What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-07-28 compared with 2022-04-28 · 59 added, 47 removed, 142 unchanged (43% of the section changed)

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

As of March 31, 2022, we had 174.7 million .com and .net registrations in the domain name base.

As of June 30, 2022, we had 174.3 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 $346.9 million during the three months ended March 31, 2022, an increase of 7% compared to the same period in 2021.

• We recorded operating income of $224.8 million during the three months ended March 31, 2022, an increase of 7% compared to the same period in 2021.

• As of March 31, 2022, we had 174.7 million .com and .net registrations in the domain name base, which represents a 4% increase from March 31, 2021, and a net increase of 1.2 million domain name registrations from December 31, 2021.

• During the three months ended March 31, 2022, we processed 10.2 million new domain name registrations for .com and .net compared to 11.6 million for the same period in 2021.

• We recorded revenues of $351.9 million and $698.8 million during the three and six months ended June 30, 2022, an increase of 7% compared to the same periods in 2021.

• We recorded operating income of $236.0 million and $460.8 million during the three and six months ended June 30, 2022, an increase of 11% and 9%, respectively, compared to the same periods in 2021.

• As of June 30, 2022, we had 174.3 million .com and .net registrations in the domain name base, which represents a 2% increase from June 30, 2021, and a net decrease of 0.4 million domain name registrations from March 31, 2022.

The net decrease in the domain name base from March 31, 2022, reflects that the higher demand for domain name registrations observed during the first 12 to 18 months of the pandemic has subsided, recent global economic uncertainty, and reduced demand, primarily in China, for new domain name registrations and renewals.

• During the three months ended June 30, 2022, we processed 10.1 million new domain name registrations for .com and .net compared to 11.7 million for the same period in 2021.

• The final .

net renewal rate for the fourth quarter of 2021 was 74.8% compared to 73.5% for the fourth quarter of 2020.

net renewal rate for the first quarter of 2022 was 75.9% compared to 76.0% for the first quarter of 2021.

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

• During the three months ended March 31, 2022, we repurchased 0.9 million shares of our common stock for an aggregate cost of $195.5 million.

As of March 31, 2022, there was approximately $892.6 million remaining available for future share repurchases under our share repurchase program.

• We generated cash flows from operating activities of $207.1 million during the three months ended March 31, 2022, compared to $198.3 million for the same period in 2021.

• 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.

• During the three months ended June 30, 2022, we repurchased 2.0 million shares of our common stock for an aggregate cost of $349.5 million.

As of June 30, 2022, there was approximately $543.1 million remaining available for future share repurchases under our share repurchase program.

• We generated cash flows from operating activities of $352.0 million during the six months ended June 30, 2022, compared to $340.8 million for the same period in 2021.

• On July 28, 2022, we announced that we will increase the annual registry-level wholesale fee for each new and renewal .net domain name registration from $9.02 to $9.92, effective February 1, 2023.

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.

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

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 2022 2021

Revenues 100.0 % 100.0 % 100.0 % 100.0 %

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Interest expense (5.4) (7.0) (5.4) (7.0)

Non-operating income, net 0.1 0.2

Non-operating income (loss), net 0.4 (0.7) 0.3 (0.2)

Income before income taxes 62.1 57.0 60.8 57.6

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

On July 28, 2022, we announced that we will increase the annual registry-level wholesale fee for each new and renewal .net domain name registration from $9.02 to $9.92, effective February 1, 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 March 31,

2022 % Change 2021

Three Months Ended June 30, Six Months Ended June 30,

2022 % Change 2021 2022 % Change 2021

(Dollars in millions)

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

March 31, 2022 % Change March 31, 2021

June 30, 2022 % Change June 30, 2021

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

174.3 million 2% 170.6 million

Revenues increased by $23.3 million during the three months ended March 31, 2022 as compared to the same period last year, primarily due to an increase in revenues from the operation of the registry for the .

Revenues increased by $22.5 million and $45.8 million during the three and six months ended June 30, 2022, 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 driven by a 3% increase in the domain name base for .

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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, such as for resale at increased prices or for revenue generation through website advertising, 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 2022 and beyond.

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, such as for resale at increased prices or for revenue generation through website advertising, and global economic uncertainty, has limited the rate of growth of the domain name base and may do so in the remainder of 2022 and beyond.

Geographic revenues

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The following table presents a comparison of our geographic revenues:

Three Months Ended March 31,

2022 % Change 2021

Three Months Ended June 30, Six Months Ended June 30,

2022 % Change 2021 2022 % Change 2021

(Dollars in millions)

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Revenue growth for each region may be impacted by registrars reincorporating, relocating, or from acquisitions or changes in affiliations of resellers.

Revenues in the U.S.

benefited from several such changes during 2022, while revenues in EMEA were negatively impacted.

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

During the three months ended March 31, 2022, revenues increased in all regions except China.

Revenues from registrars based in China declined during the three months ended March 31, 2022 as a result of lower new registrations and renewal rates in the country.

Revenues increased in all regions for the periods presented except EMEA which declined in the three months ended June 30, 2022 due to the factors described above.

Cost of revenues

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A comparison of Cost of revenues is presented below:

Three Months Ended March 31,

2022 % Change 2021

Three Months Ended June 30, Six Months Ended June 30,

2022 % Change 2021 2022 % Change 2021

(Dollars in millions)

Cost of revenues $ 49.5 4% $ 47.8 $ 100.2 6% $ 94.8

Cost of revenues increased by $3.7 million during the three months ended March 31, 2022, compared to the same period last year, due to a combination of individually insignificant factors.

Cost of revenues increased by $1.7 million and $5.4 million during the three and six months ended June 30, 2022, respectively, compared to the same periods last year, due to a combination of individually insignificant factors.

Research and development

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A comparison of Research and development expenses is presented below:

Three Months Ended March 31,

2022 % Change 2021

Three Months Ended June 30, Six Months Ended June 30,

2022 % Change 2021 2022 % Change 2021

(Dollars in millions)

Research and development $ 20.3 3% $ 19.8 $ 43.2 8% $ 40.1

Research and development expenses increased by $2.6 million during the three months ended March 31, 2022, compared to the same period last year, due to a combination of individually insignificant factors.

Research and development expenses increased by $0.5 million and $3.1 million during the three and six months ended June 30, 2022, respectively, compared to the same periods last year, due to a combination of individually insignificant factors.

Selling, general and administrative

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A comparison of Selling, general and administrative expenses is presented below:

Three Months Ended March 31,

2022 % Change 2021

Three Months Ended June 30, Six Months Ended June 30,

2022 % Change 2021 2022 % Change 2021

(Dollars in millions)

Selling, general and administrative $ 46.1 (6)% $ 48.8 $ 94.6 —% $ 94.7

Selling, general and administrative expenses increased by $2.6 million during the three months ended March 31, 2022, compared to the same period last year, primarily due to a $2.1 million increase in salary and employee benefits expenses as a result of an increase in expenses for certain employee health insurance related benefits.

Selling, general and administrative expenses decreased by $2.7 million during the three months ended June 30, 2022, compared to the same period last year, due to a combination of individually insignificant factors.

Selling, general and administrative expenses remained consistent during the six months ended June 30, 2022, compared to the same period last year, as a $2.2 million increase in expenses related to network security and other software services was offset by decreases in expenses related to several individually insignificant factors.

Interest expense

Interest expense decreased by $3.7 million in the three months ended March 31, 2022 compared to the same period last year, due to the lower interest rate on our 2031 Notes compared to the 2023 Notes which were redeemed in the second quarter of 2021.

Interest expense decreased by $4.2 million and $7.9 million in the three and six months ended June 30, 2022, respectively, compared to the same periods last year, due to the lower interest rate on our 2031 Notes compared to the 2023 Notes which were redeemed in the second quarter of 2021.

Non-operating income (loss), net

Non-operating income (loss), net increased by $3.6 million and $3.5 million in the three and six months ended June 30, 2022, respectively, compared to the same periods last year, primarily due to the $2.1 million loss on extinguishment of debt recognized in the second quarter of 2021.

Income tax expense

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

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 2022 2021

(Dollars in millions)

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taxes on foreign earnings, net of foreign tax credits, offset by a lower foreign effective tax rate.

The foreign effective tax rate increased in the three and six months ended June 30, 2022 compared to the same periods of the prior year, primarily as a result of the transfer of intellectual property between certain non-U.S.

subsidiaries that took place in the fourth quarter of 2021.

Liquidity and Capital Resources

The following table presents our principal sources of liquidity:

March 31, December 31,

June 30, December 31,

(In millions)

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

As of March 31, 2022, all of our debt securities have contractual maturities of less than one year.

As of June 30, 2022, 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 March 31, 2022, we repurchased 0.9 million shares of our common stock for an aggregate cost of $195.5 million.

As of March 31, 2022, there was approximately $892.6 million remaining available for future share repurchases under the share repurchase program which has no expiration date.

As of March 31, 2022, we had $750.0 million of 2.70% senior unsecured notes due 2031, $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 March 31, 2022, there were no borrowings outstanding under our $200.0 million credit facility that will expire in 2024.

During the three months ended June 30, 2022, we repurchased 2.0 million shares of our common stock for an aggregate cost of $349.5 million.

As of June 30, 2022, there was approximately $543.1 million remaining available for future share repurchases under the share repurchase program which has no expiration date.

As of June 30, 2022, we had $750.0 million of 2.70% senior unsecured notes due 2031, $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 June 30, 2022, 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 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 and beyond.

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Our cash requirements have not changed materially since the 2021 Form 10-K.

In summary, our cash flows for the three months ended March 31, 2022 and 2021 were as follows:

Three Months Ended March 31,

In summary, our cash flows for the six months ended June 30, 2022 and 2021 were as follows:

Six Months Ended June 30,

(In millions)

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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 three months ended March 31, 2022, compared to the same period last year, primarily due to decreases in cash paid for income taxes, partially offset by a decrease in cash received from customers.

Cash paid for income taxes decreased primarily due to the timing of certain non-US income tax payments.

Cash received from customers decreased primarily due to timing of payments from certain large customers.

Net cash provided by operating activities increased during the six months ended June 30, 2022, compared to the same period last year, primarily due to decreases in cash paid for interest and cash paid to employees and vendors, and an increase in cash received from customers, partially offset by an increase in cash paid for income taxes.

Cash paid for interest decreased due to the lower interest rate on our 2031 Notes compared to the 2023 Notes which were redeemed in the second quarter of 2021.

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

Cash paid for income taxes increased primarily due comparatively higher U.S.

federal and foreign income taxes.

Cash received from customers increased primarily due to timing of payments from certain large customers.

Cash flows from investing activities

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

We had net cash inflows from investing activities in the three months ended March 31, 2022, compared to net cash outflows during the same period last year, primarily due to a decrease in purchases of marketable securities, net of proceeds from maturities and sales of marketable securities.

We had net cash inflows from investing activities in the six months ended June 30, 2022, compared to net cash outflows during the same period last year, primarily due to an increase in proceeds from maturities and sales of marketable securities, net of purchases of marketable securities, and 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 three months ended March 31, 2022, compared to the same period last year, primarily due an increase in share repurchases.

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

Net cash used in financing activities increased during the six months ended June 30, 2022, compared to the same period last year, primarily due an increase in share repurchases, partially offset by the net impact of the redemption of our 2023 Senior Notes and the issuance of the 2031 Senior Notes during 2021.

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