VERISIGN INC/CA 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion in conjunction with the 2023 Form 10-K and the interim unaudited Condensed Consolidated Financial Statements and related notes included in Part I, Item I of this Quarterly Report on Form 10-Q. 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 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. 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 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 2024. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update publicly or revise such statements, whether as a result of new information, future events, or otherwise, except as required by law. For purposes of this Quarterly Report on Form 10-Q, the terms “Verisign,” “the Company,” “we,” “us,” and “our” refer to VeriSign, Inc. and its consolidated subsidiaries. Overview 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 thirteen global internet root servers, and providing registration services and authoritative resolution for the . com and . net generic top-level domains (“gTLDs”), which support the majority of global e-commerce. As of March 31, 2024, we had 172.5 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. The number of domain name registrations under our management may be negatively impacted 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 $384.3 million during the three months ended March 31, 2024, which represents an increase of 5% compared to the same period in 2023. • We recorded operating income of $258.9 million during the three months ended March 31, 2024, which represents an increase of 7% compared to the same period in 2023. • As of March 31, 2024, we had 172.5 million .com and .net registrations in the domain name base, which represents a 1.3% decrease from March 31, 2023, and a net decrease of 0.3 million domain name registrations from December 31, 2023. • During the three months ended March 31, 2024, we processed 9.5 million new domain name registrations for .com and .net compared to 10.3 million for the same period in 2023. • The final . com and . net renewal rate for the fourth quarter of 2023 was 73.2% compared to 73.3% for the fourth 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, 2024, we repurchased 1.3 million shares of our common stock for an aggregate cost of $260.4 million. As of March 31, 2024, there was $859.6 million remaining for future share repurchases under the share repurchase program. • We generated cash flows from operating activities of $257.3 million during the three months ended March 31, 2024, compared to $259.0 million for the same period in 2023. 12 Table of Contents 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. The zone counts and information on how to obtain access to the zone files can be found at https://www.Verisign.com/zone. The domain name base is the active zone plus the number of domain names that are registered but not configured for use in the respective top-level domain zone file plus the number of domain names that are in a client or server hold status. The domain name base may also reflect compensated or uncompensated judicial or administrative actions to add or remove from the active zone an immaterial number of domain names. These files and the related summary data are updated daily. The update times may vary each day. The number of domain names provided in this Form 10-Q are as of midnight of the date reported. Results of Operations The following table presents information regarding our results of operations as a percentage of revenues: Three Months Ended March 31, 2024 2023 Revenues 100.0 % 100.0 % Costs and expenses: Cost of revenues 12.8 13.7 Research and development 6.4 6.6 Selling, general and administrative 13.4 13.5 Total costs and expenses 32.6 33.8 Operating income 67.4 66.2 Interest expense (4.9) (5.2) Non-operating income, net 3.6 3.2 Income before income taxes 66.1 64.2 Income tax expense (15.6) (15.2) Net income 50.5 % 49.0 % Revenues 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 gTLDs and one ccTLD, 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. 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. New registrations and the renewal rate for existing registrations are impacted by continued growth in online advertising, e-commerce, and the number of internet users, as well as marketing activities carried out by us and our registrars. We also offer promotional incentive-based discount programs to registrars based upon market conditions and the business environment in which the registrars operate. Under the . com Registry Agreement, we are permitted to increase the price of a .com domain name registration by up to 7% in each of the final four years of each six-year period beginning on October 26, 2018. We increased 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. Under the .net Registry Agreement which renewed in June 2023, we are permitted to increase the price of .net domain name registrations by up to 10% each year during the term of our agreement with ICANN, through June 30, 2029. We increased 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 and from $9.92 to $10.91 effective February 1, 2024. All fees paid to us for .com and .net registrations are in U.S. dollars. 13 Table of Contents A comparison of revenues is presented below: Three Months Ended March 31, 2024 % Change 2023 (Dollars in millions) Revenues $ 384.3 5% $ 364.4 The following table compares the .com and .net domain name registrations in the domain name base: March 31, 2024 % Change March 31, 2023 .com and .net domain name registrations in the domain name base 172.5 million (1)% 174.8 million Revenues increased during the three months ended March 31, 2024, 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, 2023 and 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 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 We generate revenues in the U.S.; Europe, the Middle East and Africa (“EMEA”); China; and certain other countries, including Canada, Japan, and Singapore. The following table presents a comparison of our geographic revenues: Three Months Ended March 31, 2024 % Change 2023 (Dollars in millions) U.S. $ 255.3 5% $ 242.8 EMEA 60.3 10% 55.0 China 20.7 (18)% 25.1 Other 48.0 16% 41.5 Total revenues $ 384.3 $ 364.4 Revenues in the table above are attributed to the country of domicile and the respective regions in which our registrars are located; however, this may differ from the regions where the registrars operate or where registrants are located. Revenue growth for each region may be impacted by registrars reincorporating, relocating, or from acquisitions or changes in affiliations of resellers. 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., EMEA and certain other countries, while revenues from registrars based in China declined in the three months ended March 31, 2024 compared to the same period of the prior year due to the lower demand noted above. Cost of revenues Cost of revenues consist primarily of salaries and employee benefits expenses for our personnel who manage the operational systems, depreciation expenses, operational costs associated with the delivery of our services, fees paid to ICANN, customer support and training, costs of facilities and computer equipment used in these activities, telecommunications expense and allocations of indirect costs such as corporate overhead. A comparison of cost of revenues is presented below: Three Months Ended March 31, 2024 % Change 2023 (Dollars in millions) Cost of revenues $ 49.1 (2)% $ 49.9 Cost of revenues decreased slightly during the three months ended March 31, 2024, compared to the same period last year, due to a combination of individually insignificant factors. 14 Table of Contents Research and development Research and development expenses consist primarily of costs related to research and development personnel, including salaries and other personnel-related expenses, consulting fees, facilities costs, computer and communications equipment, support services used in our service and technology development, and allocations of indirect costs such as corporate overhead. A comparison of research and development expenses is presented below: Three Months Ended March 31, 2024 % Change 2023 (Dollars in millions) Research and development $ 24.8 3% $ 24.2 Research and development expenses increased slightly during the three months ended March 31, 2024, compared to the same period last year, due to a combination of individually insignificant factors. Selling, general and administrative Selling, general and administrative expenses consist primarily of salaries and other personnel-related expenses for our executive, administrative, legal, finance, information technology, human resources, sales, and marketing personnel, travel and related expenses, trade shows, costs of computer and communications equipment and support services, consulting and professional service fees, costs of marketing programs, costs of facilities, management information systems, support services, and certain tax and license fees, offset by allocations of indirect costs such as facilities and shared services expenses to other cost types. A comparison of selling, general and administrative expenses is presented below: Three Months Ended March 31, 2024 % Change 2023 (Dollars in millions) Selling, general and administrative $ 51.5 5% $ 49.0 Selling, general and administrative expenses increased during the three months ended March 31, 2024, 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 March 31, 2024 compared to the same period last year. Non-operating income, net Non-operating income, net increased during the three months ended March 31, 2024, 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 March 31, 2024 2023 (Dollars in millions) Income tax expense $ 59.9 $ 55.1 Effective tax rate 24 % 24 % The effective tax rate for each of the periods in the table above differed from the statutory federal rate of 21%, due to state income taxes and U.S. taxes on foreign earnings, net of foreign tax credits, partially offset by a lower foreign effective tax rate. 15 Table of Contents Liquidity and Capital Resources The following table presents our principal sources of liquidity: March 31, December 31, 2024 2023 (In millions) Cash and cash equivalents $ 731.8 $ 240.1 Marketable securities 192.9 686.3 Total $ 924.7 $ 926.4 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. The cash equivalents consist of amounts invested in money market funds, time deposits and U.S. Treasury bills purchased with original maturities of three months or less. As of March 31, 2024, 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. 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 March 31, 2024, we repurchased 1.3 million shares of our common stock for an aggregate cost of $260.4 million. As of March 31, 2024, there was approximately $859.6 million remaining available for future share repurchases under the share repurchase program. As of March 31, 2024, 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 March 31, 2024, there were no borrowings outstanding under our $200.0 million credit facility that 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. We regularly assess our cash management approach and activities in view of our current and potential future needs. Our cash requirements have not changed materially since the 2023 Form 10-K. In summary, our cash flows for the three months ended March 31, 2024 and 2023 were as follows: Three Months Ended March 31, 2024 2023 (In millions) Net cash provided by operating activities $ 257.3 $ 259.0 Net cash provided by investing activities 496.4 409.8 Net cash used in financing activities (261.6) (222.5) Effect of exchange rate changes on cash, cash equivalents, and restricted cash (0.4) (0.2) Net increase in cash, cash equivalents, and restricted cash $ 491.7 $ 446.1 Cash flows from operating activities Our largest source of operating cash flows is cash collections from our customers. 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 decreased slightly during the three months ended March 31, 2024, compared to the same period last year, primarily due to an increase in cash paid to employees and vendors, partially offset by an increase in cash received from customers. Cash paid to employees and vendors increased primarily due to the timing of payments and an increase in operating expenses. Cash received from customers increased primarily due to the . com price increase that became effective on September 1, 2023 and the . net price increase that became effective on February 1, 2024. 16 Table of Contents 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 increased during the three months ended March 31, 2024, compared to 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. 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, 2024, compared to the same period last year, primarily due to an increase in share repurchases. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no significant changes in our market risk exposures since December 31, 2023.