What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-10-26 compared with 2023-07-27 · 56 added, 56 removed, 149 unchanged (43% of the section changed)

5 unchanged sentences

Our actual results may differ significantly from those projected in the forward-looking statements.

Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” in Part I, Item 1A of the 2022 Form 10-K.

Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q.

You should also carefully review the risks described in other documents we file from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q or Current Reports on Form 8-K that we file in 2023.

3 unchanged sentences

and its consolidated subsidiaries.

We are a global provider of domain name registry services and internet infrastructure, enabling internet navigation for many of the world’s most recognized domain names.

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 .

We are a global provider of critical internet infrastructure and domain name registry services, enabling internet navigation for many of the world’s most recognized domain names.

We help enable the security, stability, and resiliency of the Domain Name System and the internet by providing root zone maintainer services, operating two of the 13 global internet root servers, and providing registration services and authoritative resolution for the .

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

As of June 30, 2023, we had 174.4 million .com and .net registrations in the domain name base.

As of September 30, 2023, we had 173.9 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.

2 unchanged sentences

Business Highlights and Trends

• 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.

• We recorded revenues of $376.3 million and $1,112.7 million during the three and nine months ended September 30, 2023, an increase of 5% compared to the same periods in 2022.

• We recorded operating income of $254.3 million and $744.3 million during the three and nine months ended September 30, 2023, an increase of 7% compared to the same periods in 2022.

• As of September 30, 2023, we had 173.9 million .com and .net registrations in the domain name base, which represents a 0.1% decrease from September 30, 2022, and a net decrease of 0.5 million domain name registrations from June 30, 2023.

• During the three months ended September 30, 2022 and 2023, we processed 9.9 million new domain name registrations for .com and .net .

• The final .

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

net renewal rate for the second quarter of 2023 was 73.4% compared to 73.8% for the second quarter of 2022.

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

• 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.

• Effective July 27, 2023, our Board of Directors authorized the repurchase of our 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.

• During the three months ended September 30, 2023, we repurchased 1.1 million shares of our common stock for an aggregate cost of $219.9 million.

As of September 30, 2023, there was approximately $1.34 billion remaining available for future share repurchases under our share repurchase program.

• We generated cash flows from operating activities of $649.6 million during the nine months ended September 30, 2023, compared to $614.2 million for the same period in 2022.

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

10 unchanged sentences

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,

2023 2022 2023 2022

21 unchanged sentences

We increased 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.

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.

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

2 unchanged sentences

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.

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 June 30, Six Months Ended June 30,

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

2023 % Change 2022 2023 % Change 2022

2 unchanged sentences

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

June 30, 2023 % Change June 30, 2022

September 30, 2023 % Change September 30, 2022

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

173.9 million —% 174.2 million

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 .

Revenues increased during the three and nine months ended September 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.

3 unchanged sentences

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.

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

Geographic revenues

3 unchanged sentences

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,

2023 % Change 2022 2023 % Change 2022

9 unchanged sentences

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.

and negatively impacted revenues in EMEA during the three and nine months ended September 30, 2023.

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

The majority of our revenue growth 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.

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

2023 % Change 2022 2023 % Change 2022

1 unchanged sentence

Cost of revenues $ 48.6 (3)% $ 50.0 $ 148.8 (1)% $ 150.2

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.

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

Cost of revenues decreased slightly during the nine months ended September 30, 2023, compared to the same period last year, due to a decrease in registry fees that was partially offset by an increase in compensation and benefit expenses.

Registry fees decreased by $3.7 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.

Compensation and benefit expenses increased by $3.1 million due to salary increases and an increase in average headcount.

Research and development

1 unchanged sentence

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,

2023 % Change 2022 2023 % Change 2022

1 unchanged sentence

Research and development $ 21.7 4% $ 21.0 $ 68.1 6% $ 64.2

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.

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

Research and development expenses increased during the nine months ended September 30, 2023, compared to the same period last year, primarily due to a $2.3 million decrease in capitalized labor as a result of a shift in work from capital projects to certain non-capital projects and maintenance of existing software products.

Selling, general and administrative

1 unchanged sentence

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,

2023 % Change 2022 2023 % Change 2022

1 unchanged sentence

Selling, general and administrative $ 51.7 5% $ 49.1 $ 151.5 5% $ 143.7

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.

Selling, general and administrative expenses increased during the three months ended September 30, 2023, compared to the same period last year, due to a combination of individually insignificant factors.

Selling, general and administrative expenses increased during the nine months ended September 30, 2023, compared to the same period last year, due to increases in compensation and benefit expenses and other individually insignificant factors.

Compensation and benefit expenses increased by $3.9 million due to salary increases and an increase in average headcount.

Interest expense

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

Interest expense remained consistent during the three and nine months ended September 30, 2023 compared to the same periods last year.

Non-operating income, net

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.

See Note 8, “Non-operating Income, Net” of our Notes to Consolidated Financial Statements in Item 1 of this Form 10-Q.

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,

2023 2022 2023 2022

6 unchanged sentences

The following table presents our principal sources of liquidity:

June 30, December 31,

September 30, December 31,

(In millions)

6 unchanged sentences

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

As of June 30, 2023, all of our debt securities have contractual maturities of less than one year.

As of September 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 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.

Effective July 27, 2023, our Board of Directors authorized the repurchase of our 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.

During the three months ended September 30, 2023, we repurchased 1.1 million shares of our common stock for an aggregate cost of $219.9 million.

As of September 30, 2023, there was approximately $1.34 billion remaining available for future share repurchases under our share repurchase program.

As of September 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 September 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.

1 unchanged sentence

Our cash requirements have not changed materially since the 2022 Form 10-K.

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

Six Months Ended June 30,

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

Nine Months Ended September 30,

(In millions)

Net cash provided by operating activities $ 649.6 $ 614.2

Net cash provided by investing activities 11.5 579.4

Net cash (used in) provided by investing activities (201.5) 546.0

Net cash used in financing activities (663.5) (821.7)

4 unchanged sentences

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, 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 nine months ended September 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 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.

com price increase that became effective on September 1, 2022 and September 1, 2023, changes in customer deposit balances, and the .

net price increase that became effective on February 1, 2023.

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 comparatively higher U.S.

federal income taxes.

Cash paid for income taxes increased primarily due to comparatively higher taxable income and higher transition tax payments on accumulated foreign earnings resulting from the 2017 Tax Cuts and Jobs Act.

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

1 unchanged sentence

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 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.

We had net cash outflows from investing activities in the nine months ended September 30, 2023, compared to net cash inflows from investing activities during 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 and an increase in purchases of property and equipment, primarily related to the purchase of a building to be used as our future corporate headquarters.

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

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

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

1 unchanged sentence

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