What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-10-27 compared with 2022-07-28 · 58 added, 58 removed, 143 unchanged (45% of the section changed)

14 unchanged sentences

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

As of June 30, 2022, we had 174.3 million .com and .net registrations in the domain name base.

As of September 30, 2022, we had 174.2 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 $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.

• We recorded revenues of $356.9 million and $1,055.7 million during the three and nine months ended September 30, 2022, an increase of 7% compared to the same periods in 2021.

• We recorded operating income of $236.8 million and $697.6 million during the three and nine months ended September 30, 2022, an increase of 7% and 8%, respectively, compared to the same periods in 2021.

• As of September 30, 2022, we had 174.2 million .com and .net registrations in the domain name base, which represents a 1% increase from September 30, 2021, and a net decrease of 0.2 million domain name registrations from June 30, 2022.

The net decrease in the domain name base from June 30, 2022, was driven primarily by decreased demand for domain name registrations compared with the higher demand observed during the first 12 to 18 months of the COVID-19 pandemic, recent global economic uncertainty, and reduced demand, primarily in China, for new domain name registrations and renewals.

• During the three months ended September 30, 2022, we processed 9.9 million new domain name registrations for .com and .net compared to 10.7 million for the same period in 2021.

• The final .

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

net renewal rate for the second quarter of 2022 was 73.8% compared to 75.4% for the second quarter of 2021.

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

• 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.

• During the three months ended September 30, 2022, we repurchased 1.5 million shares of our common stock for an aggregate cost of $275.5 million.

As of September 30, 2022, there was approximately $267.6 million remaining available for future share repurchases under our share repurchase program.

• Effective October 27, 2022, our Board of Directors authorized the repurchase of our common stock in the amount of $803.0 million, in addition to the $197.0 million that remained available for repurchases under the share repurchase program, for a total repurchase authorization of up to $1.00 billion under the program.

• We generated cash flows from operating activities of $614.2 million during the nine months ended September 30, 2022, compared to $600.9 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.

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COVID-19 Update

The United States and the global community we serve continue to face unprecedented challenges posed by the COVID-19 pandemic.

In response to the pandemic, we established a task force to monitor the pandemic and took a number of actions to protect our employees, including restricting travel, modifying our sick leave policy to encourage quarantine and isolation when warranted, and directing most of our employees to work from home.

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

We believe that, initially, the effects of the pandemic led to an incremental increase in the demand for domain names, particularly as businesses and entrepreneurs sought to establish or expand their presence online in the beginning of the pandemic.

This incremental demand experienced earlier in the pandemic appears to have subsided.

As discussed in prior periods, we believe that the effects of the COVID-19 pandemic initially led to an incremental increase in the demand for domain names, particularly as businesses and entrepreneurs sought to establish or expand their presence online in the beginning of the pandemic.

This incremental increased demand appears to have subsided.

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 the 2021 Form 10-K.

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

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

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

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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, who are our direct customers, in turn register the domain names with Verisign.

Individual customers, called registrants, contract directly with registrars or their resellers, and the registrars, who are our direct customers, in turn register the

domain names with Verisign.

Changes in revenues are driven largely by changes in the number of new domain name registrations and the renewal rate for existing registrations as well as the impact of new and prior price increases, to the extent permitted by ICANN and the Department of Commerce (“DOC”).

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.

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.

com Registry Agreement, we are permitted to increase the price of a .com domain name by up to 7% in each of the final four years of each six-year period beginning on October 26, 2018.

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 increased 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, and from $8.39 to $8.97 effective September 1, 2022.

We have the contractual right to increase the fees for .

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A comparison of revenues is presented below:

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

Three Months Ended September 30, Nine Months Ended September 30,

2022 % Change 2021 2022 % Change 2021

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

June 30, 2022 % Change June 30, 2021

September 30, 2022 % Change September 30, 2021

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

174.2 million 1% 172.1 million

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 .

com and the price increase which became effective September 1, 2021.

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 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.

Revenues increased by $22.6 million and $68.4 million during the three and nine months ended September 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 the price increase that became effective September 1, 2021, and to a lesser extent, an increase in the domain name base for .

Demand for domain names 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 global economic uncertainty, has limited the demand for domain names 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 June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2022 % Change 2021 2022 % Change 2021

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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.

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.

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

Cost of revenues

1 unchanged sentence

A comparison of Cost of revenues is presented below:

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

Three Months Ended September 30, Nine Months Ended September 30,

2022 % Change 2021 2022 % Change 2021

1 unchanged sentence

Cost of revenues $ 50.0 5% $ 47.8 $ 150.2 5% $ 142.6

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.

Cost of revenues increased by $2.2 million and $7.6 million during the three and nine months ended September 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 June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2022 % Change 2021 2022 % Change 2021

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Research and development $ 21.0 7% $ 19.6 $ 64.2 8% $ 59.7

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.

Research and development expenses increased by $1.4 million and $4.5 million during the three and nine months ended September 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 June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2022 % Change 2021 2022 % Change 2021

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Selling, general and administrative $ 49.1 8% $ 45.6 $ 143.7 2% $ 140.3

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.

Selling, general and administrative expenses increased by $3.5 million during the three months ended September 30, 2022, compared to the same period last year, due to a combination of individually insignificant factors.

Selling, general and administrative expenses increased by $3.4 million during the nine months ended September 30, 2022, compared to the same period last year, primarily due to increases in equipment and software expenses and several other individually insignificant factors.

Equipment and software expenses increased by $2.6 million due to expenses related to network security and other software services.

Interest expense

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.

Interest expense remained consistent during the three months ended September 30, 2022.

Interest expense decreased by $7.9 million in the nine months ended September 30, 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 refinanced 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.

Non-operating income (loss), net increased by $4.8 million and $8.3 million in the three and nine months ended September 30, 2022, respectively, compared to the same periods last year, primarily due to an increase in interest income driven by higher interest rates on our investments in debt securities and 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 June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

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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.

The foreign effective tax rate increased in the three and nine months ended September 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.

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The following table presents our principal sources of liquidity:

June 30, December 31,

September 30, December 31,

(In millions)

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

As of June 30, 2022, all of our debt securities have contractual maturities of less than one year.

As of September 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 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.

During the three months ended September 30, 2022, we repurchased 1.5 million shares of our common stock for an aggregate cost of $275.5 million.

As of September 30, 2022, there was approximately $267.6 million remaining available for future share repurchases under the share repurchase program which has no expiration date.

Effective October 27, 2022, our Board of Directors authorized the repurchase of our common stock in the amount of $803.0 million, in addition to the $197.0 million that remained available for repurchases under the share repurchase program, for a total repurchase authorization of up to $1.00 billion under the program.

As of September 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 September 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 six months ended June 30, 2022 and 2021 were as follows:

Six Months Ended June 30,

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

Nine Months Ended September 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 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.

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

Cash received from customers increased primarily due to the impact of the .

com price increases that were effective on each of September 1, 2021 and September 1, 2022.

Cash received from interest on investments increased due to higher interest rates on our investments in debt securities.

Cash paid for interest decreased due to the lower interest rate on our 2031 Notes compared to the 2023 Notes which were refinanced 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 paid for income taxes increased primarily due to comparatively higher U.S.

federal, state, and foreign income taxes.

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 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.

We had net cash inflows from investing activities in the nine months ended September 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, 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.

Net cash used in financing activities increased during the nine months ended September 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