威瑞信 (VRSN) 2001 Q3 法說會逐字稿

VERISIGN INCORPORATED THIRD QUARTER EARNINGS RELEASE CONFERENCE CALL

Please stand by. We are about to begin. Good day everyone and welcome to the VeriSign Incorporated third quarter earnings release conference call. Today's call is being recorded. At this time, for opening remarks, I would like to turn the call over to Ms. Dana Evan. Ms. Evan, please go ahead now.

Thank you. Good afternoon everyone, and welcome to VeriSign's third quarter 2001 conference call. I am Dana Evan, Chief Financial Officer for VeriSign, and I am here with Stratton Sclavos, President and CEO, and Katie Ochsner, our Director of Investor Relations. On behalf of the company, we would like to thank you for joining us today. Before I review the format of the call, we would like you know that our financial results were released to the newswires this afternoon after the markets closed. The press release can be found on our website at www.verisign.com. This call is also being web cast live, both on our website, as well as at www.streetfusion.com. As it relates to the format of the call today, I will begin with a review of VeriSign's financial results for the third quarter of 2001, and then turn the call over to Stratton. He will review the quarterly highlights and other important business milestones, as well as give you a high level view into our business opportunities, strategy in the overall outlook going forward. Stratton will then turn it back to me for some financial guidance for Q4 '01 and fiscal 2002, as well as some final comments. We will then open the call for your questions. We'll stop the call promptly at 3 o'clock. Before we begin today, I would like to remind you that the matters that we will be discussing, other than the historical financial data, may be forward-looking statements. As such, they are subject to the risks and uncertainties as described in our 10-K for the year ended December 31st, 2000, as well as other reports filed with the SEC. Our actual results may vary materially from any such statements. Now turning to the financial review. As you will see in a moment, our third quarter results indicate another strong quarter for VeriSign in what was obviously an extremely challenging macroeconomic environment. The positive trends we saw in the quarter in both the growth of our customer base, as well as our revenue per customer, were driven primarily by higher ASPs in our core services and increased customer rates. This translated into continuous sequential growth in our topline revenue, healthy operating cash flows, greatly expanded operating margins that came in well ahead of plan, and better than expected earnings results. In addition, we exited the quarter with a very strong balance sheet containing over a billion dollars of cash and a substantial deferred revenue balance. Now turning towards the actual results for the quarter. On a consolidated basis, VeriSign reported $255 million of revenue for the quarter compared to 173 million in Q3 of last year and 231 million last quarter. To segment that further into our business divisions, the Mass Market division delivered approximately 56% of total revenue for the quarter, while the Enterprise and Service Provider division made up the remaining 44% of revenue. As we have told you in the past, we would expect the revenue split between Mass Market and Enterprise Service Provider divisions to reach a 50/50 distribution by the end of 2002. Over the course of the quarter, the continued demand for our core services, in addition to our expansion into new and enhanced service offerings, drove even further diversification in our revenue base. Customer concentration therefore remains virtually nonexistent with no single customer accounting for even 5% of total revenue. More importantly, due to the critical nature and broad range of the services that we offer and the span of markets in which we offer them, we are not necessarily relying on any one area of the business to demonstrate strong financial growth. The percentage of revenues driven from our international affiliates and subsidiaries was 15% in Q3, up from 13% last quarter. Consolidated cost of revenue for the quarter was $86 million compared to 60 million in the year ago period and 78 million last quarter. This translates into a 66.2% consolidated gross margin for this quarter, which is up from 65.4% in the same period a year ago and 66% last quarter. Now moving onto the operating expense related items. We ended the quarter with a consolidated employee headcount of approximately 2,560 people that is compared to 2,355 in the previous quarter. Total consolidated operating expenses for Q3 were 125 million compared to 96 million in Q3 of '00, and 119 million in Q2 of this. While we continue to see increase in efficiencies in our marketing spending during the quarter, we also continue to invest in the corporate infrastructure and R&D areas. This reported operating expense level translates into consolidated operating income of 43.5 million or 17.1% operating margin. This represents a significant expansion over the 9.7% operating margin we reported in Q3 of last year and the 14.6% that we reported just last quarter. We continue to look for more ways to enhance our cost control measures throughout the quarter and drive further revenue synergies across all lines of business while continuing to manage our expense growth more efficiently. Other income for Q3 was 17 million as compared to 19 million in Q2 and consists primarily of interest income as well as realized gains from the sale of marketable securities. The sequential decline you see here in other income was driven primarily by the continued rate decreases by the Federal Reserve which shows lower yields on our cash balances during the quarter, as well as the write down of some abandoned fixed assets. VeriSign reported pro forma consolidated net income for the third quarter of $60 million versus net income last year of 36 million and 53 million last quarter. This translates into a pro forma consolidated EPS in Q3 of ¢28 compared to an EPS of ¢25 in Q2 of '01. As you know, VeriSign is not currently in a tax paying position and does not expect to be for the foreseeable future. I will talk more about the outlook for our tax situation in a few minutes when I give the guidance for 2002. With that said, on a fully taxed basis using the 40% effective tax rate, EPS this quarter was ¢17 cents or ¢1 ahead of the first call consensus of ¢16 which had also been tax affected. Now moving onto the balance sheet. As it relates to the cash balances, VeriSign continues to post an extremely strong balance sheet with cash equivalents and investments of approximately 1.2 billion at the end of Q3. As we have shown in past quarters, we continue to generate healthy positive cash flows from operations. On a normalized basis, operating cash flow, excluding certain one-time charges, was in the range of $45 to $50 million and relatively consistent with cash flow from last quarter. Turning to the accounts receivable area. The AR balances which consist primarily of trade receivables increased by 39 million to 228 million. This was due for the most part to increased sales, acquisitions in the quarter and their related AR balances that were booked through purchase accounting upon the closing, the increase in international revenues overall, as well as significantly lower cash collections during the last few weeks of the quarter as a result of the tragedies of September 11th. In fact, the acquisitions added over 10 million of the 28 million increase, for which there is little corresponding revenue. Our cash collections during the last few weeks of September were approximately 50% less than the previous weeks in July and August, and we saw some significant payments come in during the first few weeks of October that were expected in September which totaled over $10 million. That being said, net DSOs in Q3 came in at 75 days, as compared to 66 days last quarter, factoring in the change in deferred revenue for the quarter. To normalize that number further for the acquisition related receivables, the adjusted DSO would have been 70 days. Factoring into account Q3 expected cash receipts from affiliates and large enterprise customers that weren't actually booked until early October would have reduced this number another 2-3 days to 62 to 67 day range. As many of you know, there has been a quite a bit of confusion in this information as it relates to our accounts receivable balances in DSOs over the past few quarters. As we have continually said during the course of the year, you should expect accounts receivable and DSO to increase due to the deferred revenue model that drives a large portion of our revenue, the number of invoice renewals this year, and the continued growth we expect to see in the international and enterprise business. To drill down a bit further for Q3, the AR balance and hence the DSO for the Mass Market side of the business actually declined by several days in the quarter. As we've said numerous times before, internally we manage our accounts receivable balances to a goal of maintaining approximately 80% of our accounts receivables less than 60 days plus two. We have continued to achieve that goal throughout the year. In fact, approximately 90% of accounts receivable in the Mass Market's division is less than 30 days old. This is significant in our opinion as it shows a continued willingness by the customer to pay for our services in a relatively timely manner. Total deferred revenue increased to $585 million in Q3, up from $570 million last quarter. This represents a 3% sequential increase, which was at the low end of the 3% to 5% guidance we gave last quarter. Clearly, the events on September 11th, which caused several million dollars worth of deals to slip into October and to a lesser extent the delay in the rollout of the new gTLDs in the domain name business, had an impact on our growth rate here. We would expect deferred revenue to grow at a rate of approximately 3% to 5% sequentially in Q4. Capital expenditures for the quarter were approximately $28 million as compared to 25 million last quarter. As a reminder, the company expects to spend approximately $100 million in capital for 2001. Let me now spend a couple of minutes updating you on some of the Q3 and post-quarter developments as it relates to our corporate finance activity. As you know, on September 24th, VeriSign announced its intent to acquire Illuminet holdings. Under the terms of the agreement, VeriSign will exchange 0.93 shares and options of VeriSign common stock for each outstanding share and option of Illuminet. Illuminet is the leading provider of intelligent network and signaling services to communications carriers in both wireline and wireless markets. Stratton will take about this transaction more in few minutes. During October, the company took the opportunity to purchase the existing buildings that were under lease at our Mountain View, California headquarters facility. This transaction was completed at a price of approximately $285 million. The purchase of these buildings where our main corporate headquarters and data center facilities reside afforded us a significant operating expense benefit for the future, thereby allowing us to direct our resources toward revenue generating areas such as R&D, sales and marketing, and infrastructure versus operating facilities expense. In addition, given current interest rates, we felt that this was an opportunity to catch from the long-term perspective. In addition, consistent with our conservative financial strategy, VeriSign today filed a shelf registration statement for $750 million. This equity shelf registration is straightforward and provides the company the increased flexibility we need for rapid execution, for potential equity issuances, and other general corporate purposes. There are no specific transactions being earmarked at this time for the use of this shelf. However, we believe that putting this instrument in place is simply a matter of good corporate governance. I would like to also remind you that the VeriSign board of directors authorized the share repurchase program in Q2, whereby the company, from time to time, will repurchase up to $350 million of its common stock in the open market. In Q3, we bought back over a million shares of VeriSign common stock in the open market. As we have said before, we will look to buy back VeriSign shares from time to time at appropriate prices to fuel employee option grants and for other general purposes. With that, I will conclude my review of the financial results and turn the call over to Stratton.

