Good day, everyone. Welcome to VeriSign's second quarter 2020 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 second quarter 2020 earnings call. Thank you to everyone for joining our call today, and we hope each of you are staying safe and healthy. Joining me remotely from their respective locations are Jim Bidzos, Executive Chairman and CEO, Todd Strubbe, President and COO, and George Kilguss, Executive Vice President and CFO. Thank you in advance for your patience if we experience any interference, delays, or sound quality issues during today's call. 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 second quarter 2020 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. In a moment, 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.
Thanks, David, and good afternoon, everyone. With the increased demand for and reliance on internet services during the COVID-19 crisis, the secure and reliable operation of our infrastructure becomes even more important. Our focus remains on our mission, which is to ensure the availability of our critical infrastructure. We have been and are prepared to continue operating all of our services, including registry services for .com and .net, and our root operations at the rigorous standards of performance and availability governed by ICANN, with most of our employees continuing to work remotely. Our focus on mission is emphasized by the fact that the company last week marked 23 years of 100% availability of the .com and .net domain name resolution system. This achievement is the result of the dedication and expertise of our team and of our specialized infrastructure.
Also, as part of our response to the COVID-19 crisis, we announced in March a freeze of the wholesale prices in all of our TLDs, including .com, through the end of 2020. Today, given the current environment, we are further extending that price freeze for the wholesale prices in all of our TLDs through March 31st, 2021. Additionally, we are also extending the waiver of the wholesale restore fee for expired domain names through the end of 2020. Now I will address our quarterly results. Q2 of 2020 was another consistent quarter for VeriSign, in which we focused on our core business, expanded the domain name base, and delivered solid financial results.
Regarding second quarter operational highlights, at the end of June, the domain name base in .com and .net totaled 162.1 million, consisting of 148.7 million names for .com and 13.4 million names for .net, with a year-over-year growth rate of 3.8%. During the second quarter, we processed 11.1 million new registrations, and the domain name base increased by 1.41 million names. Although renewal rates are not fully measurable until 45 days after the end of the quarter, we believe that the renewal rate for the second quarter of 2020 will be approximately 72.8%. This preliminary rate compares to 74.2% achieved in the second quarter of 2019 and 75.4% last quarter. For 2020, we now expect a domain name- base growth rate of between 2.75% and 4%.
This updated range, which recognizes the ongoing uncertainty presented by COVID-19, reflects the strength we have seen in new registrations and our expectation for domain name- base growth for the balance of the year. During the second quarter, we continued our share repurchase program that resulted in 730,000 shares of common stock repurchased for $150 million. At June 30th, 2020, $676 million remained available and authorized under the current share repurchase program, which has no expiration. Our financial and liquidity position remains stable, with $1.2 billion in cash equivalents and marketable securities at the end of the quarter. We continually evaluate the overall liquidity and investing needs of the business and consider the best uses for our cash, including potential share repurchases. Now I'd like to turn the call over to George.
Thanks, Jim, and good afternoon, everyone. For the quarter ended June 30th, 2020, the company generated revenue of $314 million, up 2.6% from the same quarter in 2019, and delivered operating income of $207 million, up 2.5% from $202 million in the same quarter a year ago.
Operating expense totaled $108 million, up from $105 million in the second quarter a year ago, and up from $106 million last quarter. The sequential increase in operating expense is primarily a result of increased sales and marketing spend during the quarter. The operating margin in the quarter came to 65.8%, compared to 65.9% in the same quarter a year ago. Net income totaled $152 million, compared to $148 million a year earlier, which produced diluted earnings per share of $1.32 in the second quarter this year, compared to $1.24 for the same quarter last year. Operating cash flow for the second quarter was $215 million, and free cash flow was $204 million, compared with the $165 million and $154 million, respectively, in the second quarter last year.
Operating cash flow in the second quarter benefited from lower cash tax payments due to the permitted deferral of approximately $50 million in U.S. federal tax payments until the third quarter of 2020. Additionally, the deferred revenue balance increased during the quarter as a result of the strength in new registrations. I will now discuss full-year 2020 guidance. Revenue is now expected to be in the range of $1.255 billion to $1.265 billion. This revenue range forecast reflects the updated domain name base growth of between 2.75% and 4% that Jim mentioned earlier. Operating margin, which includes stock-based compensation, is still expected to be between 64.5% and 65.5%. This guidance range reflects our expectation of incremental and continued investment in our operational infrastructure, security capabilities, and sales and marketing expense during the remainder of 2020.
