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 preauthorized. At this time, I would like to turn the conference over to Mr.
David Atchley, Vice President of Investor Relationships and Corporate Treasurer. Please go ahead, sir.
Thank you, operator. Welcome to VeriSign's 2nd 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 Strube, President and COO and George Kilgus, 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 2nd 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 ks 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 2 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-nineteen 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 dotcomand.net and our route 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 percent availability of the dotcomand.netdomainnameresolutionsystem.
This achievement is the result of dedication and expertise of our team and of our specialized infrastructure. Also, as part of our response to the COVID-nineteen crisis, we announced in March a freeze of the wholesale prices in all of our TLDs, including dotcom 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 31, 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 2nd quarter operational highlights, at the end of June, the domain name base in dotcomand.net totaled 162,100,000 consisting of 148,700,000 names for dotcom and 13,400,000 names for dot net with a year over year growth rate of 3.8%. During the Q2, we processed 11,100,000 new registrations and the domain name base increased by 1,410,000 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 Q2 of 2020 will be approximately 72.8%. This preliminary rate compares to 74.2% achieved in the Q2 of 2019 and 75.4% last quarter.
For 2020, we now expect the domain name based growth rate of between 2.75% and 4%. This updated range, which recognizes the ongoing uncertainty presented by COVID-nineteen, reflects the strength we have seen in new registrations and our expectation for domain name based growth for the balance of the year. During the Q2, we continued our share repurchase program that resulted in 730,000 shares of common stock repurchased for $150,000,000 At June 30, 2020, dollars 676,000,000 remained available and authorized under the current share repurchase program, which has no expiration. Our financial and liquidity position remains stable with $1,200,000,000 in cash, 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 30, 2020, the company generated revenue of $314,000,000 up 2.6% from the same quarter in 2019 and delivered operating income of $207,000,000 up 2.5 percent from $202,000,000 in the same quarter a year ago. Operating expense totaled $108,000,000 up from $105,000,000 in the Q2 a year ago and up from $106,000,000 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 $152,000,000 compared to $148,000,000 per year earlier, which produced diluted earnings per share of $1.32 in the Q2 this year compared to $1.24 for the same quarter last year. Operating cash flow for the Q2 was $215,000,000 and free cash flow was $204,000,000 compared with the $165,000,000 $154,000,000 respectively in the Q2 last year. Operating cash flow in the 2nd quarter benefited from lower cash tax payments due to the permitted deferral of approximately $50,000,000 in U. S. Federal tax payments until the Q3 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 $1,255,000,000 to $1,265,000,000 This revenue range forecast reflects the updated domain name base growth of between 2.75% 4% that Jim mentioned earlier. Operating margin, which includes stock based compensation, is still expected to be between 64.5%
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 $75,000,000 to $80,000,000 This updated range reflects the additional $5,000,000 gain recognized during the Q2 related to the sale of our security services business. Capital expenditures are still expected to be between $45,000,000 $55,000,000 We still expect our full year effective tax rate to be a benefit of between 2% 5%, which reflects the $168,000,000 income tax benefit recognized in the Q1. For the balance of 2020, we still expect tax expense as a percent of pre tax income of between 19% 22%. Cash taxes for 2020 are now expected to be in the range of 18% to 20% of pre tax income.
In summary, VeriSign continue to demonstrate solid financial performance during the Q2 and we look forward to continuing our focused execution in the second half of twenty twenty. 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 dotcomand.netdnsavailability 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 the 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 dotcom? First, as a reminder, the wholesale price for dotcom domain names has been unchanged at $7.85 for 8 years since 2012. Also 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 registrar's who have no regulation of their pricing. Additionally, there's an unregulated secondary market for domain names. With that background, under Amendment 3 to the dotcom Registry Agreement, VeriSign is now permitted to raise the wholesale price of dotcomdomainnames by up to 7% in each of the final 4 years of every 6 year period. Within the current 6 year period, the 1st year in which we may increase the wholesale price ends on October 25, 2021, and we expect to effectuate a dotcomwholesale price increase before that October 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 3rd in the independent review process or IRP that affiliates 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 3, can you help me better understand what is impacting the increase in new registrations and the lower preliminary quarterly renewal rate for the Q2. Most of the strength in new registrations comes came from registrars in North America. While we don't have the same visibility that retailers do, based on feedback from our retailers, 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 4. Are there any updates to the donations you announced earlier this year? Yes, there are. During the Q1, we made an initial $2,000,000 donation to organizations assisting those impacted by COVID-nineteen locally and nationally.
During the Q2, we made a cash contribution of $1,000,000 to the Equal Justice Initiative in support of their work. We are actively working on an expansion to our VeriSign Cares program beyond the $3,000,000 the company donated during the first half of the year, again, with a focus on providing assistance to those impacted during the COVID-nineteen crisis. I'm sure you have questions, and I can only say that these additional effort should be further along by the time we talk to you again next quarter. And now we'll open the call for your questions. Operator, we're ready for the first question.
Yes, sir. Thank And 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. So on 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. Strength. Can you maybe flush that out a little bit more? And then 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?
And then I had 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.
Yes. Thanks, Jim, and thanks for the question, Rob. So 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.
And 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 and we saw that decline primarily manifest itself in lower first time renewal rates and they were down also in most markets that we keep track keep an eye on. And as Jim also mentioned, we're a FIN 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. But in general, gross adds were very strong this quarter. Our net adds were good. They were $1,400,000 which was very similar to, if not slightly above Q3 I'm sorry, Q2 of 2019 when they totaled 1,300,000
dollars Thanks, George. Appreciate it. And then just a follow-up. And I think it makes a lot of sense on the suspension of the price increase given the pandemic. And so I guess I would just ask if there's anything beyond the obvious in terms of the rationale there.
And then 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 the 4 years or the final 6 years. I just want to make sure we understand that properly and if there's anything else you can add to flush that out. Thank you very much, gentlemen.
Sure. Thanks, Rob. I don't think I can't read that anything. You summarized it accurately. We are taking another freeze of prices through March 31, 2021 that is related to the current environment.
The date of the 1st year period of our available price increase is October 25, 2021, and you accurately stated that we expect to effectuate our comm 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, just as you extend the waiver for restore fees, can you walk through maybe what the implications there? Is there kind of a building group of domains that are up? They could potentially I guess you guys could generate some revenue from these restore fees that maybe fall off.
Would you then recognize those as churned? I guess if you could walk through kind of the dynamic of the restore fees and maybe provide a little bit color on is there like a buildup coming down? And I'll have one follow-up after that.
Okay. Let me invite Todd or George to answer your question.
Yes. 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.
And the registrant has a chance to get the name back then before it goes into general availability. So it's those names we're talking about. It's already been deleted by the registrar. And so this restore fee is an addition to the standard registration and renewal fee associated with the domain name renewal. And we don't disclose our wholesale charged to the registrar and of course they determine what the actual retail restore fee is.
And we've seen many registrars pass on the waiver from a retail perspective. So anecdotally, we believe that small businesses and individuals are benefiting from our waiver.
Got it. Thank you. And then just I guess one follow-up on operating margin with kind of the increased SMB interest and 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.
Yes. Thanks, Nick. I mean, 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, and we do have plans to continue marketing activities throughout the year. But those costs again are factored into the guidance that we provided.
But we do expect to continue to invest in sales and marketing activity for the rest of 2020 year.
Great. Thank you.
And we will take our last question from Sterling Auty with JPMorgan.
Yes, thanks. Hi, guys. Couple of questions. So 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?
Yes. So 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. And we expect that there'll be continued demand for the products.
But as far as what will happen specifically to the renewal rate into the 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. But our full year guidance is the guidance we divide. We don't break it up quarterly.
All right. But 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. And we use that algorithmic model to guide us not only for the quarter's year, but also in our planning. It's been fairly reliable for us. And so 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, but the data is so voluminous that we have to use algorithms to help us do that. And the algorithms, which is like I said 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?
Yes. So the number of names that were up fully enrolled in the Q2 2020 was 35,100,000. Dollars We expect $34,200,000 to be up for renewal next quarter in Q3. When I go back a year ago in the Q2 of 2019, that was closer to $33,300,000 and the Q3 of 2019 was $32,600,000
All right, great. And then last one, and I think I can guess the answer, but 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 6 month window in terms of announcement. But 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 a merely state at, as you point out, there is a 6 month notice that's required to effectuate a price increase before it's we have to provide 6 months notice. And obviously, we will do that. The date of the expiration of the 1st year of the four price increases available in the 6 year period is October 25, 2021. And we, of course, by virtue of today's announcement are freezing wholesale prices in all of our TLDs through March 31, 2021. So I think a little bit of math could answer your question.
There is certainly a point somewhere, right?
Absolutely. Go ahead, sorry. And I
think that's fair. Okay. Yes.
No, I think that's fair. Maybe just to sneak one last one in. GoDaddy's acquisition of the NuStar registry assets brings a, 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, and 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 dotcomand.net in 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 other of our registered 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.
And that does conclude our question and answer session. I'd like to turn the conference back over to Mr. Ashley 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.
And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.