our guidance for domain name base growth to be between 6.5% and 7% for 2026. As a reminder, you can monitor the progression of the domain name base on our website, which is updated daily. As we stated last quarter, .web is delegated into the root zone, and we're actively preparing for its launch. We have been communicating to our registrars that the required 30-day [ Sunrise ] period is planned to begin in mid-December. In mid-January, we are planning to begin a limited registration period or LRP which could run into early April 2027. At that point, we expect to open .web for general availability. During the LRP, most registrants of .com domain name will have an opportunity to register an exact match .web domain name. We're in the process of finalizing pricing and we'll be communicating our pricing plans to registrars over the next few weeks. As we shared last quarter, the .web registry agreement allows for pricing flexibility, including premium names, which we intend to use. The agreement also gives us more flexibility in marketing and engaging with our registrars than we have in .com and .net. We're looking forward to launching .web and adding it to our portfolio of trusted domain names alongside .com and .net. Now I'd like to turn the call over to John. I'll return when John has completed his financial report with closing remarks, including more information on VeriSign and form, our high assurance validation service we announced earlier this month. John?

Thank you, Jim, and good morning or good afternoon, everybody. For the quarter ended September 30, 2026, the company generated revenue of $443 million up from -- up 5.7% from the same quarter a year ago. Operating expense in Q3 2026 totaled $147 million, which compared to $138 million last quarter and $135 million for the third quarter a year ago. During third quarter of 2026, the company recognized a pretax operating loss of $7.5 million related to certain assets held for sale, which accounted for the majority of the sequential increase in operating expenses. Operating income totaled $296 million, up $12 million or 4.2% from the previous year and flat sequentially. Net income for the third quarter totaled $213 million compared to $217 million last quarter and $213 million for the same quarter a year ago. This resulted in diluted earnings per share of $2.35 for the third quarter this year compared to $2.38 last quarter and $2.27 for the third quarter last year. The previously mentioned loss to adjust the carrying value of certain assets held for sale decreased EPS by $0.06 in the current period. Operating cash flow for the third quarter of 2026 was $268 million and free cash flow was $261 million compared with $308 million and $303 million, respectively, in the year ago quarter. The year-over-year decrease is primarily related to higher cash taxes and payments to employees and vendors partially offset by higher cash collected from customers in the third quarter this year. Our financial and liquidity position remained stable with $476 million in cash equivalents and marketable securities at the end of the quarter. I will now discuss our updated full year 2026 guidance. Revenue is now expected to be between $1.755 billion and $1.76 billion. Operating income is now expected to be between $1.188 billion and $1.192 billion, which reflects the expense booked during the third quarter, as mentioned before. Interest expense and nonoperating income net is still expected to be an expense between $59 million and $65 million, Capital expenditures are still expected to be between $55 million and $65 million. The GAAP effective tax rate is still expected to be between 22% and 25%. Now I'll turn the call back to Jim for his closing remarks.

Thank you, John. We're pleased with the results of our core DNS business in Q3. We believe that our record of more than 29 years of uninterrupted [ Commnet ] DNS global availability contributes to our domain growth by establishing and maintaining [ common net ] as highly reliable and trusted TLDs, now processing approximately 800 billion DNS queries per day on average returning cryptographically protected answers within milliseconds. With this unparalleled record of availability, reliability and performance, we use the term high assurance to describe our services. Very soon we will join our family of trusted TLDs, and it will allow us to offer more choice to customers, and they will benefit from VeriSign's rigorous attention to availability and reliability. We're very pleased to be on track to bring .web to market in just a few months. As many of you know, we have recently announced another new product. On October 5, we announced VeriSign Informed or VI, a security service to support the use of critically important and widely used digital credentials. There are many use cases for these credentials, authorized network access by users and corporate networks, secure e-mail, secure software distribution, including app updates and on billions of financial chip cards worldwide. Web certificates are used to establish a secure link when connecting to a website. Like any credential, there are many reasons certificates may need to be revoked before their expiration date. Gaps in that process will result in stale trust. At its core, VI answers the question, has this certificate been revoked. It's easy to see how vital the answer to this question is in today's world. VI allows trust decisions to be made with the most current information at global scale and runs on our high assurance infrastructure built with the same know-how and proprietary high-performance architecture that enables VeriSign's DNS to provide cryptographically protected responses in milliseconds to billions of DNS queries per day. Our microsite, [ verisigninformed.com ] contains several blogs and tech reports introducing VI and offering descriptions and measurements and risk reduction that VI can provide. Three points I believe are of interest to investors. First, VI is fully operational in our infrastructure today. All financial data from 2024 up to and including our guidance through 2026 includes all VI expense. Second, pricing is being finalized now and should be completed by year-end with production service delivery expected during 1 half 2027. Third, they can be provisioned and operated like domains through our existing registrar channel, through existing PKI service providers and other application vendors or even through a self-service facility. Provisioning and delivering the service are nearly identical to those of our core offerings. I'll close by saying that we have always seen ourselves as a critical infrastructure service provider that prioritizes security, stability and resiliency. That focus has delivered profitable growth for the company, and our focus will not change. We've established a record of disciplined capital allocation over many years that has delivered a compounding benefit through share repurchases now diversified with the dividend. We achieved our goal of earning investment-grade status in 2021, and we intend to maintain it. We believe our new services carefully selected for alignment with our risk tolerance and core competencies, represent a carefully measured way to continue to deliver for both our customers and shareholders. 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.

[Operator Instructions] We will now take our first question from Rob Oliver with Baird.

Great. First one, Jim, it's a 2-parter for you. The gross domain adds continue to be stunningly strong, up 24% year-over-year. You guys added another over $13 million this quarter. So I was wondering if you could just touch on and remind us or update what you're seeing in terms of the drivers of that? I know clearly, AI, but are you also seeing digital providence or other things like that playing into that? And the follow-up question I have is regarding trends you're seeing in first year renewals. You guys have been clear with us about the fact that, that renewal rate would be impacted by this large bolus of domain -- new domains that you have. But it sounds as if those first year renewals have been coming in pretty strong. So I wanted to understand what you're seeing in terms of those -- the stickiness, the quality of those first year renewal trends.

All right. Well, let me address your first question first. So some of the drivers that we're seeing in new registrations, which is, as you pointed out, a $13.1 million during the quarter is a record for us. Q2 was a record for us. Key drivers that we see are -- what I referred to before is a synergistic convergence of demand for domain names from businesses, new business starts but also our marketing programs and AI tailwind. And we are hearing from some registrars that AI is a factor. AI clearly makes it easier to find a domain name, develop a website and maintain a website. We're seeing that content creators want their content bound by AI, and a domain name is one of the primary ways to have that content available. I think what we've been saying historically for a number of years that the well-governed DNS is going to continue its value, the decades of investment in infrastructure like ours. Governance by ICANN strengthening and ensuring that a domain name is a unique, trusted, secure, global identifier, I think, is really demonstrating its value in a world where people still get online for the fundamental purpose of being found and conducting commerce. And I think all that just really works together to drive that growth. I think your second question, John, I'll let you address that about renewal rates.

Through the third quarter, what we've seen with our first time renewal rates is they remain fairly steady in the mid-40% range. And the previously renewed rates have been the same. They've remained fairly steady in the mid-80% range. So we haven't seen a great deal of movement either direction in those. But as Jim mentioned, with the strong new registrations, the mix of first-time renewing names is growing in proportion to the total base, and that does result just from math and the renewal rate going down. We are going to be watching very closely next year because this year's registrations have been very strong, and we'll be looking to see if there's any trends in the first time renewal rates, but nothing of significance to report to you right now.

Great. Jim, I just had one follow-up for you, and then I'll cede the floor. I'd love to get your take on just the timing of .web, it strikes me you guys might be in a unique position here relative to the timing of this pretty strong generic TLD which is coming out ahead and by a period of time of many of the new TLDs that will come out as part of the auction. So I wanted to get a sense from you of if that's right, if that early access to the market is a benefit to you guys? And any other way you can help us think about that timing or frame that opportunity?

Yes. Thanks, Rob. Well, certainly, you made some factual statements about the timing. That's true. I think the strength of .web is what it's always been. It is a short generic relevant TLD, operating in our infrastructure, our high assurance infrastructure. I'm kind of looking beyond the short-term period. I do understand and I do agree there's an opportunity. There will be another round, but it's a ways down the road, and there's an opportunity here with .web. But I think the strength of running on our reliable infrastructure with its track record, providing more choice to our customers with a short relevant TLD is going to be a value proposition that will continue beyond this opportunity that we may have in the short term. I think the flexibility that we have in marketing and all of the things that come with a pure generic TLD that's not regulated the way .com and .net are all those things play well. I think the enduring value of a domain name plays well. Certainly, the timing is good. We waited a long time. It would have been nice to have it sooner, but I think there's always room for a secure, reliable domain name that gives people more choice, and that's how we view it. We see .web as another member of the trusted family of .com and .net that's provided 29 years of 100% availability. And I think that value is going to be continue to be enduring the longer that record gets.

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

Maybe just follow up first on Rob's first question. You're adding -- you're going to be adding about 11 million domains this year. I mean, that's, I think, going back as high as it's been in decades, if I'm not mistaken. And I know it's being driven by multiple factors. But if I can get you to look forward a little bit, Jim, into next year, like what gets this to slowdown? It feels like AI trends and agentic in particular, as that starts to pick up, especially when you guys point to things like queries and the rate of change that you're seeing inquiry growth. It feels like this strength has a lot of runway, and I just want to maybe get some of your thoughts, we look forward into next year without getting guidance.

Sure. I guess I would point to what we see as the very long trend lines here. First of all, there's just simply a growing -- the economy is built on a digital platform that continues to grow. So there's constant new adoption of delivering services digitally. There is greater reliance on digital services. Cloud service providers, new entrants offering new services, more businesses converting to online, the efficiencies that come. AI is a relatively recent driver and certainly contributing to that as well. So I see the combination of that long trend line just simple growth and adoption of online services that the ongoing move towards more digital efficient services, AI as a boost and the enduring value of a domain name and the very mature and trusted because of all the security that's been built in over the last decades in the DNS, our infrastructure, I think, is an important component of that. I just see those long trend lines. And I kind of I don't think in terms of quarters of years, obviously, we do as we report quarterly and annually, but I think those trend lines run much longer, and I think they bode well. I think also our carefully assessed and measured addition of VeriSign Informed to our offerings, the way it leverages our infrastructure. I think the long trend line favors that as well. New advanced services, agenetic AI, et cetera, I think we're already seeing evidence that there are security challenges that come. We think offering tools that can close security gaps are very important. So we tend to take the longer-term view, but I think you could certainly -- looking out a year, I can see all of those factors coming into play. Registrars are very engaged. They are seeking more customers. There are a lot of factors driving their business as well. So there's quite a bit of synergy in all of the factors that are driving this growth. And there may be ups and downs along the way. There always are, but I think the long trend line is really strong, and that's what we keep our eye on.

Okay. Great. Very helpful there. And I wanted to ask, maybe if we could elaborate a little bit more on VeriSign in form. I guess first, can you help us understand why VeriSign has the right to win in this business versus other cybersecurity providers why enterprises or consumers are choosing VeriSign and not, maybe particularly on the enterprise side, but on both on what you can hit? And then I know you talked about pricing, finalizing pricing plans. But if you could help investors think through what the -- maybe not the actual price, but the structure, what does pricing look like? How should we be thinking about -- again, not the actual number, but what it means in general and how to think about it. Any help there would be great.

Sure. Well, let me take those in reverse order. I think with respect to pricing, we're just a few months away from having more to say about that, which I think will help people assess the opportunity. As I mentioned, we think this is a leveraged carefully assessed core offering that -- where the real synergy and what I think will make VeriSign Informed strong back to your -- the first part of your question, why VeriSign Informed? I think it's really, first of all, OCS, the online certificate status protocol is difficult to do as quickly as we do DNS and operating in our infrastructure. We're going to offer that level of performance. And the key distinction here is that there are a couple of things we can do. Number 1 is that at the time of making the trust decision. And here's another important aspect, whether that's a person-to-machine interaction or whether it's a machine-to-machine interaction, which it clearly will be with the agenetic AI becoming prevalent, performance, speed and reliability matter. I think all of those aspects of our high assurance infrastructure, combined with this service, which closes these gaps if you don't do credential revocation, certificate revocation quickly, those gaps can be exploited. I think if we're learning anything at this point, we can see that AI is extremely good at identifying vulnerabilities, and those usually are followed up very quickly with AI-enabled attack chains and closing all vulnerability windows as much as possible is really important and I think going to increase in importance. And I think we just have a solid offering. So with respect to why VeriSign Informed, I would say, it offers the sort of -- I think if you look at some of our block, I would say demonstrable reduction in risk when making trust decisions that are better informed. And I think that value proposition will be of a great interest to a lot of folks out there. We're seeing it already in the financial industry. I think that will grow in our opinion.

We will take our next question from Jamesmichael Sherman-Lewis with Citi.

Three here, if I may. First of all, with the dot com price increase coming into effect, any early color here on registrar pricing actions or customer renewal benefits that you're seeing that could be mitigating the first-time renewal headwinds that you talked about earlier?

Jamesmichael, this is John. We've been watching closely what our registrars are doing with pricing. And at least for the last 3 months since we've announced the price increase. I think that was last April or -- yes, for .com. We haven't seen a significant increase in pricing on new registrations or renewals. Our analysis shows it's the price increases during that time period are in the neighborhood of 1% or even less. So we haven't seen a lot of move -- in the past, when we've done price increases, we have seen some registrars in advance of the effective date raise prices or in conjunction with the effective date. But so far, that's something we haven't seen a lot of, but we do continue to keep our eye on that.

I guess...

I would just add -- sorry, go ahead. I don't mean to interrupt. I was just going to add to that. The price increase is $0.71. And I think given that we've controlled the retail price, of course, that's set by the registrars. And it's a modest price increase they can certainly absorb and adjust accordingly. But the impact on the retail channel, where prices are unregulated is different than our pricing. And we did provide as required 6 months' notice of the price increase. So it's not a surprise.

Understood. Follow-up here on the gTLD rounds. We saw like [ DuPKInews ], but there are other TLDs out there that are pretty key, including [indiscernible] so curious if you could elaborate on your strategic approach of to a new TLD acquisition?