Interest expense and non-operating income net is now expected to be an expense of between $75 million-$80 million. This updated range reflects the additional $5 million gain recognized during the second quarter related to the sale of our security services business. Capital expenditures are still expected to be between $45 million and $55 million. We still expect our full-year effective tax rate to be a benefit of between 2% and 5%, which reflects the $168 million income tax benefit recognized in the first quarter. For the balance of 2020, we still expect tax expense as a percent of pre-tax income of between 19% and 22%. Cash taxes for 2020 are now expected to be in the range of 18%-20% of pre-tax income.
In summary, VeriSign continued to demonstrate sound financial performance during the second quarter, and we look forward to continuing our focused execution in the second half of 2020. Now I'll turn the call back to Jim for his closing remarks.
Thank you, George. I'd like to say again that our priorities are our mission of ensuring the availability of our critical infrastructure and the safety of our people. Internet usage has increased during the pandemic, and reliance on online services even more so. For many people who are working from home and isolating at home, online services are critical, and more businesses and individuals than ever depend on internet infrastructure for their livelihood. Our record of .com and .net DNS availability speaks volumes about our commitment to our mission.
I'd like to acknowledge the team here at VeriSign for their hard work in maintaining our uptime record, even during the pandemic. Given that participants are dialing in remotely for this call, we'd like to walk through a few questions which we believe are on your mind before we open the call for your additional questions.
First question: With today's announced extension of the price freeze, how should we think about the limited pricing flexibility you have for .com? As a reminder, the wholesale price for .com domain names has been unchanged at $7.85 for eight years, since 2012. As a reminder, our wholesale prices for .com are governed by our Registry Agreement with ICANN. The retail price that the end user actually pays for a domain name is set by the retail channel, which is the registrars, who have no regulation of their pricing. There's an unregulated secondary market for domain names. With that background, under Amendment 3 to the .com Registry Agreement, VeriSign is now permitted to raise the wholesale price of .com domain names by up to 7% in each of the final four years of every six-year period.
Within the current six-year period, the first year in which we may increase the wholesale price ends on October 25th, 2021, and we expect to effectuate a .com wholesale price increase before that October 21 date, 2021 date. The second question: Are there any updates on the status of .web? Answer: As we noted last quarter, a final hearing is currently scheduled to begin on August third in the independent review process, or IRP, that Afilias initiated in November 2018. That hearing is scheduled to take place via video conferencing. As a reminder, VeriSign is not a party in these IRP proceedings but was granted the right to participate in certain limited aspects.
Also, as a reminder, an IRP under ICANN's bylaws is for the purpose of ensuring that ICANN followed its own policies and procedures when making decisions. Our expectation is that following the resolution of the IRP, the ICANN Board will make a final decision on the delegation of the .web TLD. Question three: Can you help me better understand what is impacting the increase in new registrations and the lower preliminary quarterly renewal rate for the second quarter?
Most of the strength in new registrations came from registrars in North America. While we don't have the same visibility that registrars do, based on feedback from our registrars, they are seeing increased demand from small businesses getting online. This strength was partially offset by slower activity from registrars in China. As it relates to the preliminary quarterly renewal rate, the year-over-year decrease is primarily related to a lower overall first-time renewal rate.
Year-over-year, the overall previous renewal rate remained relatively consistent. Question four, are there any updates to the donations you announced earlier this year? Yes, there are. During the first quarter, we made an initial $2 million donation to organizations assisting those impacted by COVID-19 locally and nationally.
During the second quarter, we made a cash contribution of $1 million to the Equal Justice Initiative in support of their work. We are actively working on an expansion to our VeriSign Cares program beyond the $3 million the company donated during the first half of the year, again, with a focus on providing assistance to those impacted during the COVID-19 crisis. I'm sure you have questions. I can only say that these additional efforts should be further along by the time we talk to you again next quarter. Now we'll open the call for your questions.
Operator, we're ready for the first question.
Yes, sir. Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Also, in order to receive the best signal, please refrain from using your headset to ask a question. We'll now take our first question from Rob Oliver with Baird.
Great. Thank you, guys, for taking my question, and Jim, thanks for all the color. If I can maybe pry a little bit more, remarkably, the domain growth is back now above where it was pre-COVID, at least at the lower end of the range, which is pretty remarkable. You mentioned some of the drivers there, U.S. strengths. Can you maybe flesh that out a little bit more? China weakness maybe being responsible for the lower renewal rate. Can we perhaps get a little bit more color on that, both geographically as well as some of the economic puts and takes around SMBs, and what you guys are seeing there? I have one follow-up. Thanks.
Okay, Rob. I think we can try. First of all, let me just say that basically the strength came from predominantly North America, with small businesses getting online. As to geography, I think we have limited visibility, but let me invite George to comment further.
Yeah. Thanks, Jim, and thanks for the question, Rob. As Jim mentioned, in Q2, we did see strength in gross additions or new registrations in North America. I will also say EMEA and APAC were also strong. They also improved in the quarter year-over-year. China was a little bit lower. As far as the China gross adds, they were similar to the gross add levels we had last quarter there, but they were down from year-ago levels. As far as renewal rates, Jim mentioned they were down about 1.4% in total year-over-year. We saw that decline primarily manifest itself in lower first-time renewal rates, and they were down also in most markets that we keep an eye on. As Jim also mentioned, we're a thin registry.
We talked to before. We don't have direct visibility into the end user, so it's a little more difficult for us to understand economic impact per se. In general, gross adds were very strong this quarter. Our net adds were good. They were $1.4 million, which was very similar to, if not slightly above, second quarter of 2019, when they totaled $1.3 million.
Thanks, George. Appreciate it. Just a follow-up, I think it makes a lot of sense on the suspension of the price increase, given the pandemic. I guess I would just ask if there's anything beyond the obvious in terms of the rationale there. You do draw a line in the sand that you guys will avail yourself of the price increase in October, which I believe would get you guys to four years of the final six years. I just want to make sure we understand that properly. If there's anything else you can add to flesh that out. Thank you very much, gentlemen.
Sure. Thanks, Rob. I don't think I can or need to add anything. You summarized it accurately. We are taking another freeze of prices through March 31st, 2021. That is related to the current environment. The date of the first-year period of our available price increase is October 25th, 2021, and you accurately stated that we expect to effectuate a .com wholesale price increase before that date. I think we're ready for another question, operator.
Yes, sir. We'll move to Nick Jones with Citi.
Great. Thank you for taking my questions. The first one, as you extend the waiver for restore fees, can you walk through maybe what the implications there are? Is there kind of a building group of domains that are up that could potentially, I guess, you guys could generate some revenue from these restore fees that maybe fall off? Would you then recognize those as churn? I guess if you could walk through kind of the dynamic of the restore fees and maybe provide a little bit of color on, is there a build- up coming down? I'll have one follow-up after that.
Okay. Let me invite Todd or George to answer your question.
This is Todd, Nick. First off, the impact of waiving the restore fees is immaterial to our financials, and it's accounted for in the revenue guidance we provided today. There's a period of time after a registrar deletes a domain name. It's known as the Redemption Grace Period. It's a 30-day period; the registrant has a chance to get the name back then before it goes into general availability. It's those names we're talking about. It's already been deleted by the registrar. This restore fee is an addition to the standard registration and renewal fee associated with the domain name renewal. We don't disclose our wholesale restore fee, which is charged to the registrar, and of course, they determine what the actual retail restore fee is. We've seen many registrars pass on the waiver from a retail perspective.
Anecdotally, we believe that small businesses and individuals are benefiting from our waiver.
Got it. Thank you. Then, just, I guess one follow-up on operating margin with kind of the increased SMB interest in having a digital presence. Is there potential leverage in the sales and marketing bucket kind of throughout the rest of the year, as maybe you don't need to advertise or be as aggressive in that OpEx line? Thanks.
Yeah. Thanks, Nick. Clearly, every quarter, we're looking at our expenses and making sure we're spending the appropriate amount in each of the categories to drive profitable growth and support the business. Sales and marketing expense sequentially was up. We do have plans to continue marketing activities throughout the year. Those costs, again, are factored into the guidance that we provided. We do expect to continue to invest in sales and marketing activity for the rest of 2020 year.
Great. Thank you.
We will take our last question from Sterling Auty with JPMorgan.
Yeah, thanks. Hi, guys. Couple of questions. The new guidance for the domain growth for the full year, what have you factored in for the last two quarters in terms of the pace of new registrations and the renewal rate?
George?
Sterling, we don't guide to gross registrations or renewal rates. We guide to the net zone increase. Clearly, we've done pretty well here through the first half of the year. We expect that there'll be continued demand for the products. As far as what will happen specifically to the renewal rate inter-quarter or gross adds, we'll wait and see. We clearly publish the gross adds of new unit information in the domain name base on our website. You can see what is going on there. Our full- year guidance is the guide we provide. We don't break it out quarterly.
All right. Maybe just to follow up and try it a different way, at least qualitatively, I think if we look at some of the previous economic cycles, when we get to this point, we tend to see increased business closures, and I think we saw that manifest itself in the renewal rate in the June quarter. Are you at least incorporating an idea of a lower renewal rate in the back half and maybe a higher elevation in new registrations just qualitatively?
We don't forecast or model our results that way. We do a lot of algorithmic computations and models that have proven fairly accurate over the prior period. We use that algorithmic model to guide us, not only for the quarters year, but also in our planning. It's been fairly reliable for us. That's the methodology that we're looking at. It's very hard to go down and forecast demand by an end user or by a registrar, or by a country level. We clearly look at those results. The data is so voluminous that we have to use algorithms to help us do that. The algorithms, which is, like I said it before, have been relatively accurate, are giving us the range that we've put out here for our guidance.
That makes sense. Can you give us what the number of domain names up for renewal in the September quarter looks like, and how does that compare against what you just had in June, and what does it look like versus September a year ago?
The number of names that were up for renewal in the second quarter 2020 was $35.1 million. We expect $34.2 million to be up for renewal next quarter in the third quarter. When I go back a year ago, in the second quarter of 2019, that was closer to $33.3 million, and the third quarter of 2019 was $32.6 million.
All right, great. Then last one, I think I can guess the answer, I still want to ask it anyway because it's been a topic of a lot of investor conversations that I've had. You mentioned that you are going to take advantage of the price increase before the October deadline. We know you have the six-month window in terms of announcement. Based on the comments that you've given, are you leaving open the possibility that you might at least announce the price increase prior to that March timeframe that you've extended the price freezes until?
I'm not entirely sure I understand your question, but I think maybe the answer can be determined by having me merely state that, as you point out, there is a six-month notice that's required to effectuate a price increase. We have to provide six months' notice. Obviously, we will do that. The date of the expiration of the first year of the four price increases available in this six-year period is October 25th, 2021. We, of course, by virtue of today's announcement, are freezing wholesale prices on all of our TLDs through March 31st, 2021. I think a little bit of math could answer your question.
No, I think that-
Certainly a point somewhere, right?
Absolutely.
Go ahead. I'm sorry.
No, I think that's fair. Yep. No, I think that's fair.
Okay.
Maybe just to sneak one last one in. GoDaddy's acquisition of the Neustar Registry assets brings, let's say, a stronger, financially sound company into the registry operations. How do you view their entrance into the registry space, and how do you think that might influence consolidation of registries moving forward?
Well, GoDaddy has been and is, always has been an important channel partner for us, obviously. Ever since all the way back to when Bob Parsons started and built that company. We certainly expect that to continue. End users see tremendous value in .com and .net and those TLDs, and we know that our channel partners recognize that value as well. I just should point out that vertical integration is not new. Several of our registrars channel partners also operate TLD registries. Google has Google Registry. Name.com has Donuts with over 200 TLDs in it. In each of those cases, these registrars continue to be an important channel partner to VeriSign for our TLDs. I expect those relationships to continue.
Great. Thank you.
Thank you, sir.
That does conclude our question and answer session. I'd like to turn the conference back over to Mr. Atchley for 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.
Once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.