What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-04-22 compared with 2020-10-22 · 103 added, 138 removed, 129 unchanged (65% of the section changed)

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This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

These forward-looking statements are based on current expectations and assumptions and involve risks and uncertainties, including, among other things, statements regarding our expectations about (i) the impact from the effects of the COVID-19 pandemic, (ii) the rate of growth in revenues for the remainder of 2020, (iii) Cost of revenues, Sales and marketing expenses, Research and development expenses, General and administrative expenses, Interest expense, and Non-operating income, net, for the remainder of 2020, (iv) the impact of new legislation and IRS guidance issued in response to the COVID-19 pandemic, and (v) our annual effective tax rate for 2020.

These forward-looking statements are based on current expectations and assumptions and involve risks and uncertainties, including, among other things, statements regarding our expectations about (i) the impact from the effects of the COVID-19 pandemic, (ii) the rate of growth in revenues for the remainder of 2021, (iii) Cost of revenues, Sales and marketing expenses, Research and development expenses, General and administrative expenses, quarterly Interest expense, and quarterly Non-operating income, net, for the remainder of 2021, (iv) our annual effective tax rate for 2021, and (v) the sufficiency of our existing cash, cash equivalents and marketable securities, and funds generated from operations, together with our borrowing capacity under the unsecured revolving credit facility.

Forward-looking statements include, among others, those statements including the words “expects,” “anticipates,” “intends,” “believes” and similar language.

Our actual results may differ significantly from those projected in the forward-looking statements.

Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q.

You should also carefully review the risks described in other documents we file from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q or Current Reports on Form 8-K that we file in 2020 and the 2019 Form 10-K, which discuss our business in greater detail.

Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” in Part I, Item 1A of the 2020 Form 10-K.

You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q.

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

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

As of March 31, 2021, we had 168.0 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.

Growth in the number of domain name registrations under our management may be hindered by certain factors, including overall economic conditions, competition from country code top-level domains (“ccTLDs”), competition from, and the continued introduction of, new generic top-level domains (“gTLDs”), and ongoing changes in the internet practices and behaviors of consumers and businesses.

Growth in the number of domain name registrations under our management may be hindered by certain factors, including overall economic conditions, competition from country code top-level domains (“ccTLDs”), other generic top-level domains (“gTLDs”), services that offer alternatives for an online presence, such as social media, and ongoing changes in the internet practices and behaviors of consumers and businesses.

Factors such as the evolving practices and preferences of internet users, and how they navigate the internet, as well as the motivation of domain name registrants and how they will manage their investment in domain names, can negatively impact our business and the demand for new domain name registrations and renewals.

Business Highlights and Trends

• 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.

• We recorded revenues of $323.6 million during the three months ended March 31, 2021, an increase of 4% compared to the same period in 2020.

• We recorded operating income of $210.4 million during the three months ended March 31, 2021, an increase of 2% compared to the same period in 2020.

• As of March 31, 2021, we had 168.0 million .com and .net registrations in the domain name base, which represents a 5% increase from March 31, 2020, and a net increase of 2.8 million domain name registrations from December 31, 2020.

• During the three months ended March 31, 2021, we processed 11.6 million new domain name registrations for .com and .net compared to 10.0 million for the same period in 2020.

• The final .

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

net renewal rate for the fourth quarter of 2020 was 73.5% compared to 73.8% for the fourth quarter of 2019.

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

• 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 .

net registries.

At the same website address, we make available a summary of the active zone count registered in the .

net registries and the number of .

net domain name registrations in the domain name base.

The domain name base is the active zone plus the number of domain name registrations that are registered but not configured for use in the respective TLD zone file plus the number of domain name registrations that are in a client or server hold status.

• During the three months ended March 31, 2021, we repurchased 0.9 million shares of our common stock for an aggregate cost of $172.6 million.

As of March 31, 2021, there was approximately $910.0 million remaining available for future share repurchases under our share repurchase program.

• We generated cash flows from operating activities of $198.3 million during the three months ended March 31, 2021, compared to $180.1 million for the same period in 2020.

• On February 11, 2021, we announced that we will increase the annual registry-level wholesale fee for each new and renewal .com domain name registration from $7.85 to $8.39, effective September 1, 2021.

Pursuant to our agreements with the Internet Corporation for Assigned Names and Numbers (“ICANN”), we make available files containing all active domain names registered in the .com and .net registries.

Further, we also make available a summary of the active zone count registered in the .com and .net registries and the number of .com and .net domain name registrations in the domain name base.

The zone counts and information on how to obtain access to the zone files can be found at https://www.Verisign.com/zone.

The domain name base is the active zone plus the number of domain names that are registered but not configured for use in the respective top-level domain zone file plus the number of domain names that are in a client or server hold status.

The domain name base may also reflect compensated or uncompensated judicial or administrative actions to add or remove from the active zone an immaterial number of domain names.

These files and the related summary data are updated at least once per day.

The update times may vary each day.

The number of domain name registrations provided in this Quarterly Report on Form 10-Q are as of midnight of the date reported.

Information available on, or accessible through, our website is not incorporated herein by reference.

The number of domain names provided in this Form 10-Q are as of midnight of the date reported.

COVID-19 Update

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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 .

Our revenues continued to grow during 2020 and the first quarter of 2021 primarily driven by an increase in the domain name base for the .

however, the situation remains uncertain and hard to predict.

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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.

For further discussion, see “Risk Factors – The effects of the COVID-19 pandemic could adversely affect our business, operations, financial condition and results of operations, and the extent to which the effects of the pandemic will impact our business, operations, financial condition and results of operations remains uncertain” in Part II, Item 1A of this Quarterly Report on Form 10-Q.

For further discussion, see “Risk Factors – The effects of the COVID-19 pandemic have impacted how we operate our business, and the extent to which the effects of the pandemic will impact our business, operations, financial condition and results of operations remains uncertain” in Part 1, Item 1A of the 2020 Form 10-K.

Results of Operations

The following table presents information regarding our results of operations as a percentage of revenues:

Three Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

Three Months Ended March 31,

Revenues 100.0 % 100.0 %

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We also derive revenues from operating domain name registries for several other TLDs and from providing back-end registry services to a number of TLD registry operators, all of which are not significant in relation to our consolidated revenues.

For domain names registered in the .com and .net registries we receive a fee from registrars per annual registration that is fixed pursuant to our agreements with ICANN.

For domain names registered in the .

net registries we receive a fee from registrars per annual registration that is determined pursuant to our agreements with ICANN.

Individual customers, called registrants, contract directly with registrars or their resellers, and the registrars in turn register the domain names with Verisign.

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New registrations and the renewal rate for existing registrations are impacted by continued growth in online advertising, e-commerce, and the number of internet users, as well as marketing activities carried out by us and our registrars.

We also offer promotional incentive-based discount programs to registrars based upon market conditions and the business environment in which the registrars operate.

The annual fee for a .com domain name registration has been fixed at $7.85 since 2012.

On October 26, 2018, we entered into an agreement with the DOC to amend the Cooperative Agreement.

The amendment extends the term of the Cooperative Agreement until November 30, 2024 and permits the price of a .com domain name to be increased without further DOC approval by up to 7% in each of the final four years of each six-year period beginning on October 26, 2018.

On March 27, 2020, Verisign and ICANN entered into an agreement to amend the .com Registry Agreement (“Third .com Amendment”) that incorporates these changes to the pricing terms.

We have the contractual right to increase the fees for .net domain name registrations by up to 10% each year during the term of our agreement with ICANN, through June 30, 2023.

As part of our response to the COVID-19 crisis, we announced on March 25, 2020 that we will freeze registry prices for domain name registrations and renewals for all of our TLDs, including .com and .net , through the end of 2020.

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.

