What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-04-27 compared with 2022-10-27 · 65 added, 77 removed, 124 unchanged (53% 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 the impact from the effects of the COVID-19 pandemic and 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.

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 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.

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We enable the security, stability, and resiliency of key internet infrastructure and services, including providing root zone maintainer services, operating two of the 13 global internet root servers, and providing registration services and authoritative resolution for the .

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

As of September 30, 2022, we had 174.2 million .com and .net registrations in the domain name base.

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

As of March 31, 2023, we had 174.8 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”), 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.

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 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 $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.

• We recorded revenues of $364.4 million during the three months ended March 31, 2023, an increase of 5% compared to the same period in 2022.

• We recorded operating income of $241.3 million during the three months ended March 31, 2023, an increase of 7% compared to the same period in 2022.

• As of March 31, 2023, we had 174.8 million .com and .net registrations in the domain name base, which represents a 0.1% increase from March 31, 2022, and a net increase of 1.0 million domain name registrations from December 31, 2022.

• During the three months ended March 31, 2023, we processed 10.3 million new domain name registrations for .com and .net compared to 10.2 million for the same period in 2022.

• The final .

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

net renewal rate for the fourth quarter of 2022 was 73.3% compared to 74.8% for the fourth quarter of 2021.

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

• 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.

• During the three months ended March 31, 2023, we repurchased 1.1 million shares of our common stock for an aggregate cost of $220.0 million.

As of March 31, 2023, there was approximately $638.8 million remaining available for future share repurchases under our share repurchase program.

• We generated cash flows from operating activities of $259.0 million during the three months ended March 31, 2023, compared to $207.1 million for the same period in 2022.

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

COVID-19 Update

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.

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,

2022 2021 2022 2021

Three Months Ended March 31,

Revenues 100.0 % 100.0 %

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Interest expense (5.2) (5.4)

Non-operating income (loss), net 1.5 — 0.7 (0.2)

Non-operating income, net 3.2 0.1

Income before income taxes 64.2 59.5

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Our revenues are primarily derived from registrations for domain names in the .com and .net domain name registries.

We also derive revenues from operating domain name registries and technical systems for several other TLDs, all of which are not significant in relation to our consolidated revenues.

We also derive revenues from operating domain name registries and technical systems for several other gTLDs and ccTLDs, all of which are not significant in relation to our consolidated revenues.

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, 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”).

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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.

com domain name registration from $8.39 to $8.97 effective September 1, 2022.

On February 9, 2023, we announced that we will increase the annual registry-level wholesale fee for each new and renewal .com domain name registration from $8.97 to $9.59, effective September 1, 2023.

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.

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.

Effective February 1, 2023, we increased the annual registry-level wholesale fee for each new and renewal .net domain name registration from $9.02 to $9.92.

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,

2022 % Change 2021 2022 % Change 2021

Three Months Ended March 31,

2023 % Change 2022

(Dollars in millions)

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

September 30, 2022 % Change September 30, 2021

March 31, 2023 % Change March 31, 2022

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

174.8 million —% 174.7 million

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 .

Revenues increased by $17.5 million during the three months ended March 31, 2023, as compared to the same period last year, primarily due to an increase in revenues from the operation of the registry for the .

com gTLD supported by the price increases that became effective September 1, 2022 and 2021.

This increase in revenue was partially offset by the elimination of revenue from the operation of the .

tv ccTLD which was transitioned to another service provider in the fourth quarter of 2022.

Demand for domain names has been primarily driven by continued internet growth and marketing activities carried out by us and our registrars.

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Europe, the Middle East and Africa (“EMEA”);

and certain other countries, including Canada, Australia, and Japan.

and certain other countries, including Canada, Japan, and Singapore.

The following table presents a comparison of our geographic revenues:

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

2022 % Change 2021 2022 % Change 2021

Three Months Ended March 31,

2023 % Change 2022

(Dollars in millions)

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Revenues in the U.S.

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

benefited from several such changes during the first quarter of 2023, 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.

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.

Revenues increased in the U.S.

and certain other countries during the three months ended March 31, 2023 compared to the same period last year.

Revenues in China remained consistent and revenues in EMEA declined in the three months ended March 31, 2023, compared to the same period last year, 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 September 30, Nine Months Ended September 30,

2022 % Change 2021 2022 % Change 2021

Three Months Ended March 31,

2023 % Change 2022

(Dollars in millions)

Cost of revenues $ 49.9 (2)% $ 50.7

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.

Cost of revenues decreased by $0.8 million during the three months ended March 31, 2023, compared to the same period last year, due to a combination of individually insignificant factors, including the elimination of the registry fees for the .

tv ccTLD which was transitioned to another service provider in the fourth quarter of 2022.

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,

2022 % Change 2021 2022 % Change 2021

Three Months Ended March 31,

2023 % Change 2022

(Dollars in millions)

Research and development $ 24.2 6% $ 22.9

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.

Research and development expenses increased by $1.3 million during the three months ended March 31, 2023, compared to the same period 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 September 30, Nine Months Ended September 30,

2022 % Change 2021 2022 % Change 2021

Three Months Ended March 31,

2023 % Change 2022

(Dollars in millions)

Selling, general and administrative $ 49.0 1% $ 48.5

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.

Selling, general and administrative expenses increased by $0.5 million during the three months ended March 31, 2023, compared to the same period last year, due to a combination of individually insignificant factors.

Interest expense

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 $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.

Interest expense remained consistent during the three months ended March 31, 2023 compared to the same period last year.

Non-operating income, net

Non-operating income, net increased by $11.0 million during the three months ended March 31, 2023, compared to the same period last year, primarily due to an increase in interest income driven by higher interest rates on our investments in debt securities.

Income tax expense

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

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

2022 2021 2022 2021

Three Months Ended March 31,

(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 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.

Liquidity and Capital Resources

The following table presents our principal sources of liquidity:

September 30, December 31,

March 31, December 31,

(In millions)

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

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

As of March 31, 2023, 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, 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.

During the three months ended March 31, 2023, we repurchased 1.1 million shares of our common stock for an aggregate cost of $220.0 million.

As of March 31, 2023, there was approximately $638.8 million remaining available for future share repurchases under the share repurchase program which has no expiration date.

As of March 31, 2023, 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, 2023, 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 2022 Form 10-K.

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

Nine Months Ended September 30,

In summary, our cash flows for the three months ended March 31, 2023 and 2022 were as follows:

Three Months Ended March 31,

(In millions)

Net cash provided by operating activities $ 259.0 $ 207.1

Net cash provided by (used in) investing activities 546.0 (215.1)

Net cash provided by investing activities 409.8 524.5

Net cash used in financing activities (222.5) (196.4)

Effect of exchange rate changes on cash, cash equivalents, and restricted cash (0.2) (0.1)

Net increase (decrease) in cash, cash equivalents, and restricted cash $ 337.1 $ (148.1)

Net increase in cash, cash equivalents, and restricted cash $ 446.1 $ 535.1

Cash flows from operating activities

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

Net cash provided by operating activities increased during the 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.

Net cash provided by operating activities increased during the three months ended March 31, 2023, compared to the same period last year, primarily due to increases in cash received from customers and cash received from interest on investments, partially offset by increases in cash paid for income taxes and cash paid to employees and vendors.

Cash received from customers increased primarily due to the .

com price increases that became effective on each of September 1, 2021 and September 1, 2022, changes in customer deposit balances, and higher new and renewal domain name registrations.

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 to comparatively higher U.S.

federal, state, and foreign income taxes.

Cash paid for income taxes increased primarily due to the timing of certain foreign income tax payments.

Cash paid to employees and vendors increased 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, and 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.

Net cash provided by investing activities decreased during the three months ended March 31, 2023, compared the same period last year, primarily due to a decrease in proceeds from maturities and sales of marketable securities, net of purchases of marketable securities.

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 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.

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

Net cash used in financing activities increased during the three months ended March 31, 2023, compared to the same period last year, primarily due an increase 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