What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-10-22 compared with 2020-07-23 · 84 added, 72 removed, 183 unchanged (46% of the section changed)

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net top-level domains (“TLDs”), which support the majority of global e-commerce.

As of June 30, 2020, we had 162.1 million .com and .net registrations in the domain name base.

As of September 30, 2020, we had 163.7 million .com and .net registrations in the domain name base.

The number of domain names registered is largely driven by continued growth in online advertising, e-commerce, and the number of internet users, which is partially driven by greater availability of internet access, as well as marketing activities carried out by us and our registrars.

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Business Highlights and Trends

• We recorded revenues of $314.4 million and $626.9 million during the three and six months ended June 30, 2020, an increase of 3% and 2%, respectively, compared to the same periods in 2019.

• We recorded operating income of $206.8 million and $413.0 million during the three and six months ended June 30, 2020, an increase of 3% compared to the same periods in 2019.

• As of June 30, 2020, we had 162.1 million .com and .net registrations in the domain name base, which represents a 4% increase from June 30, 2019, and a net increase of 1.4 million domain name registrations from March 31, 2020.

• During the three months ended June 30, 2020, we processed 11.1 million new domain name registrations for .com and .net compared to 10.3 million for the same period in 2019.

• We recorded revenues of $317.9 million and $944.8 million during the three and nine months ended September 30, 2020, an increase of 3% compared to the same periods in 2019.

• We recorded operating income of $206.6 million and $619.7 million during the three and nine months ended September 30, 2020, an increase of 1% and 2%, respectively, compared to the same periods in 2019.

• As of September 30, 2020, we had 163.7 million .com and .net registrations in the domain name base, which represents a 4% increase from September 30, 2019, and a net increase of 1.7 million domain name registrations from June 30, 2020.

• During the three months ended September 30, 2020, we processed 10.9 million new domain name registrations for .com and .net compared to 9.9 million for the same period in 2019.

• The final .

net renewal rate for the first quarter of 2020 was 75.4% compared to 75.0% for the first quarter of 2019.

net renewal rate for the second quarter of 2020 was 72.8% compared to 74.2% for the second quarter of 2019.

Renewal rates are not fully measurable until 45 days after the end of the quarter.

• During the three months ended June 30, 2020, we repurchased 0.7 million shares of our common stock for an aggregate cost of $150.0 million.

As of June 30, 2020, there was approximately $675.6 million remaining available for future share repurchases under our share repurchase program.

• We generated cash flows from operating activities of $395.4 million during the six months ended June 30, 2020, compared to $352.2 million for the same period in 2019.

• On July 23, 2020, we announced that we will extend the freeze on registry prices for all of our TLDs, including .

net , through March 31, 2021.

Additionally, we announced the extension of the waiver of the wholesale restore fee for expired domains through the end of 2020.

• During the three months ended September 30, 2020, we repurchased 0.8 million shares of our common stock for an aggregate cost of $170.0 million.

As of September 30, 2020, there was approximately $505.6 million remaining available for future share repurchases under our share repurchase program.

• We generated cash flows from operating activities of $535.0 million during the nine months ended September 30, 2020, compared to $560.3 million for the same period in 2019.

• During the three months ended September 30, 2020, we remeasured certain previously unrecognized income tax benefits which resulted in the recognition of a $24.0 million benefit in the quarter.

Pursuant to our agreements with ICANN, we make available on our website (at https://www.Verisign.com/zone ) files containing all active domain names registered in the .

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We have implemented our readiness plans, which include the ability to maintain critical internet infrastructure with most employees working remotely.

While we believe the pandemic has had certain impacts on our business, we do not believe there has been, nor are we anticipating, a material impact from the effects of the pandemic on our business and operations, results of operations, financial condition, cash flows, liquidity and capital and financial resources;

however, the situation is uncertain, rapidly changing, and hard to predict.

We believe that the effects of the pandemic to date have led to an increase in the demand for domain names, particularly as businesses and entrepreneurs have been seeking to establish or expand their presence online in response to the pandemic.

Our revenues increased during the first three quarters of 2020 compared to the same periods last year primarily driven by an increase in the domain name base for the .

however, the situation remains uncertain and hard to predict.

The broader implications of the pandemic on our business and operations and our financial results, including the extent to which the effects of the pandemic will impact future growth in the domain name base, remain uncertain.

The duration and severity of the economic downturn from the pandemic may negatively impact our business and operations, results of operations, financial condition, cash flows, liquidity and capital and financial resources.

The duration and severity of the economic disruptions from the pandemic may ultimately result in negative impacts on our business and operations, results of operations, financial condition, cash flows, liquidity and capital and financial resources.

Because fees for domain name registrations and renewals are generally due at the time of registration or renewal and revenues from such registrations and renewals are recognized ratably over their terms, the effects of the pandemic may not be fully reflected in our results of operations until future periods.

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September 30, Nine Months Ended

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2020 2019 2020 2019

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 % Change 2019 2020 % Change 2019

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The following table compares the .com and .net domain name registrations in the domain name base:

June 30, 2020 % Change June 30, 2019

September 30, 2020 % Change September 30, 2019

.com and .net domain name registrations in the domain name base

163.7 million 4 % 157.4 million

Revenues increased by $8.1 million and $14.2 million during the three and six months ended June 30, 2020, respectively, as compared to the same periods last year, primarily due to an increase in revenues from the operation of the registry for the .

Revenues increased by $9.5 million and $23.7 million during the three and nine months ended September 30, 2020, respectively, as compared to the same periods last year, primarily due to an increase in revenues from the operation of the registry for the .

com TLD, partially offset by the elimination of revenues from our divested security services business.

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However, competitive pressure from ccTLDs, the continued introduction of new gTLDs, ongoing changes in internet practices and behaviors of consumers and business, as well as the motivation of existing domain name registrants managing their investment in domain names, and historical global economic uncertainty, has limited the rate of growth of the domain name base in recent years and may continue to do so in the remainder of 2020 and beyond.

We expect the rate of growth in revenues will remain consistent during the remainder of 2020 compared to the six months ended June 30, 2020, as a result of continued growth in the aggregate number of .

We expect the rate of growth in revenues will remain consistent during the remainder of 2020 compared to the nine months ended September 30, 2020, as a result of continued growth in the aggregate number of .

com domain names.

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Revenue growth for each region may also be impacted by registrars domiciled in one region, registering domain names in another region.

During the three and six months ended June 30, 2020, the majority of our revenue growth has come from increased sales to registrars based in the U.S.

During the three and nine months ended September 30, 2020, the majority of our revenue growth has come from increased sales to registrars based in the U.S.

Revenues from registrars based in China have declined during 2020 as a result of lower new registrations and renewal rates in the region.

Cost of revenues

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2020 % Change 2019 2020 % Change 2019

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Cost of revenues $ 45,024 1 % $ 44,443 $ 134,205 — % $ 134,013

Cost of revenues remained consistent during the three and six months ended June 30, 2020, compared to the same periods last year as decreases in salary and employee benefits expenses of $1.0 million and $1.5 million, respectively, during the three and six months ended June 30, 2020 resulting from a functional realignment of some headcount to research and development were offset by other individually insignificant increases.

We expect Cost of revenues as a percentage of revenues to remain consistent during the remainder of 2020 compared to the six months ended June 30, 2020.

Cost of revenues remained consistent during the three and nine months ended September 30, 2020, compared to the same periods last year as decreases in salary and employee benefits expenses resulting from a functional realignment of some headcount to research and development were offset by other individually insignificant items.

We expect Cost of revenues as a percentage of revenues to remain consistent during the remainder of 2020 compared to the nine months ended September 30, 2020.

Sales and marketing

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September 30,

2020 % Change 2019 2020 % Change 2019

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Sales and marketing $ 8,389 (15) % $ 9,857 $ 23,883 (27) % $ 32,775

Sales and marketing expenses decreased by $3.5 million and $7.4 million during the three and six months ended June 30, 2020, respectively, compared to the same periods last year, primarily due to decreases in advertising and marketing expenses of $2.4 million and $5.5 million, respectively, as a result of decreases in marketing programs in various regions.

We expect Sales and marketing expenses as a percentage of revenues to increase during the remainder of 2020, compared to the six months ended June 30, 2020, as we execute more advertising and marketing campaigns.

Sales and marketing expenses decreased slightly in the three months ended September 30, 2020 compared to the same period last year.

Sales and marketing expenses decreased by $8.9 million during the nine months ended September 30, 2020 compared to the same period last year, primarily due to decreases in advertising and marketing expenses of $6.4 million, as a result of decreases in marketing programs in various regions.

We expect Sales and marketing expenses as a percentage of revenues to increase during the remainder of 2020, compared to the nine months ended September 30, 2020, as we execute more advertising and marketing campaigns.

Research and development

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2020 % Change 2019 2020 % Change 2019

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Research and development $ 19,708 35 % $ 14,619 $ 55,268 21 % $ 45,704

Research and development expenses increased by $3.2 million and $4.5 million during the three and six months ended June 30, 2020, respectively, compared to the same periods last year, primarily due to increases in salary and employee benefits expenses of $2.7 million and $3.8 million, respectively, resulting from a functional realignment of some headcount from cost of revenues, additional headcount increases, and an increase in expenses for other employee benefits including expanded paid time off benefits provided to employees in response to the COVID-19 pandemic.

We expect Research and development expenses as a percentage of revenues to increase slightly during the remainder of 2020 compared to the six months ended June 30, 2020.

Research and development expenses increased by $5.1 million and $9.6 million during the three and nine months ended September 30, 2020, respectively, compared to the same periods last year, primarily due to increases in salary and employee benefits expenses of $3.5 million and $7.2 million, respectively.

These increases in salary and employee benefits expenses were due to several factors, including a functional realignment of some headcount from cost of revenues, additional headcount increases throughout the year, and an increase in expenses for other employee benefits including expanded paid time off benefits provided to employees in response to the COVID-19 pandemic.

During the nine months ended September 30, 2020, allocated overhead expenses increased by $2.8 million due to higher average headcount relative to other cost types.

We expect Research and development expenses as a percentage of revenues to remain consistent during the remainder of 2020 compared to the nine months ended September 30, 2020.

General and administrative

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June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 % Change 2019 2020 % Change 2019

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General and administrative $ 38,109 12 % $ 33,886 $ 111,719 11 % $ 101,065

General and administrative expenses increased by $3.7 million during the three months ended June 30, 2020, compared to the same period last year, due to a $2.2 million increase in salary and employee benefits expenses resulting from an increase in average headcount as well as an increase in expenses for other employee benefits.

General and administrative expenses increased by $6.4 million during the six months ended June 30, 2020, compared to the same period last year, due to increases in salary and employee benefits expenses and charitable contributions, partially offset by a decrease in stock-based compensation expenses.

General and administrative expenses increased by $4.2 million during the three months ended September 30, 2020, compared to the same period last year, due to a $2.4 million increase in salary and employee benefits expenses resulting from an increase in average headcount as well as an increase in expenses for other employee benefits.

General and administrative expenses increased by $10.7 million during the nine months ended September 30, 2020, compared to the same period last year, due to increases in salary and employee benefits expenses, charitable contributions, software license expenses and legal expenses, partially offset by a decrease in stock-based compensation expenses and an increase in overhead costs allocated to other cost types.

Salary and employee benefits expenses increased by $6.4 million as a result of an increase in average headcount as well as an increase in expenses for other employee benefits.

Charitable contributions increased by $3.1 million to support the response to the COVID-19 pandemic and to promote equal justice.

Stock-based compensation expense decreased by $2.0 million as a result of a decrease in the projected achievement level on certain performance-based RSU grants.

We expect General and administrative expenses as a percentage of revenues to remain consistent during the remainder of 2020 compared to the six months ended June 30, 2020.

Software license expenses increased by $2.2 million due to expenses related to network security and other software services.

Legal expenses increased by $1.8 million due to an increase in external legal costs on various projects.

Stock-based compensation expense decreased by $2.0 million as a result of a decrease in the projected achievement levels on certain performance-based RSU grants.

Overhead costs allocated to other cost types increased by $1.8 million due to an increase in total allocable expenses.

We expect General and administrative expenses as a percentage of revenues to remain consistent during the remainder of 2020 compared to the nine months ended September 30, 2020.

Interest expense

Interest expense remained consistent in the three and six months ended June 30, 2020 as compared to the same period last year.

We expect quarterly Interest expense to remain consistent during the remainder of 2020 compared to the six months ended June 30, 2020.

Interest expense remained consistent in the three and nine months ended September 30, 2020 as compared to the same period last year.

We expect quarterly Interest expense to remain consistent during the remainder of 2020 compared to the nine months ended September 30, 2020.

Non-operating income, net

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2020 2019 2020 2019

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Total non-operating income, net $ 775 $ 10,498 $ 15,262 $ 34,137

Interest income decreased in the three and six months ended June 30, 2020 due to a decline in interest rates on our investments in debt securities.

Transition services income related to our divested security services business decreased in the three and six months ended June 30, 2020 due to the expiration of the transition services agreement in February 2020.

Gain on sale of business increased in the three and six months ended June 30, 2020 as the result of contingent consideration received related to our divested security services business in excess of the estimated receivable.

We expect Non-operating income, net to decrease as a percentage of revenues during the remainder of 2020 compared to the six months ended June 30, 2020 due to the impact of the decline in interest rates on our investments in debt securities and the expiration of the transition services agreement.

Interest income decreased in the three and nine months ended September 30, 2020 due to a decline in interest rates on our investments in debt securities.

Transition services income related to our divested security services business decreased in the three and nine months ended September 30, 2020 due to the expiration of the transition services agreement in February 2020.

Gain on sale of business increased in the nine months ended September 30, 2020 as the result of contingent consideration received related to our divested security services business in excess of the estimated receivable.

We expect Non-operating income, net to decrease as a percentage of revenues during the remainder of 2020 compared to the nine months ended September 30, 2020 due to the impact of the decline in interest rates on our investments in debt securities and the expiration of the transition services agreement.

Income tax expense (benefit)

The following table presents Income tax (benefit) expense and the effective tax rate:

The following table presents Income tax expense (benefit) and the effective tax rate:

Three Months Ended

June 30, Six Months Ended

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September 30,

2020 2019 2020 2019

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taxes on foreign earnings, net of foreign tax credits.

During the six months ended June 30, 2020, the Company remeasured its previously unrecognized income tax benefits relating to the worthless stock deduction taken in 2013.

The remeasurement, which resulted in the recognition of a $167.8 million benefit in the first quarter, was based on Internal Revenue Service (“IRS”) written confirmation indicating no examination adjustment would be proposed.

Notwithstanding this written confirmation, the Company’s U.S.

federal income tax returns remain under examination by the IRS for 2010 through 2014.

The timing of completion and ultimate outcome of the audits remains uncertain and it is reasonably possible that during the next 12 months, the Company’s unrecognized tax benefits may change further as a result of IRS audits.

During the first quarter of 2020, new legislation was enacted and new IRS guidance was issued to provide relief to businesses in response to the COVID-19 pandemic.

We have evaluated the tax provisions included in legislation such as the CARES Act, as well as recent IRS guidance and we do not expect it to have a significant impact on our financial position, results of operations or cash flows.

We expect our annual effective tax rate for 2020 to be a net benefit of between 5% and 2%, which reflects the income tax benefit from $167.8 million of previously unrecognized tax benefits recognized in the first quarter of 2020.

Additionally, we remeasured certain previously un recognized income tax benefits, which resulted in the recognition of $24.0 million and $191.8 million of income tax benefits in the three and nine months ended September 30, 2020, respectively.

The most significant portion of these tax benefits related to the worthless stock deduction taken in 2013, which resulted in the recognition of a $167.8 million benefit in the first quarter of 2020.

These remeasurements were based on written confirmations from Internal Revenue Service (“IRS”), received in the first and third quarters of 2020, indicating no examination adjustments would be proposed related to the worthless stock deduction or certain other matters reviewed as part of the audit of our federal income tax returns for 2010 through 2014.

Notwithstanding these written confirmations, our U.S.

federal income tax returns for those years remain under examination by the IRS.

We expect our annual effective tax rate for 2020 to be a net benefit of between 6% and 9%, which reflects the income tax benefit from $191.8 million of previously unrecognized tax benefits recognized in the nine months ended September 30, 2020.

Liquidity and Capital Resources

June 30, December 31,

September 30, December 31,

(In thousands)

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Total $ 1,150,359 $ 1,218,059

As of June 30, 2020, our principal sources of liquidity were $306.7 million of cash and cash equivalents and $887.9 million of marketable securities.

As of September 30, 2020, our principal sources of liquidity were $145.7 million of cash and cash equivalents and $1,004.7 million of marketable securities.

The marketable securities primarily consist of debt securities issued by the U.S.

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Treasury bills purchased with original maturities of less than 90 days.

As of June 30, 2020, all of our debt securities have contractual maturities of less than one year.

As of September 30, 2020, all of our debt securities have contractual maturities of less than one year.

Our cash and cash equivalents are readily accessible.

For additional information on our investment portfolio, see Note 2, “Financial Instruments,” of our Notes to Condensed Consolidated Financial Statements in Part I, Item I of this Quarterly Report on Form 10-Q.

During the three months ended June 30, 2020, we repurchased 0.7 million shares of our common stock for an aggregate cost of $150.0 million.

As of June 30, 2020, there was approximately $675.6 million remaining available for future share repurchases under the share repurchase program which has no expiration date.

As of June 30, 2020, we had $550.0 million principal amount outstanding of 4.75% senior unsecured notes due 2027, $500.0 million principal amount outstanding of 5.25% senior unsecured notes due 2025, and $750.0 million principal amount outstanding of 4.625% senior unsecured notes due 2023.

As of June 30, 2020, there were no borrowings outstanding under our $200.0 million credit facility that will expire in 2024.

During the three months ended September 30, 2020, we repurchased 0.8 million shares of our common stock for an aggregate cost of $170.0 million.

As of September 30, 2020, there was approximately $505.6 million remaining available for future share repurchases under the share repurchase program which has no expiration date.

As of September 30, 2020, we had $550.0 million principal amount outstanding of 4.75% senior unsecured notes due 2027, $500.0 million principal amount outstanding of 5.25% senior unsecured notes due 2025, and $750.0 million principal amount outstanding of 4.625% senior unsecured notes due 2023.

As of September 30, 2020, there were no borrowings outstanding under our $200.0 million credit facility that will expire in 2024.

We believe existing cash, cash equivalents and marketable securities, and funds generated from operations, together with our borrowing capacity under the unsecured revolving credit facility should be sufficient to meet our working capital, capital expenditure requirements, and to service our debt for at least the next 12 months.

We regularly assess our cash management approach and activities in view of our current and potential future needs.

In summary, our cash flows for the six months ended June 30, 2020 and 2019 were as follows:

Six Months Ended

In summary, our cash flows for the nine months ended September 30, 2020 and 2019 were as follows:

Nine Months Ended

September 30,

(In thousands)

Net cash provided by operating activities $ 534,962 $ 560,294

Net cash (used in) provided by investing activities (174,368) 418,062

Net cash used in investing activities (305,820) (237,827)

Net cash used in financing activities (591,128) (570,333)

Effect of exchange rate changes on cash, cash equivalents, and restricted cash (506) (208)

Net (decrease) increase in cash, cash equivalents, and restricted cash $ (201,491) $ 394,201

Net decrease in cash, cash equivalents, and restricted cash $ (362,492) $ (248,074)

Cash flows from operating activities

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Our primary uses of cash from operating activities are for personnel-related expenditures, and other general operating expenses, as well as payments related to taxes, interest and facilities.

Net cash provided by operating activities increased during the six months ended June 30, 2020, compared to the same period last year, primarily due to a decrease in cash paid for income taxes and to vendors, and an increase in cash received from customers, partially offset by decreases in cash received from interest on investments and from transition services.

Cash paid for income taxes decreased primarily due to IRS guidance that permitted the deferral of U.S.

federal tax payments until the third

quarter of 2020.

Net cash provided by operating activities decreased during the nine months ended September 30, 2020, compared to the same period last year, primarily due to an increase in cash paid for income taxes and decreases in cash received from interest on investments and from transition services, partially offset by a decrease in cash paid to vendors and an increase in cash received from customers.

Cash paid for income taxes increased as we used the majority of our net operating loss carryforwards and tax credit carryforwards by the end of 2019.

Cash received from interest on investments decreased due to a decline in interest rates.

Cash received from transition services decreased due to the expiration of the transition services agreement related to our divested security services business in February 2020.

Cash received from customers increased primarily due to higher domain name registrations and renewals.

Cash paid to vendors decreased primarily due to the timing of payments.

Cash received for interest on investments decreased due to a decline in interest rates.

Cash received from transition services decreased due to the expiration of the transition services agreement related to our divested security services business in February 2020.

Cash flows from investing activities

The changes in cash flows from investing activities primarily relate to purchases, maturities and sales of marketable securities, purchases of property and equipment and the sale of businesses.

We had net cash outflows from investing activities in the six months ended June 30, 2020, compared to net cash inflows during the same period last year, primarily due to a decrease in proceeds from sales and maturities of marketable securities, net of purchases, partially offset by contingent consideration received in the first half of 2020 related to our divested security services business.

Net cash used in investing activities increased during the nine months ended September 30, 2020, compared to the same period last year, primarily due to an increase in purchases of marketable securities and investments, net of proceeds from maturities and sales of marketable securities and investments and an increase in purchases of equipment, partially offset by contingent consideration received in the first half of 2020 related to our divested security services business.

Cash flows from financing activities

The changes in cash flows from financing activities primarily relate to share repurchases and our employee stock purchase plan.

Net cash used in financing activities increased during the six months ended June 30, 2020, compared to the same period last year, primarily due to an increase in share repurchases.

Net cash used in financing activities increased during the nine months ended September 30, 2020, compared to the same period last year, primarily due to an increase in share repurchases.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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What changed 10-Q

Item 2. Management’s Discussion and Analysis