Thanks Dana. Clearly, given the economic backdrop and the tragic events of September 11th, we are more than pleased that we could achieve both our financial and strategic goals for the quarter. In times like this, you need to have a sound business strategy, the ability to execute, and strong financial management. In Q3, we believe we demonstrated all three. As you know, VeriSign's strategy is to build an infrastructure company capable of delivering the critical set of digital trust services that enable everyone everywhere to conduct commerce and communication with confidence. We use an engine strategy where our basic technology such as DNS or PKI is delivered through our scalable global infrastructure to consumers, SME's, enterprises, and service providers. And as our operating results are demonstrating, we get tremendous leverage in the strategy as we drive both higher volume and new services off each engine. In addition, the sustained increase in operating leverage this year has allowed us to continue to fund significant new product and service development which should drive further incremental revenue opportunities as we head into 2002. From an execution perspective, Q3 had some significant highlights that included substantial increases in revenue per customer across almost all product lines. We also continued to expand our service offerings into new areas, especially in the global registry business, as I will talk about shortly. In addition, we saw continued progress in our efforts to cross sell our portfolio services and develop Enterprise and Mass Market customers alike. Our new retail storefront and expanded affiliate relationships rounded out the accomplishments. We also believe we successfully dealt with several significant challenges in the quarter, including the restructuring of our consulting businesses, the further cleansing of our domain name customer base, and overall management of expenses, even as we hired some incredible new employees across the company and brought in 2 small acquisitions in Exault and the corporate domain name business of euro909. And while the events of September 11th were unimaginable, we estimate their impact to our Q3 revenues at a modest $5-$7 million. Now I will cover many of these items in more detail over the next few minutes as a review of the associated Q3 business metrics for each of our divisions. We will also update you on the strategy and status of the proposed Illuminet acquisition and then finish with the business outlook for Q4 in 2002. I will then turn the call back over to Dana for her comments on financial guidance going forward. Let's start with the Enterprise and Service Provider division. This division includes our managed PKI services, global affiliated business, online brand protection services, and the global registry naming and resolution services. We are very pleased that the ESP division, as we call it, had a very strong quarter even in the face of traditional Q3 seasonality and other world events. The momentum was fueled by several factors including significant pickup in the PKI business, diversification of the affiliate business with both payment and naming platforms, expansion of the global registry offerings, and continued Greenfield growth in the online brand protection services. Revenues for this unit in Q3 totaled $112 million, representing 44% of our total revenue. And as you will see, we achieved significant growth in all the customer metrics during the quarter. First, let's talk about our managed PKI business. We continued to see good trends in terms of new orders, order size, and sales pipeline growth. In fact, we saw our average deal size for large enterprise sales increase by more than 30% over the last quarter, as we signed up many new customers, including several top Fortune 500 companies across the energy, insurance, banking, manufacturing, and telecommunications sectors, and while we did see a small number of deals slip out of the quarter, we expect the majority of those to close this month. Deployment volumes in PKI remain healthy with tens of thousands of seats being turned on weekly. While much of this work is with new customers, we also seem to be gaining market share for competitive replacements in certain accounts. Moving to our international affiliate business, we are very pleased with the high level of activity we saw here in the third quarter as well. We added 5 new international affiliates and 3 domestic affiliates in Q3, bringing our total number of partners in the VeriSign trust network to 46, up from 38 just last quarter. At the same time, we saw a continued build out and ramp up from our existing base. In fact, over 80 additional enterprise customers were signed under the affiliates in the third quarter. In addition, you will recall that earlier this year, we said we would begin selling payment platforms to either existing affiliates or new affiliates depending on the region. We added 4 payment affiliates in Q3 alone, and now we have a total of 9 service providers preparing to sell our payment services in international markets. We would expect to add one to two new affiliates in Q4, and to have another one to two of our existing affiliates at the payment platform. We also had our first success in using the affiliate model for our naming engine, as we signed on an Asian partner to deliver our WebNum service in their country. We will talk more about this after it in Q4. Our online brand protection services group continued to see strong demand for their services in Q3 as well. As you know, this group helps large corporations manage and protect their domain name portfolios on a global basis. We currently provide services for 25% of the top brand companies in the US, and as the domain name market continues to grow in complexity with the advent of new gTLDs, multilingual, and the rest, we expect to see accelerated uptake throughout the Fortune 500 and beyond. I also wanted to just quickly touch on our consulting business. As many of you will recall, this business had been relatively flat for the last few quarters. While general market conditions played a significant factor here, we also believe that we could have executed better. We told you in Q2 that we would take steps to get this business back on track, and that's exactly what we did in Q3. First, we combined our three existing consulting teams into a single organization and eliminated redundancies and non-performing resources. Second, as was widely discussed, we acquired Exault, Inc., a small network and security services firm based in Chicago. We believe Exault gives us improved geographic reach, additional customers, and a very talented management and technical team. We have taken Exault and already integrated it into the newly named VeriSign Consulting Services Group. And lastly, we have hired a new general manager in Earle Humphries, an industry veteran with more than 25 years of experience in IT services. From a resourcing perspective, the consulting services team started Q3 with 190 professionals and ended with just over 220, including the 100 or so people brought in with Exault. So as you can see, we took very significant operational actions to restructure and reenergize this business and believe that we will be back on track for growth as we enter 2002. The last business unit in the ESP division is the global registry. We saw a good performance in this unit in Q3 in its core business as the registry for dotcom and .net, but more importantly, we saw significant activity in terms of new relationships and expansion into new service offerings that leverage our installed infrastructure. This is a perfect example of the engine strategy at work. As we told you last year, when we acquired Network Solutions, we believe the naming and resolution technology could be used for more than just routing of dotcom and .net name, and now we are proving it. I will explain more about this in a minute, but first let's cover the basic dotcom and .net domain name statistics. We registered approximately 2.6 million new names for the quarter which was in line with our goal of 2.5 to 3 million, and relatively impressive given the overall market condition and the large amount of noise generated by .info and .biz. We also renewed over 2 million paid names and managed the transfer of over 500,000 more. This brought our total number of paid domain name transactions to just over 5 million for Q3. Our authoritative database for dotcom, .net, and .org now contains over 32 million names. Overall, renewal rates in the quarter were estimated at 52% to 53%. While this number is down from 60% rate we saw in Q2, it is still above our 50% guidance number, and we believe it should represent the trough in renewals since we are now coming through the final segment of last year's speculative and promotional rush. 0044:22 With that said, and just to be conservative, we are maintaining the 50% guidance number for the fourth quarter just to catch the tail end of all the grace periods on all the expired domains. We do expect, however, that renewal rates will increase as we go into 2002. Interestingly, we have also seen a stabilization, perhaps even a small uptake, in new name registrations for dotcom and .net over the last 3 months. Obviously, this could be a very positive trend should it continue into 2002. Getting back to the engine strategy, I wanted to use the global registry as an example of how we are looking at growth drivers in the business. Certainly, we would expect the core com and net businesses to continue to grow and to see improved renewal rates. We also plan to promote enhanced services such as internationalized domain names, key words, and secured DNS in the mix. The breakout strategies come from leveraging our technology expertise and deployed infrastructure to deliver services for new customers in market. We have already moved into registry hosting for 6 country-code or ccTLD and are now hosting and being paid for over 750,000 ccTLD names. And of course, our previously announced service to provide managed DNS for enterprises and service providers is now gaining traction with several key customer wins in Q3 and already here in Q4. We are finding a high degree of interest from traditional enterprises, as well as small ISPs and domain name providers, and continue to see pipeline expansion in both the size and number of potential deals. We have also, very importantly, begun to branch out beyond the domain name space into location services, IP telephony services, and voice services with our recent agreements with Preferred Voice, NetNumber and an undisclosed wireless partner, and of course, the proposed Illuminet transaction steps all of this up to another level. So from a growth perspective, we believe we can leverage the basic engines to, one, acquire new customers for existing services; two, sell existing customers new services; and three, branch into new markets with high growth potential. Now let me finish by summarizing the overall customer metrics in the ESP division for Q3. The number of enterprise customers grew to 3,775 during the quarter, up 13% from 3,330 at the end of Q2, and the average annualized revenue per customer grew to 52,000 per year, up 16% from 45,000 in Q2. The number of international affiliates grew to 46 from 38 last quarter, and as I mentioned earlier, we also had two of the existing affiliates at our payment services platform to their offering. This combination of events led to an average revenue per affiliate of $2.7 million up from 2.2 million last quarter. In the global registry business, the number of customers grew to 93 from 84 last quarter, including both registrars and some of our new non-domain name customers. Average revenue per registry customer increased to 1.4 million from 1.3 million last quarter. Now turning to the Mass Market's division. As you know, this division includes our retail domain name registration business, our small business e-mail and website hosting services, our website certificate services, and our B2C payment services. Revenue for the division was 143 million in Q3 or 56% of total revenues. Let us talk about basic domain names first. As we have said before, our strategy for 2001 in the retail domain name market has been to acquire and retain high quality paying customers who are more likely to renew their domains year after year and to purchase additional services from us as their Internet presence grows. In fact, by the end of Q4, we believe we will have turned over almost all of the speculative and promotional names in our base, and will enter 2002 with a very healthy customer portfolio. We believe this will lead to increased renewal rates and overall market share in the Mass Market's group in 2002 as well. We ended Q3 with 6.5 million unique paying customers for our domain name and web presence services. Surprisingly, this is consistent with Q2's customers count even though we took the opportunity to clean out a significant amount of our promotional and speculative names during the quarter. We registered over 750,000 net new and transferred names in the quarter at an average term of 1.6 years per paid name. We also renewed close to 1.2 million names during the quarter. The average subscription term for the renewed name was constant at approximately 2 years. In the value added services area, we brought on an additional 17,000 new customers for our ImageCafe service bringing us to a total of 70,000 hosted multi page websites, and over 360,000 one page websites. We also added 56,000 new e-mail boxes to our base, bringing us to a total of over 800,000 hosted e-mail accounts, and we expect to continue to see growth in the value-added service area in Q4. Let me also give you a quick update on the new .info and .biz PLDs. As has been widely reported, both of these PLDs ran into some not so surprising operational and procedural glitches during their initial startup. In fact, .biz is now not scheduled to open for real time registrations until November 7th. All of our sunrise and pre-registration requests have been submitted, and we are waiting for conformation data. In .info's case, the registry opened up near the end of September, but it has had significant operational issues since. That being said, we still believe we have successfully registered over 70,000 names in the .info registry and are currently number one in market share, even given this startup round-robin process that limited our early submission. We do believe that both registries will be fully operational by the end of November and that we will see .name opened up before year's end. As we have said before, we expect each of the new gTLDs to reach 15% to 20% of the overall name count of dotcom and net. It's our goal to be the number one provider of these names on a global basis as well. We have seen strong demand from large enterprise and international customers already and expect nearly 100% uptake in the corporate branding and trademark areas. In addition, we will begin a significant marketing campaign in Q4 targeting both new and existing customers for the new extension. Turning to web certificates, we issued a record 98,000 web certs during the quarter. Up-sell rates climbed to a record 42% from 40% last quarter fueled by continuing demand for our premium certificate and improved sales conversion rates. This in turn drove up revenue per customer significantly. We now have some 348,000 active website certificates deployed globally. In B2C payments, we added 6,000 new customers and saw our active base grow to over 56,000 merchants, up 12% quarter-over-quarter. While our growth here may seem surprising given the recent online retailing environment, we seem to be benefiting from a continued move by traditional retailers, large and small, to use our payment service as they bring up their online storefront. We also had a record quarter in terms of new accounts through our telemarketing channel. The total dollars transacted through our gateway in Q3 exceeded $2 billion for the first time with some 44 million roundtrip transactions. We also launched enhanced services for high-end merchants and enterprises allowing us to introduce transaction based pricing for the first time. Now the customer metrics for the Mass Market's division as a whole are as follows. We have 6.5 million unique customers and an average annualized revenue per domain customer of $73. While this is slightly down from last quarter's $77, the slip of the new gTLDs and the migration of high-end domain name customers to the Enterprise group were the simple explanation. The web certificate customer base grew to unique customers of 108,000 from 102,000 in Q2. An average revenue per certificate customer increased to $700 per year from $670 in Q2. And lastly, the B2C payment services customer base grew to over 56,000 active merchants with annual revenue per customer of $360 per year, up from $350 in Q2. Overall, we are pleased with the Mass Market performance given general marketing conditions and the unique domain name dynamics of the quarter in regards to dotcom renewals and .info and .biz startup. We remain bullish and focused on building a great customer base in the Mass Market's division and expect our growth subscribers for 2002 will include continued new customer acquisition, higher renewal rates, increases in market share, and higher ASPs for premium services. In fact, we're already seeing signs that our new storefront should be a driver of increased business. While one month does not a trend make, we've already seen higher traffic in page views that have led to increased new unit sales and renewals. Last week, in fact, we saw over 2 million domain name searches from our homepage, a very significant increase from previous run rates. So we are optimistic, but we'll wait to see the Q4 trends for further conformation. Now I also wanted to touch on the proposed Illuminet transaction for a minute. We view Illuminate as a new engine in the VeriSign model. As many of you know, we've been looking to develop new products and services to help bridge the IP and voice worlds. Illuminet's signaling and intelligent database services provide both wireline and wireless carriers with trusted infrastructure for basic call routing, as well as advanced services such as caller ID, toll-free services, and local number portability. In many ways, we believe that Illuminet is the VeriSign of the voice world. The company is a leader in its space with proven infrastructure, great customer relationships, and a business model with a high degree of recurring revenues and visibility. We are proceeding with all the normal regulatory procedures and currently expect to close the transaction in late Q4 or early Q1. The transaction is both additive to revenues and accretive to earnings in 2002. Now let me say a few things about the general business climate we are seeing and the factors that we think will drive our business forward in Q4 and 2002. I'll then turn the call back over to Dana to give you more specific financial guidance. Clearly, the trends that we saw in our Enterprise business in Q3 give us some optimism regarding Q4 and 2002. New customer acquisitions, market share gains, and broader deployments in the existing customer base and internationally are fueling the growth. We also had new services set to launch across the naming authentication payment vengeance over the next 3 to 4 months, giving us some additional momentum as we head into the New Year. We feel we're in a great position to expand the Enterprise business as the macroeconomic conditions improve. On the Mass Market side, we are encouraged that we have maintained our customer count at 6.5 million even as we cycle through the bottom of the massive renewal cycle brought on by last year's dotcom land rush and speculation. The decrease in names managed this quarter actually stems from our proactive initiatives to cleanup promotional and speculative names from the base. We are very confident that our strategy of focusing on paying customers who have an intention to use their domain name will show increasing dividends in 2002. By the end of Q4, we would expect to see renewal and customer acquisition trends moving upward again. Growth in 2002 will come from new name products such as .biz and .info that will up-sell rates for our premium services and higher customer retention and acquisition rates. On a final note, I am also very pleased that we have been bringing on some incredibly talented new employees across all levels of the corporation. In addition to the senior executives we brought on in Mass Markets, global registry, consulting, human resources, and corporate marketing, we have also added tremendous bench strength in the finance, engineering, product marketing, and operations teams. To use a sports metaphor, we're looking forward to putting our best team ever on the field in 2002. So summing it all up we think that many of the domain name issues will be behind us by the end of this year. We'll be heading into 2002 far better positioned with new products and channels. We're setting achievable goals to increase market share and retention rate, and we're bringing an enviable portfolio of current services with a long way to go on expanding the breadth and depth of the engine. The Illuminet transaction is the next engine and allows us to service new customers as we help build the bridge between voice and data. With that said, we believe we can grow at least 40% top line next year and over 60% bottom line in 2002, and that's before we add in Illuminet which we know will be accretive. Now let me turn it back over to Dana. Thanks for your attention.

Thanks Stratton. In summary, before we turn the call over to you for the Q&A session, let me just briefly give you some high level guidance. You can see by VeriSign's quarterly financial results, as well as Stratton's and my comments today, we continue to deliver on our company strategy and post strong financial results. In fact, we're very proud that in the economic environment we've seen in 2001 VeriSign has been able to meet our top line goals while exceeding on the bottom line all year long. As Stratton said, we believe there are some very positive trends now materializing in our core business and many new growth drivers on the horizon. We balance this enthusiasm, however, with the acknowledgement that world events are not completely within our control. Taking this into account, we have established what we believe to be reasonable goals for the company. In general, we would expect to see continued growth in topline revenue consistent with current business trends, although we would also expect periodic fluctuations among our growth rate. The guidance I am about to give you is specifically for VeriSign on a standalone basis and does not include any contribution for the Illuminet acquisition. We have indicated that we would expect the transaction to close either late in Q4 or early Q1 of next year. However, since it's a purchase transaction, we currently cannot provide guidance on a combined company basis. That being said, Illuminet reported their Q3 earnings results a week ago and gave their standalone guidance for 2002 on that call. It's a reasonable approach for you to take their guidance for 'O2 and simply add it on top of the VeriSign guidance I am about to give. Turning to the revenue estimates for Q4, we would look for revenue to be confirmative in the range of $270-$285 million. While this is on the low end of the current street estimates, we feel it's prudent based on the .biz slip and other economic factors. Looking forward in 2002, we would expect revenue to be in the range of 1.35 to 1.45 billion, consistent with our previous expectations on growth and the current street consensus of approximately 1.4 billion. In addition, gross, operating, and net margins should also continue to improve. However, we would expect periodic fluctuations among our growth rates here as well. As it relates to gross margins for Q4, we continue to expect gross margin in the range of 66% to 67%. Looking out a bit further, we would expect gross margin exiting 2002, to be in the range of 67% to 68%. In addition, we would expect our operating margins to continue to expand such that we exit 2001 with margins in the range of 18% to 20%, well ahead of the previously guided range of 14% to 16%. Looking out into 2002, we would expect to exit the year with operating margins in the range of 24% to 26%, at the high end of our previously guided range of 22% to 26%. In the interest income area, given the fed interest rate cuts throughout the year and the purchase of our Mountain View facility, we think it's reasonable to look for interest income next year in the $40 to $45 million range. As it relates to EPS for Q4, we are raising our guidance to ¢19, up from the current street consensus of ¢18, again, on a fully taxed basis using a 40% estimated effective tax rate. For 2002, we are comfortable with the current street consensus of $1.04. However, this EPS estimate should now reflect the higher operating margin range that we just discussed of the 24% to 26%, exiting the year. This operating margin increase offsets the reduction in interest income previously mentioned. This leads to an apples-to-apples comparison with the current street estimates and reflects the use of the 40% tax rates. Once again, all these figures are VeriSign's standalone and do not take into account the accretive nature of the proposed Illuminate acquisition. With that said, as you know, we are not currently in a tax paying position and do not expect to be for the next several years. In fact, in recently analyzing our NOL carryforwards, our current tax assets on the balance sheet, and future tax differences, we have determined that for 2002 and beyond a more appropriate effective tax rate would be 30%. We believe this is a conservative estimate, and in fact, there are indications that the rate could even be lower. We would recommend that analyst models use the new 30% effective tax rate going forward. By taking the previous EPS guidance of $1.04 and applying the revised 30% effective tax rate, we are comfortable with the new EPS range of guidance of $1.15 to $1.20 for the year 2002. With respect to the VeriSign target operating models for 3-5 years out, our long-term target-operating model would suggest delivering operating margins in the 30%-34% range. We remain comfortable in this target model as well. And with that being said, I'd like to now open the call for your questions. Operator, may we have the first question please?

Thank you Ms. Evan. Our question and answer session will be conducted electronically. If you would like to ask a question, please firmly press the '*' followed by the digit '1' on your touch-tone telephone. We will come to you in the order that you signal, and if you find that your question has been asked and answered before you could ask it and you would like to remove yourself from the question roster, please firmly press the '#' key. Again, if you would like to ask a question, press the '*' key followed by the digit '1'. And for our first question, we go to Todd Raker Credit Suisse First Boston.

Hey guys. How are you?

Good, thanks.

Few just quick housekeeping questions. In terms of the purchase of the facility, did that hit cash balance at the end of the quarter or was that something that closed in the fourth quarter?

It closed in the fourth quarter.

Okay, so we should see a reduction of cash. Can you give us some insight in terms of overall cash, why it went down, and what some of these one-time charges were when you referenced the operating cash flow?

Alright, so there were some acquisitions in the quarter that had some cash implications, and when you see the cash flow statement when it comes out in the Q, that will be fairly consistent there. But you can see cash receivables went up significantly and that always affects the cash flow, but we still look for the cash flow to be in the $45-$50 million range.

Okay, and Stratton, if you could talk about US affiliates. This is a new development. What are the verticals these guys are approaching and how many affiliates you would expect long-term?

Well, I am glad you asked that Todd. We have had a couple, from probably a couple of years ago, what we call the domestic affiliates, and they are really folks targeted at vertical markets. Mostly you think of these guys as system integrators targeting vertical markets. In fact, SurePay and the things we are doing with FTC has some analogy there. But the guys that we signed up in this quarter include folks who will be targeted at government applications with token type 2 factor authentication solutions, financial service companies that are aggregating across accounts, a variety of folks in those spaces, and when we talk about them as affiliates, they fall into what you'll remember we called the service provider affiliate as opposed to the processing center, meaning we still have the back-end thing for them, where as they maintain all of the front-end registration systems and customer support systems.

And from an economic perspective, is that consistent with how a service provider affiliate in the international space would operate?

Generally, in the international space, the upfront fees, as well as the commitments, are much higher.

Okay. Can you talk about strength in PKI, very surprising given this environment?

As you and I have talked before, I mean, I keep knocking my head trying to understand why it's strong as it's been for us, and the things that I keep coming back to are, as simple as I can say it, customers need this stuff now because they are looking to roll out applications that help them save costs, and generally, an extra net to their customers or to their suppliers is something they want to secure with more than just a password. That's where 80%-85% of our deployments go. And it's very simple to deploy because they have already got the databases in-house, their customers have web browsers, and we just set them up with certificates and a few of our components. So it's a great application, and in many respects, the current economic times are driving faster deployment of that, and coupled with the fact that the outsource model allows the customer to not have to know anything about PKI to get it done, it's probably what's driving this for the most part. And as I said, I think we are also gaining market share against the software providers in this space right now.

And last question before I go. You talked about cleaning out some of the promotional names out of the domain name site. Can you quantify that for us at all?

Well, I think the best way to think about it is if you go back to last year and look at, kind of, Q3 and Q4, there were probably between 800,000 to a million promotional names, speculative names given out, and that's from the VeriSign side of the registrar. Now there are a bunch of others from the other registrars that we have nothing to do with, but since those represent zero revenues on the current balance sheets, since they represent zero forward revenues, and since they actually don't represent a decrease in customer count to get rid of them, we are just going through and cleaning them out here in Q3 and Q4. And most important to us is maintaining customer account here. Those are the people who are actually paying, whereas most of the promotional stuff was an add-on name to a dotcom at the low end for a speculator or something like that. So to be honest with you, we didn't have to do this. We think it's actually the right approach right now here in Q3 and Q4. So as we start Q1, we come in with a very healthy, very clean customer base there that we can drive upward revenues from.

Great, thanks guys.

Thanks Todd.

Thanks Todd.

For our next question, we go to Mark Fernandes with Merrill Lynch.

Thanks. Stratton, can you talk about the impact on the new TLDs on the dotcom and .net sales please?

Sure Mark. Interestingly, we pull all the data now, as you know, on a kind of a biweekly basis to see exactly how many names are going into the registry. I have gone back now and looked at July, August, September, and now the first three weeks of October, and interestingly, in the third week of each of those months, the number of common net registrations has actually been relatively stable, and in fact, in this month, it's actually picked up. Now that is counterintuitive, I would think, given that all the noises around biz and info, and I think what it shows is that we are now seeing biz and info getting people to think about buying dotcom and net if it's available. That's certainly a potential driver. But in addition, we think we've stabilized the dotcom run rate here. It looks like it can be consistent going into '02, and frankly, there are some folks in the company that think we'll start to see it grow again. Because if you think about it, we have now gone through the absorption period of the 22 million names that got added last year, right, and so we are now back into a kind of almost a fresh start perspective.

Okay, so what's your expectation, Stratton, at the end of the day because there is big discrepancy between what affiliates and Newstar are saying versus what you are saying, so give us a sense of what your expectation is here?

I'm sorry, what do you mean the discrepancy?

I mean they have some pretty inflated numbers in terms of what they expect total names to be. What do you think you'll be, a million names or a million and a half, where do you think you'll end up?

Of .info and .biz? I think we will have between 20% and 30% market share in those names, and our expectations, probably for the next 4 to 6 quarters, is somewhere north than of million, somewhere below 2. I mean, I think it's very hard to say right now. There are some encouraging signs, but you've got the slip in .biz, so all in all I think we are cautiously optimistic about the whole thing.

Okay. So with affiliates up 11 million, how much was royalty versus one-time payments here?

I don't know that number, but significant, it's always the most significant amount comes from the royalties now.

Okay, and last question, on Exault, what was the contribution this quarter? What do you think it's going to be next quarter and next year, Stratton?

I think, interestingly, we were probably hoping for about 5 million plus, because remember we only had 41/2 weeks of Exault contribution. As it turns out, we probably got that, although we had a little bit of a hiccup at the end because they had many customers in that downtown New York area. We set the impact to quarterly revenue at probably about 5-7 million, probably 1 or 2 of that came out from that shop, so we think it's, as you also saw, we took out a significant number of people from the other 3 consulting groups, so we are only up 40 in headcount. We think going into Q4 you should look for that business to drive maybe 8% to 10% of the revenues of which that would be something on the order of 25-30 million of which the Exault guys could hopefully generate 5-7 million. Although to be honest with you Mark, it really is now fully integrated. The Exault guys have taken over many of the VeriSign accounts, vice versa.

Okay, great. Thanks guys.

For our next question we go to Mary Meeker with Morgan Stanley.

Thanks. Dave and I just have a couple of questions. Dana you did a pretty good job of addressing a lot of the issues on the call, but could you spend a little bit of time giving us a sense of where you think DSOs stabilize and when? And you talked about the revenue per customer increasing. If you could provide a little more information on exactly where that is coming from and what the go forward trends might be, we'd appreciate that. And then as a last question, it appears as though the consensus for revenue for the fourth quarter is around 285. Your range is 270 to 285 as you indicated. What are some of the weaker areas? What are some of the stronger areas? And how conservative do you think that number may end up being? Thanks.

And do I get an A if I remember all those questions?

I get a B if I can remember them. We, Dave and I, did want to commend you on having warm up music for the call that sounded like Barnabas Collins in dark shadows preparing for Halloween. So if that doesn't confuse you, we will help you.

I didn't pick the music, okay. On the DSO front, we have said all year, as you continue to have the renewal base that previously was never invoiced being invoiced every quarter in large numbers, right, you continue to see international revenue grow, and at 15% obviously there is a lot of growth still to be done there. You continue to see the Enterprise Service Provider revenue be a larger portion. You have got a lot of factors that are going to cause those DSO numbers to go up. That being said, we really think once we get through Q4, and new and renewing base of customers get to more normalized state, and that business is driving a piece of it, that you will get to a normalized DSO number in Q1. I don't want to give you a number there for Q1, because I really need to see what is going to happen here in Q4. That being said, we have seen good collections in the Mass Market's areas like I talked about. There really isn't a DSO issue in that area, and it is in the Enterprise and affiliate area of which international is the bigger component.

Mary, I don't know. My view on it is having over 90% of your customers 30 days or less in the Mass Market and having had the Mass Market DSO actually go down this quarter kind of shows that there really isn't an issue there in this whole domain name concern that has been floated. On the Enterprise side, I think we believe if you kind of disaggregated the Enterprise DSOs or traditionally where they were with the standalone VeriSign and, as Dana said, we had a couple of larger payments come in, in the first week of October that we were expecting in September, at the end of the day we are not worried about DSOs.

What would worry us Mary is if we saw a significant drop in that metric that we use here internally. So we look to have 80% of all the accounts receivable of less than 60 days plus two, and that is still being managed at that number and that is still happening. So lot of it is just an anomaly of the model. If customers were paying, that metric would not be true.

Right, okay.

Okay.

I think on the revenue per customer stuff, as we gave out all the metrics, clearly very significant quarter-over-quarter strength in the PKI side, very significant quarter-over-quarter strength, in the affiliate side, as they continued ramping up and as we brought on a significant new number of affiliates or expanded a couple of them with the payment platform. Very strong businesses, very excited about them. The online brand protection services business is a very strong growing business, and it is a little unfair to the Mass Market's crew. Any large enterprise buying lots of domain names eventually gets moved from a Mass Market customer into an Enterprise customer, and while that is not too bad on 6.5 million customers, you are not going to take the customer countdown from a revenue perspective, those are obviously all the highest paying customers, and we are continuing to see pretty strong growth there. In addition to this being our first quarter, we actually had a team in Europe doing it, and they had a very, very successful quarter. So across the board in Enterprise, I tell you we just were thrilled and even somewhat surprised ourselves at the performance of that.

And what is your expectation about the outlook, because it appears as though you got more of an uptake sooner than you might have expected in some of those areas?

Yeah, I think we did. We have been saying I think about 5% quarter-over-quarter growth and revenue per customer there and some of those were measured in teens, I think, quarter-over-quarter. So you know us. We hate to give a one-quarter trend and predict it for the future, but I think we are still comfortable that the 5% number in the enterprise quarter-over-quarter growth is going to be doable. I would tell you I think we still see significant opportunity here in Q4 around PKI and around some of the new registry services, and we will go from there. The weak areas were obviously in the domain name side and the Mass Market side. That actually went down quarter-over-quarter. Most of it we think attributable to the fact that we didn't get to sell a whole lot of .biz and .info to the existing customer base which would have taken those numbers up and kind of the flow through of the zero revenue promotional that we took out that really weren't generating anything anywhere. But we do believe those numbers will turn around in 2002. Champion Mitchell the new GM there in that division is very confident that retention rates and acquisition rates in terms of market share are going to improve here.

Okay. You answered more than enough for me. If anyone thinks our third question was relevant, they can ask it. Thanks guys.

If they can remember it.

If they can remember it.

For our next question we go to Steve Sigmond with Dain Rauscher Wessels.

Hey guys. Thanks. Nice job. Stratton and Dana, I just wanted to take a quick step back and sanity check your 40% topline growth estimate for next year. Lot of companies are coming out and either not giving guidance or they are giving guidance that is significantly lower than that, and I know with the Network Solutions acquisition, with the deferred revenue impact, that is about $15 million per quarter impact, a drag that goes away. So can you just kind of help me disaggregate that a little bit? What is the apples-to-apples growth rate? How much of it is driven by gaining of share in places like PKI and how much of it is going to be dependant on new customer growth, which is a little bit less notable at this stage?

Well Steve, I mean I think that you are here in Q3 and asking us for kind of an '02 operating plan that the teams are putting together. Pretty simple dynamics that I will walk you through, which is, basically as we end the year, we will have obviously a significant amount of short-term deferred revenue that will flow through. We will have escalating affiliate contracts where the minimums go up each year and more of the affiliates are selling through. That is a very much more significant piece of the committed revenues in a given year than it was a year before or a year before that. Then what you have got is basic blocking and tackling; large customer base, sell them more things; retention, a key area to continue growing the deferred revenue; and then using the existing infrastructures in all these new areas. I will be very honest with you. We think that the teams are going to serve up pretty aggressive targets coming in and they have got that buffer. Now the 15 million that goes away out of the base is kind of gone from a revenue perspective. You don't really get to make that up. You just kind of have to go back onto run rate businesses, but while I understand it is aggressive growth target versus other companies in the space, as you well know, we have a very unique model in terms of recurring customers and in terms of ability to leverage more sales off of the existing engines. That is one of the reasons I am still happy we actually did not delay any R&D projects this year. We will head into '02 with 80%-85% of the products we need to make revenues in '02 already there on January 1st.

I think the other thing, Steve, that is important to look at is this customer base within the Enterprise division right, and I think there is a tendency to look at the growth in that division only coming from new customers, and as you know, that's not the way the model works. When you actually have this large base of enterprise customers in hand that next year, what we've seen, when they come back to renew, they renew for more users and more applications. So that base grows on the renewal front that comes forward into the year, as well as new customer acquisitions.

Dana we have been getting a lot of questions on deferred revenue, and it was in line with your guidance. Just curious, how many of these new services are going to be built monthly as opposed to upfront? And can you just sort of help us understand generally how deferred revenues are going to track relative to reported, because at 40% doesn't really square with the 3% to 5% if you compound that out over a full year or so? Can you walk through that?

Right, so a couple of things. In the traditional areas of the business, in Mass Market and the Enterprise authentication services, we still look for deferred revenue models if we roll out new services. There are though a lot of the new services that we've been talking about, payments is one that's growing, but in the registry area, a lot of the new services there are monthly subscription based and not necessarily deferred. Now we view that as still a great recurring base of revenue stream but not necessarily deferred, because quite frankly those customers are not typically used to paying for things annually. They pay for them monthly. So as the teams roll out new services, they're constantly looking for deferred revenue sources, but if the market isn't willing to accept that, then we have built these subscription services not one-time sales build. So I don't have the number because we're right smack dab in the middle of planning, but the overall corporate strategy has always been look for recurring revenue stream in all the services that we offer.

Okay, got it. And then the last question I had was for Stratton. We've been talking a lot about the DNS and some of the investments you guys are making there. Can you just update us on the status of the infrastructure, and potentially with Illuminet coming online, what you guys look like in terms of your footprint, transaction throughputs, capacities, etc.? Thanks.

Thanks Steve. We are now, I believe, as of the beginning of October, handling about 6 billion DNS lookups per day on the resolution infrastructure. As you and I have talked many times, we are 15 months into an engineering project that rolls out here in Q1 to upgrade the infrastructure to a new generation architecture that is capable of handling 100 billion lookups a day on average, and we think over 500 billion peak. So we know it works. It's been working in the labs for quite some time now. It begins to roll out into the DNS infrastructure in Q1, and by the end of next year, we will have completely upgraded that infrastructure to the new handling rates. We think we need that for general growth rates in the registry and the naming services, as we continue to add more things like more ccTLDs into our infrastructure, as we add in keywords and other things. But long-term, we obviously believe in the notion that this will be handling voice, as well as number systems, that will potentially have much higher number counts, as well as lookup rates, than domain names. And you're right, that's where you start to bring Illuminet and some of our own efforts in local number portability and lookup services together. We're very excited about that area, and I think hopefully as the Illuminet transactions close, we'll be able to show you a product roadmap that will, in the second half of next year, introduce some pretty compelling services that are a bridge between voice and data. So nothing has changed in how we plan to use the DNS infrastructure. It's on schedule in terms of the new architecture and in terms of looking to deploy the technology. And I'll tell you, I think it's probably the most significant thing we're doing in the company right now.

Great. Thanks. Nice job.

For our next question we go to Jessica Kourakos with Goldman Sachs.

Hi, good afternoon. Could you talk first in the registrar business, I guess, what do you think essentially is happening with market share, and do you think you might be losing market share? Two, also in terms of on the affiliate side, if you could talk a little bit about the health of the affiliates especially as it pertains to the ones that you've added. And then if you could talk a little bit about WebNum and I guess the status of the roll out with that Asian partner and, I guess, to what extent your plans are to roll it out to other partners elsewhere. Thanks.

On the registrar side, again, I think we have done two things. One, limited our marketing efforts really around strong international partners, as well as obviously our retail presence, and we will continue to focus there, and so in some respects, we've given up market share at the lower end of the market around the speculative or very, very low price names that we don't believe you can actually run a profitable business on. So in some respects, it's that low end of the market for whatever percent of name still goes there that we're giving up. Second, and this is true of any market dynamic, you are now starting to see what 90+ registrars, many of them international and with a lot of new names going international, we're starting to see the number 10 through number 20 start to get some names, and so that bleeds off a little bit of market share. That all being said, