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Table of Contents

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________ 
FORM 10-Q
 ____________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                 
Commission File Number: 000-23593 
VERISIGN, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
94-3221585
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
12061 Bluemont Way,
 

Reston,
Virginia
 
20190
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (703948-3200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.001 par value per share
VRSN
Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒     No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes ☒     No   ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes      No  ☒ 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Class
 
Shares Outstanding as of October 18, 2019
Common stock, $0.001 par value per share
 
117,409,010

 
 
 
 
 


Table of Contents

TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 

2

Table of Contents

PART I—FINANCIAL INFORMATION
 
ITEM 1.     FINANCIAL STATEMENTS

VERISIGN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)
 
September 30,
2019
 
December 31,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
109,288

 
$
357,415

Marketable securities
1,120,723

 
912,254

Other current assets
68,135

 
47,365

Total current assets
1,298,146

 
1,317,034

Property and equipment, net
250,159

 
253,905

Goodwill
52,527

 
52,527

Deferred tax assets
100,564

 
104,992

Deposits to acquire intangible assets
145,000

 
145,000

Other long-term assets
40,334

 
41,046

Total long-term assets
588,584

 
597,470

Total assets
$
1,886,730

 
$
1,914,504

LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
200,361

 
$
215,208

Deferred revenues
760,517

 
732,382

Total current liabilities
960,878

 
947,590

Long-term deferred revenues
281,735

 
285,720

Senior notes
1,786,935

 
1,785,047

Long-term tax and other liabilities
309,101

 
281,621

Total long-term liabilities
2,377,771

 
2,352,388

Total liabilities
3,338,649

 
3,299,978

Commitments and contingencies

 

Stockholders’ deficit:
 
 
 
Preferred stock—par value $.001 per share; Authorized shares: 5,000; Issued and outstanding shares: none

 

Common stock—par value $.001 per share; Authorized shares: 1,000,000; Issued shares: 353,084 at September 30, 2019 and 352,325 at December 31, 2018; Outstanding shares: 117,705 at September 30, 2019 and 120,037 at December 31, 2018
353

 
352

Additional paid-in capital
15,175,962

 
15,706,774

Accumulated deficit
(16,625,815
)
 
(17,089,789
)
Accumulated other comprehensive loss
(2,419
)
 
(2,811
)
Total stockholders’ deficit
(1,451,919
)
 
(1,385,474
)
Total liabilities and stockholders’ deficit
$
1,886,730

 
$
1,914,504


See accompanying Notes to Condensed Consolidated Financial Statements.

3

Table of Contents

VERISIGN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except per share data)
(Unaudited)
 
  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Revenues
$
308,421

 
$
305,777

 
$
921,118

 
$
907,517

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenues
44,443

 
48,249

 
134,013

 
143,766

Sales and marketing
9,857

 
13,868

 
32,775

 
47,712

Research and development
14,619

 
13,712

 
45,704

 
42,842

General and administrative
33,886

 
34,951

 
101,065

 
99,771

Total costs and expenses
102,805

 
110,780

 
313,557

 
334,091

Operating income
205,616

 
194,997

 
607,561

 
573,426

Interest expense
(22,633
)
 
(22,631
)
 
(67,899
)
 
(92,211
)
Non-operating income, net
10,498

 
5,935

 
34,137

 
14,399

Income before income taxes
193,481

 
178,301

 
573,799

 
495,614

Income tax expense
(39,568
)
 
(40,621
)
 
(109,825
)
 
(95,320
)
Net income
153,913

 
137,680

 
463,974

 
400,294

Other comprehensive income (loss)
308

 
(322
)
 
392

 
(62
)
Comprehensive income
$
154,221

 
$
137,358

 
$
464,366

 
$
400,232

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
1.30

 
$
1.13

 
$
3.90

 
$
3.60

Diluted
$
1.30

 
$
1.13

 
$
3.89

 
$
3.25

Shares used to compute earnings per share
 
 
 
 
 
 
 
Basic
118,194

 
121,682

 
118,966

 
111,046

Diluted
118,569

 
122,261

 
119,410

 
123,079

See accompanying Notes to Condensed Consolidated Financial Statements.

4

Table of Contents

VERISIGN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(In thousands, except par value)
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Total stockholders’ deficit, beginning of period
$
(1,425,167
)
 
$
(1,380,989
)
 
$
(1,385,474
)
 
$
(1,260,271
)
 
 
 
 
 
 
 
 
Common stock
 
 
 
 
 
 
 
Beginning balance
353

 
352

 
352

 
325

Conversion of Subordinated Convertible Debentures

 

 

 
26

Issuance of common stock under stock plans

 

 
1

 
1

Balance, end of period:
353

 
352

 
353

 
352

 
 
 
 
 
 
 
 
Additional paid-in capital
 
 
 
 
 
 
 
Beginning balance
15,356,935

 
16,031,004

 
15,706,774

 
16,437,135

Conversion of Subordinated Convertible Debentures

 

 

 
(159,618
)
Stock-based compensation expense
13,081

 
15,710

 
39,522

 
42,985

Issuance of common stock under stock plans
4,899

 
5,026

 
13,151

 
12,835

Repurchase of common stock
(198,953
)
 
(178,206
)
 
(583,485
)
 
(459,803
)
Balance, end of period
15,175,962

 
15,873,534

 
15,175,962

 
15,873,534

 
 
 
 
 
 
 
 
Accumulated deficit
 
 
 
 
 
 
 
Beginning balance
(16,779,728
)
 
(17,409,664
)
 
(17,089,789
)
 
(17,694,790
)
Net income
153,913

 
137,680

 
463,974

 
400,294

Cumulative adjustment upon adoption of ASU 2014-09

 

 

 
22,512

Balance, end of period
(16,625,815
)
 
(17,271,984
)
 
(16,625,815
)
 
(17,271,984
)
 
 
 
 
 
 
 
 
Accumulated other comprehensive loss
 
 
 
 
 
 
 
Beginning balance
(2,727
)
 
(2,681
)
 
(2,811
)
 
(2,941
)
Other comprehensive income (loss)
308

 
(322
)
 
392

 
(62
)
Balance, end of period
(2,419
)
 
(3,003
)
 
(2,419
)
 
(3,003
)
 
 
 
 
 
 
 
 
Total stockholders’ deficit, end of period
$
(1,451,919
)
 
$
(1,401,101
)
 
$
(1,451,919
)
 
$
(1,401,101
)
See accompanying Notes to Condensed Consolidated Financial Statements.


5

Table of Contents

VERISIGN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 

 
Nine Months Ended
September 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
463,974

 
$
400,294

Adjustments to reconcile net income to net cash provided by operating activities:

 
 
Depreciation of property and equipment
34,327

 
36,450

Stock-based compensation
38,237

 
41,406

Amortization of discount on investments in debt securities
(10,271
)
 
(12,746
)
Other, net
2,126

 
14,752

Changes in operating assets and liabilities:
 
 
 
Other assets
(12,123
)
 
(6,917
)
Accounts payable and accrued liabilities
(7,110
)
 
(29,478
)
Deferred revenues
24,563

 
24,844

Net deferred income taxes and other long-term tax liabilities
26,571

 
10,662

Net cash provided by operating activities
560,294

 
479,267

Cash flows from investing activities:
 
 
 
Proceeds from maturities and sales of marketable securities
1,523,862

 
3,081,702

Purchases of marketable securities
(1,721,661
)
 
(2,067,498
)
Purchases of property and equipment
(31,498
)
 
(29,597
)
Other investing activities
(8,530
)
 
(160
)
Net cash (used in) provided by investing activities
(237,827
)
 
984,447

Cash flows from financing activities:
 
 
 
Repayment of principal on subordinated convertible debentures

 
(1,250,009
)
Proceeds from employee stock purchase plan
13,152

 
12,836

Repurchases of common stock
(583,485
)
 
(459,803
)
Net cash used in financing activities
(570,333
)
 
(1,696,976
)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(208
)
 
(985
)
Net decrease in cash, cash equivalents, and restricted cash
(248,074
)
 
(234,247
)
Cash, cash equivalents, and restricted cash at beginning of period
366,753

 
475,139

Cash, cash equivalents, and restricted cash at end of period
$
118,679

 
$
240,892

Supplemental cash flow disclosures:


 


Cash paid for interest
$
57,074

 
$
87,184

Cash paid for income taxes, net of refunds received
$
75,197

 
$
84,433

See accompanying Notes to Condensed Consolidated Financial Statements.