Within the current six-year period under the Third .

com Amendment, the first year in which we may increase the price for .

com domain names ends on October 25, 2021, and we expect to effectuate a .

com price increase by that date.

We offer promotional marketing programs for our registrars based upon market conditions and the business environment in which the registrars operate.

On October 26, 2018, Verisign and the DOC amended the Cooperative Agreement.

The amendment, among other items, extends the term of the Cooperative Agreement until November 30, 2024 and permits the price of a .com domain name to be increased, subject to appropriate

changes to the .com Registry Agreement, without further DOC approval, by up to 7% in each of the final four years of each six-year period beginning on October 26, 2018.

On March 27, 2020, Verisign and ICANN amended the .com Registry Agreement (“Third .com Amendment”) that, among other items, incorporates these changes agreed to with the DOC to the pricing terms.

On February 11, 2021, we announced that we will increase the annual registry-level wholesale fee for each new and renewal .

com domain name registration from $7.85 to $8.39, effective September 1, 2021.

We have the contractual right to increase the fees for .

net domain name registrations by up to 10% each year during the term of our agreement with ICANN, through June 30, 2023.

All fees paid to us for .com and .net registrations are in U.S.

A comparison of revenues is presented below:

Three Months Ended

September 30, Nine Months Ended

September 30,

2020 % Change 2019 2020 % Change 2019

Three Months Ended March 31,

2021 % Change 2020

(Dollars in thousands)

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

September 30, 2020 % Change September 30, 2019

March 31, 2021 % Change March 31, 2020

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

168.0 million 5 % 160.7 million

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.

The increase in revenues from the .

com TLD was driven by a 4% increase in the domain name base for .

Revenues increased by $11.1 million during the three months ended March 31, 2021, as compared to the same period last year, primarily due to an increase in revenues from the operation of the registry for the .

com TLD driven by a 5% increase in the domain name base for .

Growth in the domain name base has been primarily driven by continued internet growth and marketing activities carried out by us and our registrars.

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 nine months ended September 30, 2020, as a result of continued growth in the aggregate number of .

com domain names.

However, competitive pressure from ccTLDs, other gTLDs, services that offer alternatives for an online presence, such as social media, 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 do so in the remainder of 2021 and beyond.

We expect the rate of growth in revenues will remain consistent during the remainder of 2021 compared to the three months ended March 31, 2021, as a result of continued growth in the aggregate number of .

com domain names and the impact of the price increase for .com domain names which becomes effective September 1, 2021.

Geographic revenues

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The following table presents a comparison of our geographic revenues:

Three Months Ended

September 30, Nine Months Ended

September 30,

2020 % Change 2019 2020 % Change 2019

Three Months Ended March 31,

2021 % Change 2020

(Dollars in thousands)

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Total revenues $ 323,621 $ 312,524

Revenues for our Registry Services business are attributed to the country of domicile and the respective regions in which our registrars are located;

Revenues in the table above are attributed to the country of domicile and the respective regions in which our registrars are located;

however, this may differ from the regions where the registrars operate or where registrants are located.

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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 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.

During the three months ended March 31, 2021, revenues increased in all regions except China.

Revenues from registrars based in China declined during the first quarter of 2021 as a result of lower new registrations and renewal rates in the country.

Cost of revenues

Cost of revenues consist primarily of salaries and employee benefits expenses for our personnel who manage the operational systems, depreciation expenses, operational costs associated with the delivery of our services, fees paid to ICANN, customer support and training, consulting and development services, costs of facilities and computer equipment used in these activities, telecommunications expense and allocations of indirect costs such as corporate overhead.

Cost of revenues consist primarily of salaries and employee benefits expenses for our personnel who manage the operational systems, depreciation expenses, operational costs associated with the delivery of our services, fees paid to ICANN, customer support and training, costs of facilities and computer equipment used in these activities, telecommunications expense and allocations of indirect costs such as corporate overhead.

A comparison of Cost of revenues is presented below:

Three Months Ended

September 30, Nine Months Ended

September 30,

2020 % Change 2019 2020 % Change 2019

Three Months Ended March 31,

2021 % Change 2020

(Dollars in thousands)

Cost of revenues $ 46,968 3 % $ 45,573

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.

Cost of revenues increased by $1.4 million during the three months ended March 31, 2021, compared to the same period last year, due to a combination of individually insignificant factors.

Salary and employee benefits expenses remained consistent as the functional realignment of some headcount to research and development in the first quarter of 2020 was offset by other headcount increases throughout the rest of 2020.

We expect Cost of revenues as a percentage of revenues to remain consistent during the remainder of 2021 compared to the three months ended March 31, 2021.

Sales and marketing

Sales and marketing expenses consist primarily of salaries and other personnel-related expenses, travel and related expenses, trade shows, costs of lead generation, costs of computer and communications equipment and support services, facilities costs, consulting fees, costs of marketing programs, such as online, television, radio, print and direct mail advertising costs, and allocations of indirect costs such as corporate overhead.

Sales and marketing expenses consist primarily of salaries and other personnel-related expenses, travel and related expenses, trade shows, costs of computer and communications equipment and support services, facilities costs, consulting fees, costs of marketing programs, such as online, television, radio, print and direct mail advertising costs, and allocations of indirect costs such as corporate overhead.

A comparison of Sales and marketing expenses is presented below:

Three Months Ended

September 30, Nine Months Ended

September 30,

2020 % Change 2019 2020 % Change 2019

(Dollars in thousands) (Dollars in thousands)

Three Months Ended March 31,

2021 % Change 2020

(Dollars in thousands)

Sales and marketing $ 8,484 28 % $ 6,604

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.

Sales and marketing expenses increased by $1.9 million during the three months ended March 31, 2021, compared to the same period last year, primarily due to an increase in expenses related to marketing campaigns in various regions.

We expect Sales and marketing expenses as a percentage of revenues to remain consistent during the remainder of 2021, compared to the three months ended March 31, 2021.

Research and development

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A comparison of Research and development expenses is presented below:

Three Months Ended

September 30, Nine Months Ended

September 30,

2020 % Change 2019 2020 % Change 2019

Three Months Ended March 31,

2021 % Change 2020

(Dollars in thousands)

Research and development $ 20,311 17 % $ 17,358

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.

Research and development expenses increased by $3.0 million during the three months ended March 31, 2021, compared to the same period last year, primarily due to a $2.1 million increase in salary and employee benefits expenses, including stock-based compensation, resulting from the functional realignment of some headcount from cost of revenues during the first quarter of 2020.

We expect Research and development expenses as a percentage of revenues to remain consistent during the remainder of 2021 compared to the three months ended March 31, 2021.

General and administrative

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A comparison of General and administrative expenses is presented below:

Three Months Ended

September 30, Nine Months Ended

September 30,

2020 % Change 2019 2020 % Change 2019

Three Months Ended March 31,

2021 % Change 2020

(Dollars in thousands)

General and administrative $ 37,451 2 % $ 36,725

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.

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.

General and administrative expenses increased by $0.7 million during the three months ended March 31, 2021, compared to the same period last year, due to a $3.2 million increase in salary and employee benefits expenses, including stock-based compensation expenses, partially offset by a $2.0 million decrease in charitable contributions.

The increase in salary and employee benefits expenses, including stock-based compensation expenses was due to an increase in average headcount.

Stock-based compensation expenses also increased due to higher achievement levels on certain performance-based RSU grants.

Charitable contributions decreased due to contributions made in the first quarter of 2020 to support the response to the COVID-19 pandemic.

We expect General and administrative expenses as a percentage of revenues to remain consistent during the remainder of 2021 compared to the three months ended March 31, 2021.

Interest expense

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.

Interest expense remained consistent in the three months ended March 31, 2021 as compared to the same period last year.

We expect quarterly Interest expense to remain consistent during the remainder of 2021 compared to the three months ended March 31, 2021.

Non-operating income, net

The following table presents the components of Non-operating income, net:

Three Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

Three Months Ended March 31,

(In thousands)

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Transition services income — 2,100

Gain on sale of business (9) 64 5,602 817

Other, net 228 563

Total non-operating income, net $ 444 $ 7,084

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.

Interest income decreased in the three months ended March 31, 2021 due to a decline in interest rates on our investments in debt securities.

The transition services income in 2020 relates to the divested security services business.

The transition services agreement ended in February 2020.

We expect quarterly Non-operating income, net to remain consistent during the remainder of 2021 compared to the three months ended March 31, 2021.

Income tax expense (benefit)

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

Three Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

Three Months Ended March 31,

(Dollars in thousands)

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Effective tax rate 20 % (75) %

The effective tax rate for each of the periods in the table above differed from the statutory federal rate of 21% due to a lower foreign effective tax rate and excess tax benefits related to stock-based compensation, offset by state income taxes and U.S.

taxes on foreign earnings, net of foreign tax credits.

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.

The effective tax rate for the three months ended March 31, 2021 was lower than the statutory federal rate of 21% primarily due to a lower effective tax rate on foreign income, partially offset by state income taxes.

The effective tax rate for the three months ended March 31, 2020 was lower than the statutory federal rate of 21% primarily due to the remeasurement of

unrecognized tax benefits discussed below, a lower effective tax rate on foreign income, and $11.8 million of excess tax benefits related to stock-based compensation, partially offset by state income taxes.

During the three months ended March 31, 2020, we remeasured 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 quarter, was based on IRS written confirmation indicating no examination adjustment would be proposed.

Notwithstanding this written confirmation, our U.S.

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

We expect our annual effective tax rate for 2021 to be between 20% and 23%.

Liquidity and Capital Resources

September 30, December 31,

The following table presents our principal sources of liquidity:

March 31, December 31,

(In thousands)

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Total $ 1,181,176 $ 1,166,907

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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The cash equivalents consist of amounts invested in money market funds, time deposits and U.S.

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

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

Treasury bills purchased with original maturities of three months or less.

As of March 31, 2021, 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 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.

During the three months ended March 31, 2021, we repurchased 0.9 million shares of our common stock for an aggregate cost of $172.6 million.

As of March 31, 2021, there was approximately $910.0 million remaining available for future share repurchases under the share repurchase program which has no expiration date.

As of March 31, 2021, 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 March 31, 2021, 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 nine months ended September 30, 2020 and 2019 were as follows:

Nine Months Ended

September 30,

In summary, our cash flows for the three months ended March 31, 2021 and 2020 were as follows:

Three Months Ended March 31,

(In thousands)

Net cash provided by operating activities $ 198,336 $ 180,060

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

Net cash (used in) provided by investing activities (175,204) 79,084

Net cash used in financing activities (177,313) (267,327)

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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 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.

Net cash provided by operating activities increased during the three months ended March 31, 2021, compared to the same period last year, primarily due to an increase in cash received from customers, partially offset by increases in cash paid to employees and vendors, and decreases in cash received from interest on investments and from transition services.

Cash received

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

Cash paid to employees and vendors increased primarily due to the timing of payments and an increase in operating expenses.

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 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.

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.

We had net cash outflows from investing activities in the three months ended March 31, 2021, compared to net cash inflows during the same period last year, primarily due to an increase in purchases of marketable securities, net of proceeds from maturities and sales of marketable securities as well as a payment received during the first quarter of 2020 related to our divested security services business, partially offset by a decrease in purchases of property and equipment.

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 nine months ended September 30, 2020, compared to the same period last year, primarily due to an increase in share repurchases.

Net cash used in financing activities decreased during the three months ended March 31, 2021, compared to the same period last year, primarily due to a decrease in share repurchases.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis