What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-15 compared with 2023-02-17 · 70 added, 63 removed, 168 unchanged (44% of the section changed)

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Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

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 .

net top-level domains, which support the majority of global e-commerce.

As of December 31, 2022, we had approximately 173.8 million .

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 DNS and the internet by providing Root Zone Maintainer Services, operating two of the thirteen global internet root servers, and providing registration services and authoritative resolution for the .

net TLDs, which support the majority of global e-commerce.

As of December 31, 2023, we had 172.7 million .

net registrations in the domain name base.

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• We recorded operating income of $1,000.6 million during 2023, which represents an increase of 6% as compared to 2022.

• We finished 2022 with 173.8 million .com and .net registrations in the domain name base, which represents a 0.2% increase from December 31, 2021.

• We finished 2023 with 172.7 million .com and .net registrations in the domain name base, which represents a 0.6% decrease from December 31, 2022.

• During 2023, we processed 39.4 million new domain name registrations for .

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

• We repurchased 5.5 million shares of our common stock for an aggregate cost of $1.03 billion in 2022.

As of December 31, 2022, there was $858.8 million remaining for future share repurchases under the share repurchase program.

• We repurchased 4.2 million shares of our common stock for an aggregate cost of $882.8 million in 2023.

As of December 31, 2023, there was $1.12 billion remaining for future share repurchases under the share repurchase program.

• We generated cash flows from operating activities of $853.8 million in 2023, which represents an increase of 3% as compared to 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.

• During 2023, we recognized $69.3 million of income tax benefits related to a step-up in tax basis of certain non-U.S.

intellectual property, recognition of previously unrecognized income tax benefits as the related statutes of limitations lapsed, and a beneficial change in certain state income apportionment rules.

• On June 29, 2023, we renewed 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 February 8, 2024, we announced that we will increase the annual registry-level wholesale fee for each new and renewal .

com domain name registration from $9.59 to $10.26, effective September 1, 2024.

Critical Accounting Estimates

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however, due to the complexity of some of these uncertainties, the ultimate resolution may result in an outcome that is materially different from our current estimate of unrecognized tax benefits.

See Note 10, “Income Taxes” of our Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for further discussion of the $165.5 million deferred tax asset and corresponding income tax benefit recognized in the fourth quarter of 2021.

See Note 10, “Income Taxes” of our Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional information.

Results of Operations

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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 .com and .net registries we

receive a fee from registrars per annual registration that is determined pursuant to our agreements with ICANN.

For domain names registered in the .com and .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.

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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.

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.

On February 8, 2024, we announced that we will increase the annual registry-level wholesale fee for each new and renewal .

com domain name registration from $9.59 to $10.26, effective September 1, 2024.

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 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, 2024, we increased the annual registry-level wholesale fee for each new and renewal .

net domain name registration from $9.92 to $10.91.

All fees paid to us for .com and .net registrations are in U.S.

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172.7 million (1) % 173.8 million — % 173.4 million

Revenues increased by $97.3 million in 2022 compared to 2021, primarily due to an increase in revenues from the operation of the registry for the .

com gTLD driven by the price increases that became effective September 1, 2022 and 2021, and to a lesser extent, an increase in the domain name base for .

As discussed in prior periods, we believe that the effects of the COVID-19 pandemic initially led to an 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 increased demand appears to have subsided in 2022.

Additionally, revenues from the operation of the .

tv registry increased by $6.6 million in 2022 primarily due to the recognition of the remaining deferred revenue as the operation of the .

tv registry was transitioned to a new operator in November 2022 and upon completion of the transition, we had no remaining performance obligations to our customers.

Revenues increased in 2023 compared to 2022, primarily due to an increase in revenues from the operation of the registries for the .

net gTLDs driven by the .

com price increases that became effective September 1, 2023 and 2022 and the .

net price increase that became effective February 1, 2023.

The 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.

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 continue to do so in the future.

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 conditions, has limited the demand for domain names and may continue to do so in the future.

While the core value proposition for domain names remains strong, softness in demand primarily in China has recently led to a decline in our domain name base.

Geographic revenues

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

Revenues in the U.S.

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

Several such changes benefited revenues in the U.S.

and negatively impacted revenues in EMEA during the year ended December 31, 2023.

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

During 2022, revenues increased in all regions except EMEA, which declined 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 during 2023 compared to 2022 due to the lower demand noted above.

Cost of revenues

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Cost of revenues $ 197.3 (2) % $ 200.7 5 % $ 191.9

Cost of revenues increased by $8.8 million in 2022 compared to 2021 primarily due to a increases in compensation and benefits expenses, telecommunications expenses, allocated overhead expenses and several other individually insignificant factors.

Compensation and benefits expenses increased by $2.3 million as a result of an increase in expenses related to employee salaries.

Telecommunications expenses increased by $1.9 million due to an increase in network costs supporting our operations.

Allocated overhead expenses increased by $1.9 million primarily due to an increase in total allocable expenses.

Cost of revenues decreased in 2023 compared to 2022 primarily due to decreases in registry fees, depreciation expenses, and telecommunication expenses, partially offset by increases in compensation and benefits expenses and allocated overhead expenses.

Registry fees decreased by $4.3 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.

Depreciation expenses decreased by $2.7 million due to a decrease in capital expenditures in recent periods, particularly in 2022.

Telecommunication expenses decreased by $2.5 million primarily due to savings on renewals of colocation agreements.

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

Allocated overhead expenses increased by $2.4 million due to an increase in total allocable expenses.

Research and development

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Research and development $ 91.0 6 % $ 85.7 6 % $ 80.5

Research and development expenses increased by $5.2 million in 2022 compared to 2021 primarily due to a decrease in capitalized labor, an increase in allocated overhead expenses and a combination of several other individually insignificant factors.

Capitalized labor decreased by $1.5 million due to a shift in work from capital projects to certain non-capital projects and

maintenance of existing software products.

Allocated overhead expenses increased by $1.3 million primarily due to an increase in total allocable expenses.

Research and development expenses increased in 2023 compared to 2022 primarily due to a decrease in capitalized labor and a combination of several other individually insignificant factors.

Capitalized labor decreased by $2.9 million due to a shift in work from capital projects to certain non-capital projects and maintenance of existing software products.

Selling, general and administrative

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Selling, general and administrative $ 204.2 4 % $ 195.4 4 % $ 188.4

Selling, general and administrative expenses increased by $7.0 million in 2022 compared to 2021 primarily due to increases in stock-based compensation expenses, equipment and software expenses, compensation and benefits expenses, and several other individually insignificant factors, partially offset by an increase in overhead expenses allocated to other cost types.

Stock-based compensation expenses increased by $3.3 million due to higher projected achievement levels on certain performance-based RSU grants and increases in the total value of RSUs granted in 2022.

Equipment and software expenses increased by $3.1 million due to expenses related to network security and other software services.

Compensation and benefits expenses increased by $1.4 million due to increased employee salaries expenses and insurances related benefits expenses.

Overhead expenses allocated to other cost types increased by $3.1 million due to an increase in the total allocable expenses.

Selling, general and administrative expenses increased in 2023 compared to 2022 primarily due to increases in compensation and benefits expenses and several other individually insignificant factors, partially offset by an increase in overhead expenses allocated to other cost types.

Compensation and benefits expenses increased by $5.4 million due to salary increases and an increase in average headcount.

Among other individually insignificant factors, expenses related to travel, contractors and professional services and equipment and software, cumulatively increased by $4.7 million.

Overhead expenses allocated to other cost types increased by $3.0 million due to an increase in total allocable expenses.

Interest expense

Interest expense decreased by $8.0 million in 2022 compared to 2021 primarily due to the lower interest rate on our 2031 Notes compared to the 2023 Notes which were redeemed in June 2021.

Interest expense remained consistent during 2023 compared to 2022.

Non-operating income (loss), net

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

During 2021, we completed a transfer of intellectual property between certain non-U.S.

subsidiaries.

This intellectual property did not have any book value, however the transfer created an amortizable tax basis that resulted in the recognition of a $165.5 million deferred tax asset and a corresponding income tax benefit.

During 2023, we recognized $69.3 million of income tax benefits related to a step-up in tax basis of certain non-U.S.

intellectual property, recognition of previously unrecognized income tax benefits as the related statutes of limitations lapsed, and a beneficial change in certain state income apportionment rules.

As of December 31, 2023, we had deferred tax assets arising from deductible temporary differences, tax losses, and tax credits of $301.9 million, net of valuation allowances, but before the offset of certain deferred tax liabilities.

With the exception of deferred tax assets related to certain state and foreign net operating loss and foreign tax credit carryforwards, we believe it is more likely than not that the tax effects of the deferred tax liabilities, together with future taxable income, will be sufficient to fully recover the remaining deferred tax assets.

With the exception of

deferred tax assets related to intellectual property, certain state and foreign net operating loss and foreign tax credit carryforwards, we believe it is more likely than not that the tax effects of the deferred tax liabilities, together with future taxable income, will be sufficient to fully recover the remaining deferred tax assets.

Liquidity and Capital Resources

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Total $ 926.4 $ 980.4

The marketable securities consist primarily of debt securities issued by the U.S.

The marketable securities primarily consist of debt securities issued by the U.S.

Treasury meeting the criteria of our investment policy, which is focused on the preservation of our capital through investment in investment grade securities.

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For additional information on our investment portfolio, see Note 2, “Financial Instruments,” of our Notes to Consolidated Financial Statements in Item 8 of this Form 10-K.

In 2022, we repurchased 5.5 million shares of our common stock at an average stock price of $187.07 for an aggregate cost of $1.03 billion under our share repurchase program.

In 2021, we repurchased 3.3 million shares of our common stock at an average stock price of $215.16 for an aggregate cost of $700.0 million.

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 December 31, 2022, there was approximately $858.8 million remaining available for future share repurchases under the share repurchase program which has no expiration date.

As of December 31, 2022, we had $750.0 million principal amount outstanding of the 2.70% senior unsecured notes due 2031, $550.0 million principal amount outstanding of the 4.75% senior unsecured notes due 2027, $500.0 million principal amount outstanding of the 5.25% senior unsecured notes due 2025.

As of December 31, 2022, there were no borrowings outstanding under our $200.0 million unsecured revolving 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.

In 2023, we repurchased 4.2 million shares of our common stock at an average stock price of $210.28 for an aggregate cost of $882.8 million under our share repurchase program.

In 2022, we repurchased 5.5 million shares of our common stock at an average stock price of $187.07 for an aggregate cost of $1.03 billion.

As of December 31, 2023, there was approximately $1.12 billion remaining available for future share repurchases under the share repurchase program.

As of December 31, 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.

In December 2023, we entered into a new $200.0 million unsecured revolving credit facility which takes the place of our prior unsecured revolving credit facility.

As of December 31, 2023, there were no borrowings outstanding under this credit facility, which will expire in 2028.

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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Net cash provided by operating activities $ 853.8 $ 831.1 $ 807.2

Net cash provided by (used in) investing activities 355.7 (269.2) (72.3)

Net cash (used in) provided by investing activities (97.4) 355.7 (269.2)

Net cash used in financing activities (889.8) (1,035.8) (719.1)

Effect of exchange rate changes on cash, cash equivalents and restricted cash (0.1) (0.8) (0.7)

Net increase (decrease) in cash, cash equivalents and restricted cash $ 150.2 $ (181.8) $ (107.0)

Net (decrease) increase in cash, cash equivalents and restricted cash $ (133.5) $ 150.2 $ (181.8)

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 in 2022 compared to 2021 primarily due to increases in cash received from customers and interest on investments and a decrease in cash paid for interest , partially offset by an increase in cash paid for income taxes.

Net cash provided by operating activities increased in 2023 compared to 2022 primarily due to increases in cash received from customers and interest on investments, partially offset by an increase in cash paid for income taxes and cash paid to employees.

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 for income taxes increased primarily due to comparatively higher U.S.

federal, state, and foreign income taxes.

com price increases that were 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 taxable income and higher transition tax payments on accumulated foreign earnings resulting from the 2017 Tax Cuts and Jobs Act.

Cash paid to employees increased primarily due to salary increases.

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 2022, compared to net cash outflows in 2021, 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.

The 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 outflows from investing activities in 2023, compared to net cash inflows from investing activities in 2022, 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, proceeds from borrowings, repayment of borrowings, and our employee stock purchase plan.

Net cash used in financing activities increased in 2022 compared to 2021, 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 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 in 2023 compared to 2022 primarily due a decrease in share repurchases.

Dilution from RSUs

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In recent years, our stock repurchase program has more than offset the dilutive effect of RSU grants to employees;

however, we may reduce the level of our stock repurchases in the future as we may use our available cash for other purposes.

however, we may reduce the level of our stock repurchases in the future if and as we use our available cash for other purposes.

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-K

Item 7. Management’s Discussion and Analysis