6

Table of Contents

VERISIGN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
Interim Financial Statements
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared by VeriSign, Inc. (“Verisign” or the “Company”) in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, therefore, do not include all information and notes normally provided in audited financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and other adjustments) considered necessary for a fair presentation have been included. The results of operations for any interim period are not necessarily indicative of, nor comparable to, the results of operations for any other interim period or for a full fiscal year. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related notes contained in Verisign’s Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”) filed with the SEC on February 15, 2019.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform to current period presentation. Such reclassifications have no effect on net income as previously reported.
Adoption of New Accounting Standards
Effective January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-02, Leases, and several related amendments, issued by the Financial Accounting Standards Board, collectively codified under Accounting Standards Codification (“ASC”) 842, Leases. ASC 842 requires most operating leases to be reported on the balance sheet as a lease liability and a right-of-use asset. This standard was applied as of the effective date of January 1, 2019, and therefore prior period amounts were not adjusted. The adoption of ASC 842 did not have a material impact on the Company’s consolidated financial statements.
Note 2.  Financial Instruments
Cash, Cash Equivalents, and Marketable Securities
The following table summarizes the Company’s cash, cash equivalents, and marketable securities and the fair value categorization of the financial instruments measured at fair value on a recurring basis:
 
September 30,
 
December 31,
 
2019
 
2018
 
(In thousands)
Cash
$
28,119

 
$
37,190

Time deposits
4,884

 
3,810

Money market funds (Level 1)
85,676

 
120,832

Debt securities issued by the U.S. Treasury (Level 1)
1,120,723

 
1,117,175

Total
$
1,239,402

 
$
1,279,007

 
 
 
 
Cash and cash equivalents
$
109,288

 
$
357,415

Restricted cash (included in Other long-term assets)
9,391

 
9,338

Total Cash, cash equivalents, and restricted cash
118,679

 
366,753

Marketable securities
1,120,723

 
912,254

Total
$
1,239,402

 
$
1,279,007


The fair value of the debt securities held as of September 30, 2019 was $1.12 billion, including $0.4 million of gross and net unrealized gains. All of the debt securities held as of September 30, 2019 are scheduled to mature in less than one year.
Fair Value Measurements
The fair value of the Company’s investments in money market funds approximates their face value. Such instruments are included in Cash and cash equivalents. The fair value of the debt securities consisting of U.S. Treasury bills is based on their quoted market prices. Debt securities purchased with original maturities in excess of three months are included in Marketable securities. The fair value of all of these financial instruments are classified as Level 1 in the fair value hierarchy.

7

Table of Contents

The Company’s other financial instruments include cash, accounts receivable, restricted cash, and accounts payable. As of September 30, 2019, the carrying value of these financial instruments approximated their fair value. The fair values of the senior notes due 2023, 2025, and 2027 were $763.8 million, $546.9 million, and $577.8 million, respectively, as of September 30, 2019. The fair values of these debt instruments are based on available market information from public data sources and are classified as Level 2.
Note 3. Other Balance Sheet Items
Other Current Assets
Other current assets consist of the following: 
 
September 30,
 
December 31,
 
2019
 
2018
 
(In thousands)
Prepaid registry fees
$
21,770

 
$
20,696

Prepaid expenses
22,029

 
14,109

Contingent consideration receivable
14,721

 

Accounts receivable, net
4,142

 
6,029

Income taxes receivable
3,989

 
4,451

Other
1,484

 
2,080

Total other current assets
$
68,135

 
$
47,365


Other Long-Term Assets
Other long-term assets consist of the following: 
 
September 30,
 
December 31,
 
2019
 
2018
 
(In thousands)
Restricted cash
$
9,391

 
$
9,338

Operating lease right-of-use asset
10,388

 

Long-term prepaid registry fees
7,800

 
7,779

Other tax receivable
5,673

 
5,673

Contingent consideration receivable

 
14,721

Other
7,082

 
3,535

Total other long-term assets
$
40,334

 
$
41,046



As a result of the adoption of ASC 842, Leases, in 2019, the Company recorded right-of-use assets for operating leases of $10.4 million as of September 30, 2019. The current and long-term prepaid registry fees in the tables above relate to the fees the Company pays to ICANN for each annual increment of .com domain name registrations and renewals which are deferred and amortized over the domain name registration term. The amount of prepaid registry fees as of September 30, 2019 reflects amortization of $8.7 million and $25.8 million during the three and nine months ended September 30, 2019 which was recorded in Cost of Revenues.
The contingent consideration receivable in the tables above related to the estimated amount due from Neustar, Inc. (“Neustar”) in the first quarter of 2020, was reclassified from Other long-term assets as of December 31, 2018 to Other current assets as of September 30, 2019.


8

Table of Contents

Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following: 
 
September 30,
 
December 31,
 
2019
 
2018
 
(In thousands)
Accounts payable
$
4,849

 
$
10,445

Customer deposits, net
59,778

 
57,025

Accrued employee compensation
36,199

 
54,746

Interest payable
33,021

 
24,318

Taxes payable and other tax liabilities
26,927

 
18,961

Accrued registry fees
11,857

 
11,029

Payables to buyer
1,641

 
9,875

Current operating lease liability
4,981

 

Other accrued liabilities
21,108

 
28,809

Total accounts payable and accrued liabilities
$
200,361

 
$
215,208


Customer deposits primarily relate to advance payments to cover domain name registration activity by registrars. The balance of customer deposits can fluctuate significantly due to the timing of payments from large customers. Accrued employee compensation primarily consists of liabilities for employee leave, salaries, payroll taxes, employee contributions to the employee stock purchase plan, and incentive compensation. Accrued employee incentive compensation as of December 31, 2018, was paid during the nine months ended September 30, 2019. Interest payable varies at each period-end based on the payment due dates for each Senior Note issuance. Payables to buyer relate to amounts due to Neustar for estimated collections from Security Services customers of any billings after the closing date and until the customer contracts are assigned to Neustar. Other liabilities include amounts payable to registrars related to rebates and marketing programs as well as other miscellaneous liabilities. These amounts may vary from period to period due to the timing of payments.
Long-term tax and other liabilities
 
September 30,
 
December 31,
 
2019
 
2018
 
(In thousands)
Long-term tax liabilities
$
303,764

 
$
281,621

Long-term operating lease liability
5,337

 

Long-term tax and other liabilities
$
309,101

 
$
281,621


Long-term tax liabilities as of September 30, 2019 reflects the reclassification of unrecognized tax benefits during the nine months ended September 30, 2019, as deferred tax assets related to tax credits and loss carryforwards are no longer available to offset the liabilities. This was partially offset by a $7.9 million reclassification of a portion of the transition tax liability on accumulated foreign earnings from non-current to current as of September 30, 2019. The current and long-term lease liabilities as of September 30, 2019 in the tables above relate to the lease obligations recorded as a result of the adoption of ASC 842, Leases, during 2019.
Note 4. Stockholders’ Deficit
Effective February 7, 2019, the Company’s Board of Directors authorized the repurchase of the Company’s common stock in the amount of approximately $602.9 million, in addition to the $397.1 million remaining available for repurchase under the Company’s share repurchase program, for a total repurchase authorization of up to $1.0 billion under the share repurchase program. The share repurchase program has no expiration date. Purchases made under the program can be made through open market transactions, block purchases, accelerated share repurchase agreements or other negotiated transactions. During the three and nine months ended September 30, 2019, the Company repurchased 1.0 million and 2.9 million shares of its common stock, respectively, at an average stock price of $204.13 and $189.39, respectively. The aggregate cost of the repurchases in the three and nine months ended September 30, 2019 was $194.0 million and $543.9 million, respectively. As of September 30, 2019, there was approximately $522.1 million remaining available for future share repurchases under the share repurchase program.

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During the nine months ended September 30, 2019, the Company placed 0.2 million shares, at an average stock price of $180.43, and for an aggregate cost of $39.6 million, into treasury stock for purposes related to tax withholding upon vesting of Restricted Stock Units (“RSUs”).
Since inception, the Company has repurchased 235.4 million shares of its common stock for an aggregate cost of $10.0 billion, which is presented as a reduction of Additional paid-in capital.
Note 5. Calculation of Earnings per Share
The following table presents the computation of weighted-average shares used in the calculation of basic and diluted earnings per share:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands)
Weighted-average shares of common stock outstanding
118,194

 
121,682

 
118,966

 
111,046

Weighted-average potential shares of common stock outstanding:
 
 
 
 

 

Conversion spread related to Subordinated Convertible Debentures

 

 

 
11,452

Unvested RSUs and ESPP
375

 
579

 
444

 
581

Shares used to compute diluted earnings per share
118,569

 
122,261

 
119,410

 
123,079


The Company settled the Subordinated Convertible Debentures in May 2018. The calculation of diluted weighted average shares outstanding, excludes potentially dilutive securities, the effect of which would have been anti-dilutive, as well as performance-based RSUs granted by the Company for which the relevant performance criteria have not been achieved. The number of potential shares excluded from the calculation was not significant in any period presented.

Note 6. Revenues
The Company generates revenues in the U.S.; Europe, the Middle East and Africa (“EMEA”); China; and certain other countries, including Canada, Australia, and Japan.
The following table presents our revenues disaggregated by geography, based on the billing addresses of our customers:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands)
U.S.
$
193,392

 
$
190,980

 
$
577,395

 
$
563,981

EMEA
51,480

 
53,047

 
155,221

 
159,831

China
30,647

 
27,094

 
88,337

 
79,502

Other
32,902

 
34,656

 
100,165

 
104,203

Total revenues
$
308,421

 
$
305,777

 
$
921,118

 
$
907,517


Revenues for the Company’s Registry Services business are attributed to the country of domicile and the respective regions in which registrars are located; however, this may differ from the regions where the registrars operate or where registrants are located. Revenues for each region may be impacted by registrars reincorporating, relocating, or from acquisitions or changes in affiliations of resellers. Revenues for each region may also be impacted by registrars domiciled in one region, registering domain names in another region. Revenues in the U.S. and EMEA regions in particular, were impacted by the decrease in revenues from the Company’s Security Services business as customers terminated or consented to the assignment of their contracts to Neustar.
Deferred Revenues
As payment for domain name registrations and renewals are due in advance of our performance, we record these amounts as deferred revenues. The increase in the deferred revenues balance for the nine months ended September 30, 2019 was primarily driven by amounts billed in nine months ended September 30, 2019 for domain name registrations and renewals to be recognized as revenues in future periods, offset by refunds for domain name renewals deleted during the 45-day grace period, and $624.9 million of revenues recognized that were included in the deferred revenues balance at the beginning of the period.

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The balance of deferred revenues as of September 30, 2019 represents our aggregate remaining performance obligations. Amounts included in current deferred revenues are all expected to be recognized in revenues within 12 months, except for a portion of deferred revenues that relates to domain name renewals that are deleted in the 45-day grace period following the transaction. The long-term deferred revenues amounts will be recognized in revenues over several years and in some cases up to 10 years.
Historically, we have experienced a higher volume of domain name transactions, particularly renewals, in the first quarter of the year compared to other quarters. Our quarterly revenues do not reflect these seasonal patterns because the preponderance of our revenues for each quarterly period is provided by the ratable recognition of our deferred revenues balance. The effect of this seasonality has historically resulted in the largest amount of growth in our deferred revenues balance occurring during the first quarter of the year compared to the other quarters.

Note 7. Stock-based Compensation
Stock-based compensation is classified in the Condensed Consolidated Statements of Comprehensive Income in the same expense line items as cash compensation. The following table presents the classification of stock-based compensation:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
2019
 
2018
 
2019
 
2018
 
(In thousands)
Cost of revenues
$
1,725

 
$
1,755

 
$
5,064

 
$
5,183

Sales and marketing
864

 
1,451

 
2,866

 
4,393

Research and development
1,513

 
1,623

 
4,744

 
5,032

General and administrative
8,518

 
10,301

 
25,563

 
26,798

Total stock-based compensation expense
$
12,620

 
$
15,130

 
$
38,237

 
$
41,406



The following table presents the nature of the Company’s total stock-based compensation:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands)
RSUs
$
10,650

 
$
10,817

 
$
28,318

 
$
29,510

Performance-based RSUs
1,222

 
3,875

 
7,554

 
10,348

ESPP
1,209

 
1,018

 
3,650

 
3,127

Capitalization (included in Property and equipment, net)
(461
)
 
(580
)
 
(1,285
)
 
(1,579
)
Total stock-based compensation expense
$
12,620

 
$
15,130

 
$
38,237

 
$
41,406



Note 8. Debt and Interest Expense
The following table presents the components of the Company’s Interest expense:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
2019
 
2018
 
2019
 
2018
 
(In thousands)
Contractual interest on Senior Notes
$
21,766

 
$
21,766

 
$
65,298

 
$
65,297

Contractual interest on Subordinated Convertible Debentures

 

 

 
20,015

Amortization of debt discount on Subordinated Convertible Debentures

 

 

 
4,236

Amortization of debt issuance costs and other interest expense
867

 
865

 
2,601

 
2,663

Total interest expense
$
22,633

 
$
22,631

 
$
67,899

 
$
92,211


The Company settled its Subordinated Convertible Debentures in May 2018.

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Note 9. Non-operating Income, Net
The following table presents the components of Non-operating income, net:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands)
Interest income
$
6,457

 
$
5,823

 
$
21,045

 
$
19,894

Transition services income
3,750

 

 
11,850

 

Loss on extinguishment of Subordinated Convertible Debentures

 

 

 
(6,554
)
Other, net
291

 
112

 
1,242

 
1,059

Total non-operating income, net
$
10,498

 
$
5,935

 
$
34,137

 
$
14,399


During the three and nine months ended September 30, 2019, the Company recognized $3.8 million and $11.9 million, respectively, of income from the transition services provided to Neustar in connection with the sale of customer contracts of its Security Services business. In the second quarter of 2018, the Company recognized a $6.6 million loss on the extinguishment of the Subordinated Convertible Debentures.
Note 10. Income Taxes
The following table presents Income tax expense and the effective tax rate:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in thousands)
Income tax expense
$
39,568

 
$
40,621

 
$
109,825

 
$
95,320

Effective tax rate
20
%
 
23
%
 
19
%
 
19
%

The effective tax rate for each of the periods in the table above differed from the statutory federal rate of 21% due to a lower foreign effective tax rate, offset by state income taxes and U.S. taxes on foreign earnings, net of foreign tax credits. Additionally, income tax expense for the nine months ended September 30, 2019 was reduced by $14.6 million of excess tax benefits related to stock-based compensation. Income tax expense for the nine months ended September 30, 2018 was reduced by $12.6 million of tax benefits recognized related to changes to provisional amounts previously recognized for the impact of the 2017 Tax Cuts and Jobs Act (“Tax Act”), and $7.2 million of excess tax benefits related to stock-based compensation.
During the nine months ended September 30, 2019, the Company completed the repatriation of $249.0 million of cash held by foreign subsidiaries, net of $13.1 million of foreign withholding taxes which were previously accrued in 2018.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with the 2018 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 rate of growth in revenues for the remainder of 2019 and our expectations about costs and expenses as a percentage of revenues for the remainder of 2019. 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 2019 and the 2018 Form 10-K, which discuss our business in greater detail. 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 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 .com and .net top-level domains (“TLDs”), which support the majority of global e-commerce.
As of September 30, 2019, we had 157.4 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. 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”), competition from, and the continued introduction of, new generic top-level domains (“gTLDs”), 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 $308.4 million and $921.1 million during the three and nine months ended September 30, 2019, an increase of 1% compared to the same periods in 2018.
We recorded operating income of $205.6 million and $607.6 million during the three and nine months ended September 30, 2019, an increase of 5% and 6%, respectively, compared to the same periods in 2018.
As of September 30, 2019, we had 157.4 million .com and .net registrations in the domain name base, which represents a 4% increase from September 30, 2018, and a net increase of 1.3 million domain name registrations from June 30, 2019.
During the three months ended September 30, 2019, we processed 9.9 million new domain name registrations for .com and .net compared to 9.5 million for the same period in 2018.
The final .com and .net renewal rate for the second quarter of 2019 was 74.2% compared to 75.0% for the second quarter of 2018. Renewal rates are not fully measurable until 45 days after the end of the quarter.
During the three months ended September 30, 2019, we repurchased 1.0 million shares of our common stock for an aggregate cost of $194.0 million. As of September 30, 2019, there was approximately $522.1 million remaining available for future share repurchases under our share repurchase program.

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We generated cash flows from operating activities of $560.3 million during the nine months ended September 30, 2019, compared to $479.3 million for the same period in 2018.
Pursuant to our agreements with ICANN, we make available on our website (at https://www.Verisign.com/zone) files containing all active domain names registered in the .com and .net registries. At the same website address, we 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 domain name base is the active zone plus the number of domain name registrations that are registered but not configured for use in the respective TLD zone file plus the number of domain name registrations that are in a client or server hold status. These files and the related summary data are updated at least once per day. The update times may vary each day. The number of domain name registrations provided in this Quarterly Report on Form 10-Q are as of midnight of the date reported. Information available on, or accessible through, our website is not incorporated herein by reference.
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,
 
2019
 
2018
 
2019
 
2018
Revenues
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Costs and expenses:
 
 

 
 
 
 
Cost of revenues
14.4

 
15.8

 
14.5

 
15.8

Sales and marketing
3.2

 
4.5

 
3.5

 
5.3

Research and development
4.7

 
4.5

 
5.0

 
4.7

General and administrative
11.0

 
11.4

 
11.0

 
11.0

Total costs and expenses
33.3

 
36.2

 
34.0

 
36.8

Operating income
66.7

 
63.8

 
66.0

 
63.2

Interest expense
(7.4
)
 
(7.4
)
 
(7.4
)
 
(10.2
)
Non-operating income, net
3.4

 
1.9

 
3.7

 
1.6

Income before income taxes
62.7

 
58.3

 
62.3

 
54.6

Income tax expense
(12.8
)
 
(13.3
)
 
(11.9
)
 
(10.5
)
Net income
49.9
 %
 
45.0
 %
 
50.4
 %
 
44.1
 %
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 for several other TLDs and from providing back-end registry services to a number of TLD registry operators, all of which are not significant in relation to our consolidated revenues. For domain names registered with the .com and .net registries we receive a fee from registrars per annual registration that is fixed pursuant to our agreements with ICANN. Individual customers, called registrants, contract directly with registrars or their resellers, and the registrars 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”). 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. The annual fee for a .com domain name registration has been fixed at $7.85 since 2012. On October 26, 2018, we entered into an agreement with the DOC to amend the Cooperative Agreement. The amendment extends the term of the Cooperative Agreement until November 30, 2024 and permits the price of a .com domain name to be increased without further DOC approval by up to 7% in each of the final four years of each 6-year period beginning on October 26, 2018. We increased the annual fee for a .net domain name registration from $8.20 to $9.02 on February 1, 2018. 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. We offer promotional marketing programs for our registrars based upon market conditions and the business environment in which the registrars operate. All fees paid to us for .com and .net registrations are in U.S. dollars.


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A comparison of revenues is presented below:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
% Change
 
2018
 
2019
 
% Change
 
2018
 
(Dollars in thousands)
Revenues
$
308,421

 
1
%
 
$
305,777

 
$
921,118

 
1
%
 
$
907,517

The following table compares the .com and .net domain name registrations in the domain name base:
 
September 30, 2019
 
% Change
 
September 30, 2018
.com and .net domain name registrations in the domain name base
157.4 million
 
4
%
 
151.7 million
Revenues increased by $2.6 million and $13.6 million during the three and nine months ended September 30, 2019, respectively, as compared to the same period last year, primarily due to an increase in revenues from the operation of the registries for the .com and .net TLDs, partially offset by the decrease in revenues from the Security Services business as customers terminated or consented to the assignment of their contracts to Neustar. The increase in revenues from the .com and .net TLDs was driven by a 5% increase in the domain name base for .com and the increase in the .net domain name registration fees in February 2018, partially offset by a 5% decline in the domain name base for .net.
Growth in the domain name base has been primarily driven by continued internet growth and marketing activities carried out by us and our registrars. However, competitive pressure from ccTLDs, the continued introduction of new gTLDs, 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, and historical global economic uncertainty, has limited the rate of growth of the domain name base in recent years and may continue to do so in the remainder of 2019 and beyond.
We expect the rate of growth in revenues will remain consistent during the remainder of 2019 compared to the nine months ended September 30, 2019, as a result of continued growth in the aggregate number of .com domain names, offset by a decline in revenues from the Security Services business as the remaining customers terminate or consent to the assignment of their contracts to Neustar.
Geographic revenues
We generate revenues in the U.S.; Europe, the Middle East and Africa (“EMEA”); China; and certain other countries, including Canada, Australia, and Japan.
The following table presents a comparison of our geographic revenues:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
% Change
 
2018
 
2019
 
% Change
 
2018
 
(Dollars in thousands)
U.S.
$
193,392

 
1
 %
 
$
190,980

 
$
577,395

 
2
 %
 
$
563,981

EMEA
51,480

 
(3
)%
 
53,047

 
155,221

 
(3
)%
 
159,831

China
30,647

 
13
 %
 
27,094

 
88,337

 
11
 %
 
79,502

Other
32,902

 
(5
)%
 
34,656

 
100,165

 
(4
)%
 
104,203

Total revenues
$
308,421

 


 
$
305,777

 
$
921,118

 


 
$
907,517

Revenues for our Registry Services business 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. During the three and nine months ended September 30, 2019, the majority of our revenue growth has come from increased sales to registrars based in the U.S. and China. Revenues in the U.S. and EMEA regions in particular, were impacted by the decrease in revenues from our Security Services business as customers terminated or consented to the assignment of their contracts to Neustar.


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Table of Contents

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, consulting and development services, 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
September 30,
 
Nine Months Ended
September 30,
 
2019
 
% Change
 
2018
 
2019
 
% Change
 
2018
 
(Dollars in thousands)
Cost of revenues
$
44,443

 
(8
)%
 
$
48,249

 
$
134,013

 
(7
)%
 
$
143,766

Cost of revenues decreased by $3.8 million during the three months ended September 30, 2019, compared to the same period last year, due in part to a decrease in expenses following the sale of the Security Services business.
Cost of revenues decreased by $9.8 million during the nine months ended September 30, 2019, compared to the same period last year, primarily due to decreases in telecommunications expenses, salary and employee benefits expenses, and depreciation expenses. Telecommunications expenses decreased by $4.4 million as a result of lower costs to support our operations. Salary and benefits expenses decreased by $3.8 million due to a reduction in average headcount primarily related to employees supporting the Security Services business. Depreciation expenses decreased by $2.0 million as a result of a decrease in capital expenditures in recent years.
We expect Cost of revenues as a percentage of revenues to increase slightly during the remainder of 2019 compared to the nine months ended September 30, 2019 primarily due to costs related to infrastructure projects.
Sales and marketing
Sales and marketing expenses consist primarily of salaries, sales commissions, sales operations and other personnel-related expenses, travel and related expenses, trade shows, costs of lead generation, costs of computer and communications equipment and support services, facilities costs, consulting fees, costs of marketing programs, such as online, television, radio, print and direct mail advertising costs, and allocations of indirect costs such as corporate overhead.
A comparison of Sales and marketing expenses is presented below:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
% Change
 
2018
 
2019
 
% Change
 
2018
 
(Dollars in thousands)
Sales and marketing
$
9,857

 
(29
)%
 
$
13,868

 
$
32,775

 
(31
)%
 
$
47,712

Sales and marketing expenses decreased by $4.0 million during the three months ended September 30, 2019, compared to the same period last year, primarily due to a $2.1 million decrease in salary and employee benefits expenses as a result of a reduction in average headcount primarily affecting employees supporting the Security Services business.
Sales and marketing expenses decreased by $14.9 million during the nine months ended September 30, 2019, compared to the same period last year, primarily due to decreases in salary and employee benefits expenses, advertising and marketing expenses and allocated overhead expenses. Salary and employee benefits expenses decreased by $6.7 million due to a reduction in average headcount primarily affecting employees supporting the Security Services business. Advertising and marketing expenses decreased by $3.6 million as we executed fewer marketing activities and campaigns. Allocated overhead expenses decreased by $2.2 million primarily due to a decrease in average headcount relative to other cost types.
We expect Sales and marketing expenses as a percentage of revenues to increase slightly during the remainder of 2019, compared to the nine months ended September 30, 2019, as we execute more advertising and marketing campaigns.
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.

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Table of Contents

A comparison of Research and development expenses is presented below:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
% Change
 
2018
 
2019
 
% Change
 
2018
 
(Dollars in thousands)
Research and development
$
14,619

 
7
%
 
$
13,712

 
$
45,704

 
7
%
 
$
42,842

Research and development expenses increased by $0.9 million during the three months ended September 30, 2019, compared to the same period last year, due to a combination of individually insignificant factors.
Research and development expenses increased by $2.9 million during the nine months ended September 30, 2019, compared to the same period last year, due to a $2.0 million decrease in capitalized labor.
We expect Research and development expenses as a percentage of revenues to remain consistent during the remainder of 2019 compared to the nine months ended September 30, 2019.
General and administrative
General and administrative expenses consist primarily of salaries and other personnel-related expenses for our executive, administrative, legal, finance, information technology and human resources personnel, costs of facilities, computer and communications equipment, management information systems, support services, professional services fees, certain tax and license fees, and bad debt expense, offset by allocations of indirect costs such as facilities and shared services expenses to other cost types.
A comparison of General and administrative expenses is presented below:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
% Change
 
2018
 
2019
 
% Change
 
2018
 
(Dollars in thousands)
General and administrative
$
33,886

 
(3
)%
 
$
34,951

 
$
101,065

 
1
%
 
$
99,771

General and administrative expenses decreased by $1.1 million during the three months ended September 30, 2019, compared to the same period last year, primarily due to a $1.8 million decrease in stock-based compensation expenses as a result of a decrease in the projected achievement level on certain performance-based RSU grants.
General and administrative expenses increased by $1.3 million during the nine months ended September 30, 2019, compared to the same period last year, primarily due to an increase in costs related to certain security initiatives.
We expect General and administrative expenses as a percentage of revenues to increase slightly during the remainder of 2019 compared to the nine months ended September 30, 2019 due to the timing of certain projects and an increase in infrastructure and security related expenses.
Interest expense
The following table presents the components of Interest expense:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
2019
 
2018
 
2019
 
2018
 
(In thousands)
Contractual interest on Senior Notes
$
21,766

 
$
21,766

 
$
65,298

 
$
65,297

Contractual interest on Subordinated Convertible Debentures

 

 

 
20,015

Amortization of debt discount on Subordinated Convertible Debentures

 

 

 
4,236

Amortization of debt issuance costs and other interest expense
867

 
865

 
2,601

 
2,663

Total interest expense
$
22,633

 
$
22,631

 
$
67,899

 
$
92,211

There was no contractual interest or amortization of debt discount on the Subordinated Convertible Debentures in the three and nine months ended September 30, 2019 due to the settlement of the outstanding convertible debentures in May 2018.
We expect Interest expense as a percentage of revenues to remain consistent during the remainder of 2019 compared to the nine months ended September 30, 2019.

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Non-operating income, net
The following table presents the components of Non-operating income, net:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands)
Interest income
$
6,457

 
$
5,823

 
$
21,045

 
$
19,894

Transition services income
3,750

 

 
11,850

 

Loss on extinguishment of Subordinated Convertible Debentures

 

 

 
(6,554
)
Other, net
291

 
112

 
1,242

 
1,059

Total non-operating income, net
$
10,498

 
$
5,935

 
$
34,137

 
$
14,399

Non-operating income, net, increased in the three and nine months ended September 30, 2019 due to income from the transition services provided to Neustar in 2019 in connection with the sale of customer contracts of our Security Services business in 2018 and the loss on extinguishment of the Subordinated Convertible Debentures which was recognized in the second quarter of 2018.
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,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in thousands)
Income tax expense
$
39,568

 
$
40,621

 
$
109,825

 
$
95,320

Effective tax rate
20
%
 
23
%
 
19
%
 
19
%
The effective tax rate for each of the periods in the table above differed from the statutory federal rate of 21% due to a lower foreign effective tax rate, offset by state income taxes and U.S. taxes on foreign earnings, net of foreign tax credits. Additionally, income tax expense for the nine months ended September 30, 2019 was reduced by $14.6 million of excess tax benefits related to stock-based compensation. Income tax expense for the nine months ended September 30, 2018 was reduced by $12.6 million of tax benefits recognized related to changes to provisional amounts previously recognized for the impact of the Tax Act, and $7.2 million of excess tax benefits related to stock-based compensation.
Liquidity and Capital Resources
 
September 30,
 
December 31,
 
2019
 
2018
 
(In thousands)
Cash and cash equivalents
$
109,288

 
$
357,415

Marketable securities
1,120,723

 
912,254

Total
$
1,230,011

 
$
1,269,669

As of September 30, 2019, our principal sources of liquidity were $109.3 million of cash and cash equivalents and $1.12 billion of marketable securities. 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 and U.S. Treasury bills purchased with original maturities of less than 90 days. As of September 30, 2019, 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 nine months ended September 30, 2019, we completed the previously disclosed repatriation of $249.0 million of cash held by foreign subsidiaries, net of $13.1 million of foreign withholding taxes which were accrued during 2018. As of September 30, 2019, the amount of cash and cash equivalents and marketable securities held by foreign subsidiaries was $719.5 million.

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During the three months ended September 30, 2019, we repurchased 1.0 million shares of our common stock for an aggregate cost of $194.0 million. As of September 30, 2019, there was approximately $522.1 million remaining available for future share repurchases under the share repurchase program which has no expiration date.
As of September 30, 2019, we had $550.0 million principal amount outstanding of 4.75% senior unsecured notes due 2027, $500.0 million principal amount outstanding of 5.25% senior unsecured notes due 2025, and $750.0 million principal amount outstanding of 4.625% senior unsecured notes due 2023. As of September 30, 2019, there were no borrowings outstanding under our $200.0 million unsecured revolving credit facility that will expire in 2020.
We believe existing cash, cash equivalents and marketable securities, and funds generated from operations, together with our borrowing capacity under the unsecured revolving credit facility should be sufficient to meet our working capital, capital expenditure requirements, and to service our debt for at least the next 12 months. We regularly assess our cash management approach and activities in view of our current and potential future needs.
In summary, our cash flows for the nine months ended September 30, 2019 and 2018 were as follows:
 
Nine Months Ended
September 30,
 
2019
 
2018
 
(In thousands)
Net cash provided by operating activities
$
560,294

 
$
479,267

Net cash (used in) provided by investing activities
(237,827
)
 
984,447

Net cash used in financing activities
(570,333
)
 
(1,696,976
)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(208
)
 
(985
)
Net decrease in cash, cash equivalents, and restricted cash
$
(248,074
)
 
$
(234,247
)
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 increased during the nine months ended September 30, 2019, compared to the same period last year, primarily due to an increase in cash collected from customers and decreases in cash paid for interest on our debt obligations, for income taxes, and to suppliers and employees. Cash received from customers increased primarily due to higher domain name registrations and renewals. The decrease in cash paid for interest on our debt obligations was primarily due to the settlement of our Subordinated Convertible Debentures in May 2018. The decrease in cash paid for income taxes was primarily due to the foreign withholding taxes paid on the repatriation of $1.15 billion cash held by foreign subsidiaries to the U.S. in the first quarter of 2018, partially offset by higher U.S. federal income tax payments in 2019. Cash paid to suppliers and employees decreased due to lower 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, purchases of property and equipment and the sale of businesses.
We had net cash outflows from investing activities in the nine months ended September 30, 2019, compared to net cash inflows during the same period last year, primarily due to a decrease in proceeds from sales and maturities of marketable securities, net of purchases, and payments to Neustar for amounts collected from Security Services customers in connection with the sale of the customer contracts of our Security Services business.
Cash flows from financing activities
The changes in cash flows from financing activities primarily relate to share repurchases, debt repayments, and our employee stock purchase plan.
Net cash used in financing activities decreased during the nine months ended September 30, 2019, compared to the same period last year, primarily due to the repayment of the principal amount of the Subordinated Convertible Debentures during the second quarter of 2018, partially offset by an increase in share repurchases.

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ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in our market risk exposures since December 31, 2018.

ITEM 4.    CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based on our management’s evaluation, with the participation of our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer), as of September 30, 2019, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Inherent Limitations of Disclosure Controls and Internal Control over Financial Reporting
Because of their inherent limitations, our disclosure controls and procedures and our internal control over financial reporting may not prevent material errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to risks, including that the control may become inadequate because of changes in conditions or that the degree of compliance with our policies or procedures may deteriorate.

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PART II—OTHER INFORMATION
 

ITEM 1.    LEGAL PROCEEDINGS

As we previously disclosed, Afilias, a competitor and losing bidder in the .web auction, filed a form of arbitration proceeding against ICANN, an Independent Review Process (IRP) under ICANN’s bylaws, on November 14, 2018. Afilias alleges that the agreement between Verisign and Nu Dotco, LLC (NDC) pertaining to .web violated ICANN’s new gTLD Applicant Guidebook.  As a result, Afilias claims that ICANN had a duty to disqualify NDC’s bid and award .web to Afilias.  Afilias also claims that ICANN would violate its bylaws pertaining to competition by awarding .web to Verisign.  Afilias amended its IRP on March 21, 2019 in part to oppose Verisign’s and NDC’s participation in the IRP. A hearing was held on Verisign’s and NDC’s applications for participation and a ruling is expected in fourth quarter of 2019. We believe that Afilias’ claims regarding Verisign’s and NDC’s conduct are without merit and, if permitted to participate in the IRP, we intend to vigorously oppose Afilias’ claims.
We are also involved in various investigations, claims and lawsuits arising in the normal conduct of our business, none of which, in our opinion, will have a material adverse effect on our financial condition, results of operations, or cash flows. We cannot assure you that we will prevail in any litigation. Regardless of the outcome, any litigation may require us to incur significant litigation expense and may result in significant diversion of management attention.

ITEM 1A.    RISK FACTORS
In addition to other information in this Quarterly Report on Form 10-Q, the following risk factors should be carefully considered in evaluating us and our business because these factors currently have a significant impact or may have a significant impact on our business, prospects, operating results or financial condition. Actual results could differ materially from those projected in the forward-looking statements contained in this Quarterly Report on Form 10-Q as a result of the risk factors discussed below and elsewhere in this Quarterly Report on Form 10-Q and in other filings we make with the SEC.
Risks arising from our agreements governing our Registry Services business could limit our ability to maintain or grow our business.
We are parties to (i) a Cooperative Agreement, as amended, with the DOC with respect to the .com gTLD and (ii) Registry Agreements with ICANN with respect to the .com, .net, .name, and other gTLDs including our IDN gTLDs. As substantially all of our revenues are derived from our Registry Services business, limitations and obligations in, or changes or challenges to, these agreements, particularly the agreements that involve .com and .net, could have a material adverse impact on our business. Certain competing registries, such as the ccTLDs, are not subject to the same limitations or obligations that we are subject to in our agreements. Verisign and the DOC entered into Amendment 35 to the Cooperative Agreement on October 26, 2018, which, among other things, extends the term of the Cooperative Agreement through November 30, 2024. As amended by Amendment 35, the Cooperative Agreement will automatically renew on the same terms for successive six-year terms unless the DOC provides written notice of non-renewal within 120 days prior to the end of the then-current term. Further changes to the Cooperative Agreement require the mutual agreement of the DOC and the Company.
Modifications or Amendments. In October 2016, the Company and ICANN entered into an amendment to extend the term of the .com Registry Agreement to November 30, 2024 (the “.com Amendment”). As part of the .com Amendment, the Company and ICANN agreed to negotiate in good faith to amend the terms of the .com Registry Agreement: (i) by October 20, 2018, to preserve and enhance the security and stability of the internet or the .com TLD, and (ii) as may be necessary for consistency with changes to, or the termination or expiration of, the Cooperative Agreement. ICANN and Verisign are engaged in discussions to satisfy this obligation, including modifying the .com Registry Agreement based on the changes to the Cooperative Agreement arising from Amendment 35. We can provide no assurance that any new terms for the .com Registry Agreement that we agree to as a result of these discussions will match the changes permitted in Amendment 35 nor can we provide assurances that certain terms that we agree to will not increase the costs or risks associated with our operation of the .com TLD. Under the Cooperative Agreement, as amended by Amendment 35, standard renewals of the .com Registry Agreement will not require further DOC approval. If, in connection with a renewal of the .com Registry Agreement, the Company seeks any additional changes to the pricing section other than as approved in Amendment 35, changes to the vertical integration provisions, changes to the functional or performance specifications (including the SLAs), changes to the conditions for renewal or termination, or changes to the Whois service (other than such changes mandated by ICANN through Consensus Policies and specifications or policies established on a temporary basis (“Temporary Policies”)), as set forth in the Amendment 35, the prior written approval of the DOC is required. We can provide no assurances that such approval would be obtained.
In addition, our Registry Agreements for new gTLDs, including the Registry Agreements for our IDN gTLDs, include ICANN’s right to amend the agreements without our consent, which could impose unfavorable contract obligations on us that

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could impact our plans and competitive positions with respect to new gTLDs. At the time of renewal of our .com or .net Registry Agreements, ICANN might also attempt to impose this same unilateral right to amend these Registry Agreements under certain conditions. ICANN has also included new mandatory obligations on new gTLD registry operators, including us, that may increase the risks and potential liabilities associated with operating new gTLDs. ICANN might seek to impose these new mandatory obligations in our other Registry Agreements under certain conditions. We can provide no assurance that any changes to our Registry Agreements as a result of the above obligations will not have a material adverse impact on our business, operating results, financial condition, and cash flows.
Pricing. Under the terms of the Cooperative Agreement, as amended by Amendment 35, the Company and ICANN may agree to amend the terms of the .com Registry Agreement to permit the price of registrations or renewals of .com domain names to be increased by up to 7% per year in each of the final four years of each six-year period beginning on October 26, 2018. In addition, we are entitled to increase the price up to 7%, with the prior approval of the DOC, due to the imposition of any new ICANN Consensus Policies, as established and defined under ICANN’s bylaws and due process, and covering certain items listed in the .com Registry Agreement, or documented extraordinary expense resulting from an attack or threat of attack on the security and stability of the DNS. However, it is uncertain whether these additional circumstances would arise, or if they do, whether we would seek, or the DOC would approve, any request to increase the price for .com domain name registrations. We also have the right under the Cooperative Agreement to seek the removal of these pricing restrictions if we demonstrate to the DOC that market conditions no longer warrant such restrictions. However, it is uncertain whether we will seek the removal of such restrictions, or whether the DOC would approve the removal of such restrictions. In comparison, under the terms of the .net and .name Registry Agreements with ICANN, we are permitted to increase the price of domain name registrations and renewals in these TLDs up to 10% per year. Additionally, ICANN’s registry agreements for new gTLDs do not contain such pricing restrictions.
Vertical integration. Under Amendment 35, the parties clarified that the restrictions in the .com Registry Agreement relating to vertical integration apply solely to the .com TLD. As to the .com TLD, we are not permitted to acquire, directly or indirectly, control of, or a greater than 15% ownership interest in, any ICANN-accredited registrar that sells .com domain name registrations. Historically, all gTLD registry operators were subject to a vertical integration prohibition; however, ICANN has established a process whereby registry operators may seek ICANN’s approval to remove this restriction, and ICANN has approved such removal for certain other registry operators. Additionally, ICANN’s registry agreement for new gTLDs generally permits such vertical integration, with certain limitations including ICANN’s right, but not the obligation, to refer such vertical integration activities to competition authorities. If we seek to remove the vertical integration restrictions contained in our agreements, it is uncertain whether ICANN approval would be obtained. Furthermore, even if we obtain such approval, we can provide no assurances that we will enter the domain name retail market, or that we will be successful if we choose to do so. If registry operators of other TLDs, including ccTLDs, are able to obtain competitive advantages through vertical integration, and we are not, it could materially harm our business.
Renewal and Termination. Our .com, .net, and .name Registry Agreements with ICANN contain “presumptive” rights of renewal upon the expiration of their current terms on November 30, 2024, June 30, 2023 and August 15, 2020, respectively. The Registry Agreements for our new gTLDs including our IDN gTLDs are subject to a 10-year term and contain similar “presumptive” renewal rights. If certain terms in our .com and .net Registry Agreements are not similar to such terms generally in effect in the registry agreements of the five largest gTLDs, then a renewal of these agreements shall be upon terms reasonably necessary to render such terms similar to the registry agreements for those other gTLDs. There can be no assurance that such terms, if they apply, will not have a material adverse impact on our business. A failure by ICANN to approve the renewal of the .com Registry Agreement prior to the expiration of its current term on November 30, 2024 or to approve the renewal of the .net Registry Agreement prior to or upon the expiration of its current term on June 30, 2023, would have, absent an extension, a material adverse effect on our business. ICANN could terminate or refuse to renew our .com or .net Registry Agreements if, upon proper notice, (i) we fail to cure a fundamental and material breach of certain specified obligations, and (ii) we fail to timely comply with a final decision of an arbitrator or court. ICANN’s termination or refusal to renew either the .com or .net Registry Agreement would have a material adverse effect on our business.
Consensus Policies. Our Registry Agreements with ICANN require us to implement Consensus Policies and Temporary Policies. ICANN could adopt Consensus Policies or Temporary Policies that are unfavorable to us as the registry operator of .com, .net and our other gTLDs, that are inconsistent with our current or future plans, that impose substantial costs on our business, that subject the Company to additional legal risks, or that affect our competitive position. Such Consensus Policies or Temporary Policies could have a material adverse effect on our business. As an example, ICANN has adopted a Consensus Policy that requires Verisign to receive and display Thick Whois data for .com and .net, although that Policy is scheduled to be reviewed by ICANN. In addition, ICANN has adopted a Temporary Specification that establishes temporary requirements for registry operators and registrars regarding the collection, display and disclosure of Thick Whois data pending ICANN’s establishment of a permanent Consensus Policy. The costs of complying or failing to comply with these policies as well as laws and regulations, such as General Data Protection Regulation (“GDPR”), regarding personal information and data privacy, such

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as domestic and various foreign privacy regimes, could expose us to compliance costs and substantial liability, and result in costly and time-consuming investigations or litigation.
Technical Standards and ICANN Processes. Our Registry Agreements with ICANN require Verisign to implement and comply with various technical standards and specifications published by the Internet Engineering Task Force (“IETF”). ICANN could impose requirements on us through changes to these IETF standards that are inconsistent with our current or future plans, that impose substantial costs on our business, that subject the Company to additional legal risks, or that affect our competitive position. Any such changes to the IETF standards could have a material adverse effect on our business. In addition, under Amendment 35, we have agreed to continue to operate the .com TLD in a content neutral manner and to work within ICANN processes to promote the development of content neutral policies for the operation of the DNS. Such policies could expose us to compliance costs and substantial liability and result in costly and time-consuming investigations or litigation.
Legal Challenges. Our Registry Agreements have faced, and could face in the future, challenges, including possible legal challenges, resulting from our activities or the activities of ICANN, registrars, registrants, and others, and any adverse outcome from such challenges could have a material adverse effect on our business.
Governmental regulation and the application of new and existing laws in the U.S. and overseas may slow business growth, increase our costs of doing business, create potential liability and have an adverse effect on our business.
Application of new and existing laws and regulations in the U.S. or overseas to the internet and communications industry can be unclear. The costs of complying or failing to comply with these laws and regulations could limit our ability to operate in our current markets, expose us to compliance costs and substantial liability, and result in costly and time-consuming litigation. For example, the government of China has indicated that it will issue, and in some instances has begun to issue, new regulations, and has begun to enforce existing regulations, that impose additional costs on, and risks to, our provision of Registry Services in China and could impact the growth or renewal rates of domain name registrations in China. In addition to registry operators, some of these regulations also require registrars to obtain a government-issued license for each TLD whose domain name registrations they intend to sell directly to registrants. Any failure to obtain the required licenses, or to comply with any license requirements or any updates thereto, by us or our registrars could impact our current and future business in China.
Foreign, federal or state laws could have an adverse impact on our business, financial condition, results of operations and cash flows, and our ability to conduct business in certain foreign countries. For example, laws designed to restrict who can register and who can distribute domain names, online gambling, counterfeit goods, and intellectual property violations such as cybersquatting; laws designed to require registrants to provide additional documentation or information in connection with domain name registrations; and laws designed to promote cybersecurity may impose significant additional costs on our business or subject us to additional liabilities.
To conduct our operations, we regularly move data across national borders and receive data originating from different jurisdictions, and consequently are subject to a variety of continuously evolving and developing laws and regulations in the United States and abroad regarding privacy, data protection and data security. The scope of the laws that may be applicable to us is often uncertain and may be conflicting, particularly with respect to foreign laws. For example, the European Union’s GDPR, which greatly increases the jurisdictional reach of European Union law and adds a broad array of requirements for handling personal data, including the public disclosure of significant data breaches, and significant penalties, became effective in May 2018. Other countries and other states have enacted or are enacting data localization laws regulating or limiting data collection, storage and transfer as well as granting new rights to data subjects. All of these evolving compliance and operational requirements can impose significant costs for us that are likely to increase over time.
Due to the nature of the internet, it is possible that federal, state or foreign governments might attempt to regulate internet transmissions or prosecute us for violations of laws. We might unintentionally violate such laws, such laws may be modified or enforced using new or novel legal theories, and new laws may be enacted in the future. In addition, as we continue to launch and market our IDN gTLDs and increase our marketing efforts of our other TLDs in foreign countries, we may raise our profile in certain foreign countries thereby increasing the regulatory and other scrutiny of our operations. Any such developments could increase the costs of regulatory compliance for us, affect our reputation, expose us to liability, penalties or fines, force us to change our business practices or otherwise materially harm our business. In addition, any such laws could impede growth of, or result in a decline in, domain name registrations.
Undetected or unknown defects in our service, security breaches, defects in the technologies and services in our supply chain, and Distributed Denial of Service (“DDoS”) attacks could expose us to liability and harm our business and reputation.
Services as complex as those we offer or develop could contain undetected defects or errors. Despite testing, defects or errors may occur in our existing or new services, which could result in service outages or disruptions, compromised customer data, including DNS data, diversion of development resources, injury to our reputation, tort or contract claims, increased insurance costs or increased service costs, any of which could harm our business. Performance of our services could have

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unforeseen or unknown adverse effects on the networks over which they are delivered as well as, more broadly, on internet users and consumers, and on third-party applications and services that utilize our services, which could result in legal claims against us, harming our business. Our failure to identify, remediate and mitigate security vulnerabilities and breaches or our inability to meet customer expectations in a timely manner could also result in loss of or delay in revenues, failure to meet contracted service level obligations, loss of market share, failure to achieve market acceptance, injury to our reputation and increased costs.
In addition to undetected defects or errors, we are also subject to cyber-attacks and attempted security breaches. We retain certain customer and employee information in our data centers and various domain name registration systems. It is critical to our business strategy, as well as fulfilling our obligations as the registry operator for .com and .net, that our facilities and infrastructure remain secure, that we continue to meet our service level agreements and that we maintain the public’s trust in the internet services that we provide. The Company, as an operator of critical internet infrastructure, is frequently targeted and experiences a high rate of attacks. These include the most sophisticated forms of attacks, such as advanced persistent threat attacks and zero-hour threats. These forms of attacks involve situations where the threat is not compiled or has been previously unobserved within our observation and threat indicators space until the moment it is launched. In addition, these forms of attacks may target specific unidentified or unresolved vulnerabilities that exist only within the target’s supply chain or operating environment, making these attacks virtually impossible to anticipate and difficult to defend against. In addition to external threats, we may be subject to insider threats, including those from third-party suppliers such as consultants and advisors, SaaS providers, hardware, software, and network systems manufacturers, and other outside vendors, or from current or former contractors or employees; these threats can be realized from intentional or unintentional actions. The Shared Registration System, the root zone servers, the root zone file, the Root Zone Maintainer System, the TLD name servers and the TLD zone files that we operate are critical to our Registry Services operations. Therefore, attacks against third-party suppliers that provide services to our Registry Services operations could also impact our infrastructure. Despite the significant time and money expended on our security measures, we have been subject to a security breach, that was previously disclosed in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, and our infrastructure may in the future be vulnerable to physical break-ins, disruptions resulting from destructive malware, hardware or enabling software defects, computer viruses, attacks by hackers or nefarious actors or similar disruptive problems, including hacktivism. It is possible that we may have to expend additional financial and other resources to address such problems. Any physical or electronic break-in or other security breach or compromise of the information stored at our data centers or domain name registration systems may cause an outage of, or jeopardize the security of, information stored on our premises or in the computer systems and networks of our customers. In such an event, we could face significant liability, fail to meet contracted service level obligations, customers could be reluctant to use our services and we could be at risk for loss of various security and standards-based compliance certifications needed for operation of our businesses, all or any of which could adversely affect our reputation and harm our business or cause financial losses that are either not insured against or not fully covered through any insurance that we maintain. Such an occurrence could also result in adverse publicity and therefore adversely affect the market’s perception of the security of e-commerce and communications over the internet as well as of the security or reliability of our services.
We use externally developed technology, systems and services including both hardware and software, for a variety of purposes, including, without limitation, compute, storage, encryption and authentication, back-office support, and other functions. While we have developed operational policies and procedures to reduce the impact of security vulnerabilities in system components, as well as at any vendors where Company data is stored or processed, such measures cannot provide absolute security. Vulnerabilities in, and exploits leading to, breaches of our or our vendors’ technology, systems or services could expose us or our customers to a risk of outages, loss or misuse of Company data, including but not limited to sensitive personal information.
Additionally, our networks have been, and likely will continue to be, subject to DDoS attacks. Recent attacks have demonstrated that DDoS attacks continue to grow in size and sophistication and have an ability to widely disrupt internet services. Particularly since 2016, the size of DDoS attacks has grown rapidly, and we have successfully mitigated DDoS attacks during this time frame that are significantly larger than those we have historically experienced. While we have adopted mitigation techniques, procedures and strategies to defend against such attacks, there can be no assurance that we will be able to defend against every attack, especially as the attacks increase in size and sophistication. Any attack, even if only partially successful, could disrupt our networks, increase response time, negatively impact our ability to meet our contracted service level obligations, and generally hamper our ability to provide reliable service to our Registry Services customers and the broader internet community. We have historically incurred, and will continue to incur, significant costs to enable our infrastructure to process levels of attack traffic that are significant multiples of our normal transaction volume. Further, we are in the process of transitioning our Security Services customer contracts to Neustar. During this migration period, we will continue to operate DDoS protection services for customers that have yet to transition. These DDoS protection services share some of the infrastructure used in our Registry Services business. Therefore the operation of such services might expose our critical Registry Services infrastructure to temporary degradations or outages caused by DDoS attacks against those customers, in addition to any attacks directed specifically against us and our networks.

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Changes to the multi-stakeholder model of internet governance could materially and adversely impact our business.
The internet is governed under a multi-stakeholder model comprising civil society, the private sector, including for-profit and not-for-profit organizations such as ICANN, governments, including the U.S. government, academia, non-governmental organizations and international organizations.
Role of the U.S. Government. In the fourth quarter of 2016, the U.S. government completed a transition to the multi-stakeholder community of the historical role played by the National Telecommunications and Information Administration (“NTIA”) in the coordination of the DNS. Changes arising from this transition to the multi-stakeholder model of internet governance could materially and adversely impact our business. For example, ICANN has adopted bylaws that are designed, in part, to enhance accountability through a new organization called the Empowered Community, which is comprised of a cross section of stakeholders. ICANN or the Empowered Community may assert positions that could negatively impact our strategy or our business.
By completing the transition discussed above, the U.S. government through the NTIA has ended its coordination and management of important aspects of the DNS including the IANA functions and the root zone. There can be no assurance that the removal of the U.S. government oversight of these key functions will not negatively impact our business.
Role of ICANN. ICANN plays a central coordination role in the multi-stakeholder system. ICANN is mandated through its bylaws to uphold a private sector-led multi-stakeholder approach to internet governance for the public benefit. If ICANN or the Empowered Community fails to uphold or significantly redefines the multi-stakeholder model, it could harm our business. Additionally, the Empowered Community could adversely impact ICANN, which could negatively impact its ability to coordinate the multi-stakeholder system of governance, or negatively affect our interests. Also, legal, regulatory or other challenges could be brought challenging the legal authority underlying the roles and actions of ICANN, the Empowered Community or us.
Role of Foreign Governments. Some governments and members of the multi-stakeholder community have questioned ICANN’s role with respect to internet governance and, as a result, could seek a multilateral oversight body as a replacement. Additionally, the role of ICANN’s Governmental Advisory Committee, which is comprised of representatives of national governments, could change, and give governments more control of certain aspects of internet governance. Some governments and governmental authorities outside the U.S. have in the past disagreed, and may in the future disagree, with the actions, policies or programs of ICANN, the U.S. government and us relating to the DNS. Changes to the roles that foreign governments play in internet governance could materially and adversely impact our business.
We face risks from our operation of two root zone servers and performance of the Root Zone Maintainer functions under the RZMA.
We operate two of the 13 root zone servers. Root zone servers are name servers that contain authoritative data for the very top of the DNS hierarchy. These servers have the software and DNS configuration data necessary to locate name servers that contain authoritative data for the TLDs. These root zone servers are critical to the functioning of the internet. We also have an important operational role in support of a key IANA function as the Root Zone Maintainer. In this role, we provision and publish the authoritative root zone data and make it available to all root server operators under an agreement with ICANN, the Root Zone Maintainer Service Agreement (“RZMA”).
As we perform the Root Zone Maintainer Services under the RZMA, we may be subject to significant claims challenging the agreement or our performance under the agreement, and we may not have immunity from, or sufficient indemnification or insurance for, such claims.
For example, DNSSEC enabled in the root zone and at other levels of the DNS requires new preventative maintenance, including root key signing key (“KSK”) rollover, necessitating functions and complex operational practices that did not exist prior to the introduction of DNSSEC. Any failure by us, ICANN, external DNS vendors and service providers, or other relying parties to comply with stated practices, such as those outlined in relevant DNSSEC Practice Statements and internet standards, introduces risk to DNSSEC relying parties and other internet users and consumers of the DNS, which could have a material adverse impact on our business. In particular, because root KSK rollover involves updates to the KSK public key (the “Trust Anchor”) and private key pair managed by ICANN’s Public Technical Identifiers (PTI) operation; to the root zone DNSSEC records published by us in our role as Root Zone Maintainer; and to corresponding Trust Anchor configurations maintained by external DNS vendors and service providers’ DNSSEC-aware implementations, if such external parties are not adequately prepared for and/or do not appropriately effectuate root key updates, any root KSK rollover, including the initial rollover that occurred on October 11, 2018 at ICANN’s direction, may introduce substantial risk to relying parties. Even where we have correctly implemented our key updates, we could face potential legal claims and reputational harm if the failures described occur.

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Additionally, over 1,200 new gTLDs have already been delegated into the root zone in the current round of new gTLDs. ICANN plans on offering a subsequent round of new gTLDs, the timing of which remains uncertain. We believe there are potential security and stability issues that could involve the root zone and at other levels of the DNS from the deployment of the new gTLDs that should have been addressed before any new gTLDs were delegated, and despite our and others’ efforts, some of these issues have not been addressed by ICANN sufficiently, if at all. For example, domain name collisions have been reported to ICANN, which have resulted in various network interruptions for enterprises as well as confusion and usability issues that have led to phishing and other cyber-attacks. It is anticipated that as additional new gTLDs are delegated now, or in subsequent rounds, more domain name collisions and associated security issues will occur.
The evolution of internet practices and behaviors and the adoption of substitute technologies may impact the demand for domain names.
Domain names and the domain name system have been used by consumers and businesses to access or disseminate information, conduct e-commerce, and develop an online identity for many years. The growth of technologies such as social media, mobile devices, apps and the dominance of search engines has evolved and changed the internet practices and behaviors of consumers and businesses alike. These changes can impact the demand for domain names by those who purchase domain names for personal, commercial and investment reasons. 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 monetize their investment in domain names can negatively impact our business. Some domain name registrars and registrants seek to purchase and resell domain names at an increased price. Adverse changes in the resale value of domain names, changes in the business models for such domain name registrars and registrants, or other factors, including regulations limiting the resale of domain names, could result in a decrease in the demand and/or renewal rates for domain names in our TLDs. Such a resulting decrease in demand and/or renewal rates could negatively impact the volume of new domain name registrations, our renewal rates and our associated revenue growth.
Some domain name registrants use a domain name to access or disseminate information, conduct e-commerce, and develop an online identity. Currently, internet users often navigate to a website either by directly typing its domain name into a web browser, the use of an app on their smart phone or mobile device, the use of a voice recognition technology such as Alexa, Cortana, Google Assistant, or Siri, or through the use of a search engine. If (i) web browser or internet search technologies were to change significantly; (ii) internet users’ preferences or practices shift away from recognizing and relying on web addresses for navigation through the use of new and existing technologies; (iii) internet users were to significantly decrease the use of web browsers in favor of applications to locate and access content; (iv) internet users were to significantly decrease the use of domain names to develop and protect their online identity; or (v) internet users were to increasingly use third-level domains or alternate identifiers, such as social networking and microblogging sites, in each case the demand for domain names in our TLDs could decrease. This may trigger current or prospective customers and parties in our target markets to reevaluate their need for registration or renewal of domain names.
Some domain name registrars and registrants seek to generate revenues through advertising on their websites; changes in the way these registrars and registrants are compensated (including changes in methodologies and metrics) by advertisers and advertisement placement networks, such as Google, Yahoo!, Baidu and Bing, have adversely affected and may continue to adversely affect the market for those domain names favored by such registrars and registrants which has resulted in, and may continue to result in, a decrease in demand and/or the renewal rate for those domain names. For example, according to published reports, Google has in the past changed (and may change in the future) its search algorithm, which may decrease site traffic to certain websites and provide less pay-per-click compensation for certain types of websites. This has reportedly made such websites less profitable which has resulted in, and may continue to result in, fewer domain registrations and renewals. In addition, as a result of the general economic environment, spending on online advertising and marketing may not increase or may be reduced, which in turn, may result in a further decline in the demand for those domain names.
If any of the above factors negatively impact the renewal of domain names or the demand for new domain names, we may experience material adverse impacts on our business, operating results, financial condition and cash flows.
Many of our markets are evolving, and if these markets fail to develop or if our products and services are not widely accepted in these markets, our business or our prospects could be harmed.
We seek to serve many new, developing and emerging markets in foreign countries to grow our business. These markets are rapidly evolving, and may not grow. Even if these markets grow, our services may not be widely used or accepted. Accordingly, the demand for our services in these markets is very uncertain. The factors that may affect market acceptance or adoption of our services in these markets include the following:
regional internet infrastructure development, expansion, penetration and adoption;
market acceptance and adoption of substitute products and services that enable online presence without a domain, including social media, e-commerce platforms, website builders and mobile applications;

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public perception of the security of our technologies and of IP and other networks;
the introduction and consumer acceptance of new generations of mobile devices, and in particular, the use of mobile applications as the primary engagement mechanism for navigating the internet;
increasing cyber threats;
government regulations affecting internet access and availability, domain name registrations or the provision of registry services, data security or data localization, or e-commerce and telecommunications over the internet;
the maturity and depth of the sales channels within developing and emerging markets and their ability and motivation to establish and support sales for domain names;
preference by markets for the use of their own country’s ccTLDs as a substitute or alternative to our TLDs; and
increased acceptance and use of new gTLDs as substitutes for established gTLDs.
If the market for e-commerce and communications over IP and other networks does not grow or these services are not widely accepted in the market, our business could be materially harmed.
The business environment is highly competitive and, if we do not compete effectively, we may suffer lower demand for our products, reduced gross margins and loss of market share.
The internet and communications network services industries are characterized by rapid technological change and frequent new product and service announcements which require us to continually improve the performance, features and reliability of our services, particularly in response to competitive offerings or alternatives to our products and services. In order to remain competitive and retain our market position, we must continually improve our access to technology and software, support the latest transmission technologies, and adapt our products and services to changing market conditions and our customers’ and internet users’ preferences and practices, or potentially launch entirely new products and services such as new gTLDs in anticipation of, or in response to, market trends. We cannot assure that competing technologies developed by others or the emergence of new industry standards will not adversely affect our competitive position or render our services or technologies noncompetitive or obsolete. In addition, our markets are characterized by announcements of collaborative relationships involving our competitors. The existence or announcement of any such relationships could adversely affect our ability to attract and retain customers. As a result of the foregoing and other factors, we may not be able to compete effectively with current or future competitors, and competitive pressures that we face could materially harm our business.
We face competition in the domain name registry space from other gTLD and ccTLD registries that are competing for the business of entities and individuals that are seeking to obtain a domain name registration and/or establish a web presence. We have been designated as the registry operator for certain new gTLDs including certain IDN gTLDs; however, there is no guarantee that such new gTLDs will be as or more successful than the new gTLDs obtained by our competitors. For example, some of the new gTLDs, including our new gTLDs, may face additional universal acceptance and usability challenges in that current desktop and mobile device software does not ubiquitously recognize these new gTLDs and developers of desktop and mobile device software may be slow to adopt standards or support these gTLDs, even if demand for such products is strong. This is particularly true for IDN gTLDs, but applies to conventional gTLDs as well. As a result of these challenges, it is possible that resolution of domain names within some of these new gTLDs may be blocked within certain state or organizational environments, challenging universal resolvability of these strings and their general acceptance and usability on the internet.
See the “Competition” section in Part I, Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2018 for further information.
We must establish and maintain strong relationships with registrars and their resellers to maintain their focus on marketing our products and services otherwise our Registry Services business could be harmed.
All of our domain name registrations occur through registrars. Registrars and their resellers utilize substantial marketing efforts to increase the demand and/or renewal rates for domain names as well as their own associated offerings. Consolidation in the registrar or reseller industry or changes in ownership, management, or strategy among individual registrars or resellers could result in significant changes to their business, operating model and cost structure. Such