What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-07-27 compared with 2023-04-27 · 69 added, 53 removed, 136 unchanged (47% of the section changed)

14 unchanged sentences

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.

As of June 30, 2023, we had 174.4 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 $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.

• We recorded revenues of $372.0 million and $736.4 million during the three and six months ended June 30, 2023, an increase of 6% and 5%, respectively, compared to the same periods in 2022.

• We recorded operating income of $248.7 million and $490.0 million during the three and six months ended June 30, 2023, an increase of 5% and 6%, respectively, compared to the same periods in 2022.

• As of June 30, 2023, we had 174.4 million .com and .net registrations in the domain name base, which represents a 0.1% increase from June 30, 2022, and a net decrease of 0.3 million domain name registrations from March 31, 2023.

• During the three months ended June 30, 2023, we processed 10.2 million new domain name registrations for .com and .net compared to 10.1 million for the same period in 2022.

• The final .

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

net renewal rate for the first quarter of 2023 was 75.5% compared to 75.9% for the first quarter of 2022.

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

• 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.

• During the three months ended June 30, 2023, we repurchased 1.0 million shares of our common stock for an aggregate cost of $220.0 million.

Effective July 27, 2023, the Company’s Board of Directors authorized the repurchase of its common stock in the amount of $1.14 billion, in addition to the $356.1 million that remained available for repurchases under the share repurchase program, for a total repurchase authorization of up to $1.50 billion under the program.

• We generated cash flows from operating activities of $404.3 million during the six months ended June 30, 2023, compared to $352.0 million for the same period in 2022.

• On June 30, 2023, we announced the renewal of the .

net Registry Agreement with ICANN, pursuant to which we will remain the sole registry operator for the .net registry through June 30, 2029.

• On July 27, 2023, we announced that we will increase the annual registry-level wholesale fee for each new and renewal .

net domain name registration from $9.92 to $10.91, effective February 1, 2024.

Pursuant to our agreements with ICANN, we make available files containing all active domain names registered in the .com and .net registries.

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

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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,

2023 2022 2023 2022

Revenues 100.0 % 100.0 % 100.0 % 100.0 %

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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 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.

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.

In June 2023, we entered into a renewal of the .

net Registry Agreement with ICANN, pursuant to which we will remain the sole registry operator for the .net registry through June 30, 2029.

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, 2029.

On July 27, 2023, we announced that we will increase the annual registry-level wholesale fee for each new and renewal .net domain name registration from $9.92 to $10.91, effective February 1, 2024.

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,

2023 % Change 2022

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

2023 % Change 2022 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:

March 31, 2023 % Change March 31, 2022

June 30, 2023 % Change June 30, 2022

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

174.4 million —% 174.3 million

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 .

Revenues increased during the three and six months ended June 30, 2023, as compared to the same periods 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.

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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 2023 and beyond.

The core value proposition for domain names remains strong, however, softness in demand primarily in China has recently limited the overall growth in our domain name base.

Geographic revenues

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The following table presents a comparison of our geographic revenues:

Three Months Ended March 31,

2023 % Change 2022

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

2023 % Change 2022 2023 % Change 2022

(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 the first quarter of 2023, while revenues in EMEA were negatively impacted.

Several such changes benefited revenues in the U.S.

and negatively impacted revenues in EMEA during the three and six months ended June 30, 2023.

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

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.

The majority of our revenue growth was generated from registrars based in the U.S.

and certain other countries, while revenues from registrars based in China declined in both the three and six months ended June 30, 2023 compared to the same periods of the prior year due to the lower demand noted above.

Cost of revenues

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A comparison of cost of revenues is presented below:

Three Months Ended March 31,

2023 % Change 2022

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

2023 % Change 2022 2023 % Change 2022

(Dollars in millions)

Cost of revenues $ 50.3 2% $ 49.5 $ 100.2 —% $ 100.2

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.

Cost of revenues increased slightly during the three months ended June 30, 2023, compared to the same period last year, due to a combination of individually insignificant factors.

Cost of revenues remained consistent during the six months ended June 30, 2023, compared to the same period last year, due to an increase in compensation and benefit expenses that was offset by a decrease in registry fees.

Compensation and benefit expenses increased by $2.6 million due to salary increases and an increase in average headcount.

Registry fees decreased by $2.5 million due to the transition of the operation of the registry for the .tv ccTLD 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 March 31,

2023 % Change 2022

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

2023 % Change 2022 2023 % Change 2022

(Dollars in millions)

Research and development $ 22.2 9% $ 20.3 $ 46.4 7% $ 43.2

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.

Research and development expenses increased during the three and six months ended June 30, 2023, compared to the same periods last year, due to a combination of individually insignificant factors.

Selling, general and administrative

1 unchanged sentence

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

Three Months Ended March 31,

2023 % Change 2022

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

2023 % Change 2022 2023 % Change 2022

(Dollars in millions)

Selling, general and administrative $ 50.8 10% $ 46.1 $ 99.8 5% $ 94.6

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.

Selling, general and administrative expenses increased during the three months ended June 30, 2023, compared to the same period last year, primarily due to a $2.7 million increase in compensation and benefit expenses as a result of salary increases, an increase in average headcount, and higher expenses for certain employee benefits.

Selling, general and administrative expenses increased during the six months ended June 30, 2023, compared to the same period last year, primarily due to a $3.4 million increase in compensation and benefit expenses as a result of salary increases, an increase in average headcount, and higher expenses for certain employee benefits.

Interest expense

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

Interest expense remained consistent during the three and six months ended June 30, 2023 compared to the same periods 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.

Non-operating income, net increased during the three and six months ended June 30, 2023, respectively, compared to the same periods last year, primarily due to increases in interest income of $9.9 million and $20.3 million, respectively, that were 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 March 31,

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

2023 2022 2023 2022

(Dollars in millions)

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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, 2023, all of our debt securities have contractual maturities of less than one year.

As of June 30, 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 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.

During the three months ended June 30, 2023, we repurchased 1.0 million shares of our common stock for an aggregate cost of $220.0 million.

As of June 30, 2023, we had $750.0 million principal amount outstanding 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, 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 three months ended March 31, 2023 and 2022 were as follows:

Three Months Ended March 31,

In summary, our cash flows for the six months ended June 30, 2023 and 2022 were as follows:

Six Months Ended June 30,

(In millions)

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Effect of exchange rate changes on cash, cash equivalents, and restricted cash (0.2) (0.7)

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

Net (decrease) increase in cash, cash equivalents, and restricted cash $ (29.8) $ 382.8

Cash flows from operating activities

1 unchanged sentence

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, 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.

Net cash provided by operating activities increased during the six months ended June 30, 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.

com price increase that became effective on September 1, 2022, changes in customer deposit balances, the .

net price increase that became effective on February 1, 2023, and slightly 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 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 paid for income taxes increased primarily due to comparatively higher U.S.

federal income taxes.

Cash paid to employees and vendors increased primarily due to an increase in operating expenses.

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.

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.

Net cash provided by investing activities decreased during the six months ended June 30, 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 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.

Net cash used in financing activities decreased during the six months ended June 30, 2023, compared to the same period last year, primarily due to a decrease in share repurchases.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis