What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-02-18 compared with 2021-02-19 · 71 added, 79 removed, 192 unchanged (44% of the section changed)

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net compared to 42.4 million in 2020.

• The final .com and .net renewal rate was 73.7% for the third quarter of 2020 and 2019.

• The final .com and .net renewal rate for the third quarter of 2021 was 75.0% compared to 73.7% for the same quarter of 2020.

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

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• Effective February 10, 2022, our Board of Directors authorized the repurchase of our common stock in the amount of $705.4 million, in addition to the $294.6 million that remained available for repurchases under the share repurchase program, for a total repurchase authorization of up to $1.0 billion under the program.

• We generated cash flows from operating activities of $730.2 million in 2020, which represents a decrease of 3% as compared to 2019.

• During 2020, we recognized an income tax benefit of $204.2 million as a result of the remeasurement of certain previously unrecognized income tax benefits and the lapse of statutes of limitations related to other unrecognized income tax benefits.

• During 2020, we announced a freeze on the registry prices for all of our TLDs, including .com and .net, through March 31, 2021.

Additionally, we announced a waiver of the wholesale restore fee for expired domain names through the end of 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.

• We generated cash flows from operating activities of $807.2 million in 2021, which represents an increase of 11% as compared to 2020.

• During the fourth quarter of 2021, we recognized a deferred income tax benefit of $165.5 million related to the transfer of certain non-US intellectual property between subsidiaries.

• On June 8, 2021, we issued $750.0 million of 2.700% Senior Notes due June 15, 2031 (“2031 Notes”).

On June 23, 2021, we used the net proceeds from the 2031 Notes, along with cash on hand, to redeem all of our $750.0 million aggregate principal amount of outstanding 4.625% Senior Notes due 2023 (“2023 Notes”).

• On February 10, 2022, we announced that we will increase the annual registry-level wholesale fee for each new and renewal .com domain name registration from $8.39 to $8.97, effective September 1, 2022.

COVID-19 Update

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

We believe that the effects of the pandemic to date have led to a modest 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 2020 primarily driven by an increase in the domain name base for the .com TLD;

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 continued to grow during 2020 and 2021 primarily driven by an increase in the domain name base for the .com TLD;

however, the situation remains uncertain and hard to predict.

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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.

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 I, Item 1A of this Form 10-K.

Critical Accounting Policies and Significant Management Estimates

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with U.S.

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Actual results may differ from these estimates under different assumptions or conditions.

An accounting estimate is considered critical if the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment involved, and the impact of changes in the estimates and assumptions would have a material effect on the consolidated financial statements.

Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant.

We believe the following critical accounting estimates and policies have the most significant impact on our consolidated financial statements:

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We only recognize or continue to recognize tax positions and tax benefit amounts that are more likely than not to be sustained upon examination.

We adjust these amounts in light

of changing facts and circumstances;

We adjust these amounts in light of changing facts and circumstances;

however, due to the complexity of some of these uncertainties, the ultimate resolution may result in an outcome that is materially different from our current estimate of unrecognized tax benefits.

See Note 10, “Income Taxes” of our Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for a discussion of significant changes in unrecognized tax benefits during 2020.

See Note 10, “Income Taxes” of our Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for further discussion of the $165.5 million

deferred tax asset and corresponding income tax benefit recognized in the fourth quarter of 2021 and the $204.2 million income tax benefit recognized in 2020 as a result of the remeasurement of certain previously unrecognized income tax benefits.

Results of Operations

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Interest expense (6.3) (7.1) (7.4)

Non-operating income, net 1.2 3.5 6.3

Non-operating (loss) income, net (0.1) 1.2 3.5

Income before income taxes 58.9 59.3 61.6

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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.

The annual fee for a .

com domain name registration has been fixed at $7.85 since 2012.

We also offer promotional incentive-based discount programs to 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 March 27, 2020, Verisign and ICANN agreed to an amendment to the .com Registry Agreement that, among other items, incorporates these changes agreed to with the DOC to the pricing terms.

Effective September 1, 2021, we increased the annual registry-level wholesale fee for each new and renewal .

com domain name registration from $7.85 to $8.39.

On February 10, 2022, we announced that we will increase the annual registry-level wholesale fee for each new and renewal .com domain name registration from $8.39 to $8.97, effective September 1, 2022.

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 would 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 would extend the freeze on registry prices for all of our TLDs, including .com and .net , through March 31, 2021.

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

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

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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, 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 continue to do so in 2021 and beyond.

Revenues increased by $33.4 million in 2020 compared to 2019, 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 sale of our security services customer contracts.

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

Revenues increased by $62.5 million in 2021 compared to 2020, 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 .com and the price increase which became effective September 1, 2021.

Geographic revenues

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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.

The majority of our revenue growth in 2020 has come from increased sales to registrars based in the U.S.

Revenues increased during 2021 in all regions except China.

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

We expect revenues to continue to grow in 2021, as a result of the increased volume of domain registrations in 2020, and continued growth in registrations in the domain name base in 2021.

We expect revenues to continue to grow in 2022, 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 became effective September 1, 2021.

Cost of revenues

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Cost of revenues $ 191,933 7 % $ 180,177 — % $ 180,467

Cost of revenues remained consistent in 2020 compared to 2019, as a decrease in salary and employee benefits expenses was offset by an increase in direct cost of revenues.

Salary and employee benefits expenses decreased by $2.3 million due to a functional realignment of some headcount to research and development, partially offset by 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.

Direct cost of revenues increased by $1.8 million as a result of an increase in registry fees primarily related to the .com TLD.

We expect cost of revenues as a percentage of revenues to increase slightly in 2021 as compared to 2020.

Cost of revenues increased by $11.8 million in 2021 compared to 2020 primarily due to increases in direct cost of revenues, allocated overhead expenses and depreciation expenses.

Direct cost of revenues increased by $5.7 million primarily due to an increase in registry fees payable to ICANN in connection with the operation of the registry for the .com TLD.

Allocated overhead expenses increased by $2.4 million due to an increase in total allocable expenses.

Depreciation expenses increased by $1.9 million as a result of increased investments in our data centers and network infrastructure.

We expect cost of revenues as a percentage of revenues to remain consistent in 2022 as compared to 2021.

Sales and marketing

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Sales and marketing $ 39,877 8 % $ 36,790 (21) % $ 46,637

Sales and marketing expenses decreased by $9.8 million in 2020 compared to 2019 primarily due to a $6.9 million decrease in advertising and marketing expenses and a combination of other individually insignificant factors.

Advertising and marketing expenses declined as a result of decreases in marketing programs in various regions.

Sales and marketing expenses increased by $3.1 million in 2021 compared to 2020 primarily due to a $2.6 million increase in salary and employee benefits expenses as a result of an increase in average headcount and higher expenses for salaries and certain employee related benefits.

We expect sales and marketing expenses as a percentage of revenues to remain consistent in 2022 as compared to 2021.

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Research and development $ 80,529 8 % $ 74,671 23 % $ 60,805

Research and development expenses increased by $13.9 million in 2020 compared to 2019 primarily due to increases in salary and employee benefits expenses and allocated overhead expenses.

Salary and employee benefits expenses increased by $10.2 million as a result of 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.

Allocated overhead expenses increased by $4.0 million primarily due to an increase in average headcount relative to other cost types.

Research and development expenses increased by $5.9 million in 2021 compared to 2020 due to an increase in salary and employee benefits expenses, including stock-based compensation, and a combination of individually insignificant factors.

Salary and employee benefits expenses, including stock-based compensation, increased by $3.0 million due to a slight increase in average headcount and higher expenses for salaries and certain employee related benefits.

We expect research and development expenses as a percentage of revenues to remain consistent in 2022 as compared to 2021.

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General and administrative $ 148,434 (1) % $ 149,213 8 % $ 137,625

General and administrative expenses increased by $11.6 million in 2020 compared to 2019 primarily due to increases in salary and employee benefits expenses, software license expenses, charitable contributions, and contract and professional services expenses, partially offset by a decrease in stock-based compensation expenses and an increase in overhead expenses allocated to other cost types.

Salary and employee benefits expenses increased by $8.1 million as a result of an increase in average headcount as well as an increase in expenses for other employee benefits including expanded paid time off benefits provided to employees in response to the COVID-19 pandemic.

Software license expenses increased by $3.3 million due to expenses related to network security and other software services.

Charitable contributions increased by $3.6 million to support the response to the COVID-19 pandemic and to promote equal justice.

Contract and professional services expenses increased by $2.0 million due to increases in expenses for network security and other corporate support services.

Stock-based compensation expense decreased by $2.4 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 $3.0 million due to an increase in total allocable expenses.

General and administrative expenses decreased by $0.8 million in 2021 compared to 2020 primarily due to decreases in professional services expenses and charitable contributions and an increase in overhead expenses allocated to other cost types, partially offset by increases in salary and employee benefits expenses, equipment and software expenses, and stock-based compensation expenses.

Professional services expenses decreased by $6.0 million due to a decrease in external consulting costs on various projects.

Overhead expenses allocated to other cost types increased by $5.0 million due to an increase in the total allocable expenses.

Charitable contributions decreased by $1.6 million due to greater contributions made during 2020 to help with immediate COVID-related hardship and to support social justice efforts, compared to contributions made during 2021.

Salary and employee benefits expenses increased by $4.7 million due to an increase in average headcount and higher expenses for certain employee health insurance related benefits.

Equipment and software expenses increased by $5.5 million due to expenses related to network security and other software services.

Stock-based compensation expenses increased by $3.0 million due to higher achievement levels on certain performance-based RSU grants and increases in the total value of RSUs granted in 2021.

We expect general and administrative expenses as a percentage of revenues to remain consistent in 2022 as compared to 2021.

Interest expense

See Note 4, “Debt and Interest Expense” of our Notes to Consolidated Financial Statements in Item 8 of this Form 10-K.

We expect interest expense to remain consistent in 2021 as compared to 2020.

Non-operating income, net

See Note 9, “Non-operating Income, Net” of our Notes to Consolidated Financial Statements in Item 8 of this Form 10-K.

We expect Non-operating income, net to decrease in 2021 as compared to 2020 due to the transition services income and gain recognized in 2020 in connection with the sale of our security services customer contracts which will not recur in 2021, and lower interest income in 2021 as a result of lower interest rates.

Interest expense decreased by $6.9 million in 2021 compared to 2020 due to the lower interest rate on our 2031 Notes compared to the 2023 Notes which were redeemed in June 2021.

We expect interest expense to decrease in 2022 due to the lower interest rate on our 2031 Notes compared to the 2023 Notes.

Non-operating loss, net

See Note 9, “Non-operating (Loss) Income, Net” of our Notes to Consolidated Financial Statements in Item 8 of this Form 10-K.

We expect Non-operating loss, net to decrease in 2022 as compared to 2021 due to the loss on extinguishment of debt recognized in 2021.

Income tax (benefit) expense

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Effective tax rate — % (9) % 19 %

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.

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, offset by state income taxes and U.S.

taxes on foreign earnings, net of foreign tax credits.

Additionally, during 2020, we recognized an income tax benefit of $204.2 million as a result of the remeasurement of certain previously unrecognized income tax benefits.

Additionally, during 2021, we completed a transfer of intellectual property between certain non-U.S.

subsidiaries.

This intellectual property did not have any book value, however the transfer created an amortizable tax basis that resulted in the recognition of a $165.5 million deferred tax asset and a corresponding income tax benefit.

During 2020, we recognized an income tax benefit of $204.2 million as a result of the remeasurement of certain previously unrecognized income tax benefits.

The majority of this tax benefit related to the worthless stock deduction taken in 2013.

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As of December 31, 2021, we had deferred tax assets arising from deductible temporary differences, tax losses, and tax credits of $238.5 million, net of valuation allowances, but before the offset of certain deferred tax liabilities.

With the exception of deferred tax assets related to certain state and foreign net operating loss carryforwards, we believe it is more likely than not that the tax effects of the deferred tax liabilities, together with future taxable income, will be sufficient to fully recover the remaining deferred tax assets.

We qualified for a tax holiday in Switzerland until the end of 2019 which lowered tax rates on certain types of income and required certain thresholds of foreign source income.

The tax holiday reduced our foreign income tax expense by $17.3 million ($0.15 per share) in 2019.

The benefit from the tax holiday is calculated before consideration of any offsetting tax impact in the United States.

Effective January 1, 2020, due to Swiss tax law changes, the tax holiday was eliminated, which was partially offset by a lowered statutory tax rate.

With the exception of

deferred tax assets related to certain state and foreign net operating loss and foreign tax credit carryforwards, we believe it is more likely than not that the tax effects of the deferred tax liabilities, together with future taxable income, will be sufficient to fully recover the remaining deferred tax assets.

We expect the effective tax rate for 2022 to be between 21% and 24%.

Liquidity and Capital Resources

The following table presents our principal sources of liquidity:

As of December 31,

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Total $ 1,205,805 $ 1,166,907

As of December 31, 2020, our principal source of liquidity was $401.2 million of cash and cash equivalents and $765.7 million of marketable securities.

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

Treasury meeting the criteria of our investment policy, which is focused on the preservation of our capital through investment in investment grade securities.

The cash equivalents consist mainly of amounts invested in money market funds and U.S.

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

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

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Effective February 10, 2022, our Board of Directors authorized the repurchase of our common stock in the amount of $705.4 million, in addition to the $294.6 million that remained available for repurchases under the share repurchase program, for a total repurchase authorization of up to $1.0 billion under the program.

As of December 31, 2020, we had $550.0 million principal amount outstanding of 4.75% senior unsecured notes due 2027, $500.0 million principal amount outstanding of the 5.25% senior unsecured notes due 2025 and $750.0 million principal amount outstanding of the 4.625% senior unsecured notes due 2023.

As of December 31, 2020, there were no borrowings outstanding under the $200.0 million unsecured revolving credit facility that will expire in 2024.

We believe existing cash, cash equivalents and marketable securities, and funds generated from operations, together with our ability to arrange for additional financing should be sufficient to meet our working capital, capital expenditure requirements, and to service our debt for the next 12 months.

On June 8, 2021, we issued $750.0 million of 2.700% senior unsecured notes due June 15, 2031.

On June 23, 2021, we used the net proceeds from the 2031 Notes, along with cash on hand, to redeem all of our $750.0 million aggregate principal amount of outstanding 4.625% senior notes due 2023.

As of December 31, 2021, we also had $550.0 million principal amount outstanding of 4.75% senior unsecured notes due 2027 and $500.0 million principal amount outstanding of 5.25% senior unsecured notes due 2025.

As of December 31, 2021, there were no borrowings outstanding under our $200.0 million credit facility that will expire in 2024.

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

Our most significant future cash requirements include interest and principal payments on the senior notes issuances described above, income tax payments, purchase obligations and registry fees related to the operation of certain top-level domains.

These items are detailed in Note 11, “Commitments and Contingencies” of our Notes to Consolidated Financial Statements in Item 8 of this Form 10-K.

In summary, our cash flows for 2021, 2020, and 2019 were as follows:

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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 in 2020 compared to 2019 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 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 in 2021 compared to 2020 primarily due to an increase in cash received from customers, partially offset by increases in cash paid for income taxes, 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 and the impact of the .com price increase which became effective September 1, 2021.

The increased volume of renewal transactions was due in part to early renewal transactions before the .com price increase became effective.

Cash paid for income taxes increased primarily due to comparatively higher federal, state, and foreign taxes.

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 sale of our security services customer contracts in February 2020.

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

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 2020, compared to net cash inflows during 2019, 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 property and equipment, partially offset by contingent consideration received related to our sale of security services customer contracts.

Net cash used in investing activities increased in 2021 compared to 2020 primarily due to an increase in purchases of marketable securities and investments, net of proceeds from maturities and sales of marketable securities and investments, an increase in purchases of property and equipment, and payments received during 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, repayment of borrowings, and our employee stock purchase plan.

Net cash used in financing activities decreased in 2020 compared to 2019 primarily due to a decrease in share repurchases.

Impact of Inflation

We do not believe that inflation has had a significant impact on our operations in any of the periods presented.

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

Net cash used in financing activities decreased in 2021 compared to 2020 primarily due to proceeds received from the issuance of the 2031 Notes and a decrease in share repurchases, partially offset by the redemption of our 2023 Notes.

We expect cash paid for income taxes as a percentage of pre-tax income to be between 21% and 24% in 2022.

Property and Equipment Expenditures

Our planned property and equipment expenditures for 2021 are anticipated to be between $55.0 million and $65.0 million and will primarily be focused on infrastructure upgrades and enhancements to our product portfolio.

Contractual Obligations

See Note 11, “Commitments and Contingencies,” Purchase Obligations and Contractual Agreements , of our Notes to Consolidated Financial Statements in Item 8 of this Form 10-K.

Off-Balance Sheet Arrangements

It is not our business practice to enter into off-balance sheet arrangements.

As of December 31, 2020, we did not have any significant off-balance sheet arrangements.

See Note 11, “Commitments and Contingencies,” Off-Balance Sheet Arrangements , of our Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for further information regarding off-balance sheet arrangements.

Our planned property and equipment expenditures for 2022 are anticipated to be between $40.0 million and $50.0 million and will primarily be focused on infrastructure upgrades software enhancements.

Dilution from RSUs

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We recognize that these stock-based awards dilute existing stockholders and have sought to control the number granted while providing competitive compensation packages.

As of December 31, 2020, there are a total of 0.7 million unvested RSUs which represent potential dilution of less than 1.0%.

As of December 31, 2021, there were a total of 0.6 million unvested RSUs which represent potential dilution of less than 1.0%.

This maximum potential dilution will only result if all outstanding RSUs vest and are settled.

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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-K

Item 7. Management’s Discussion and Analysis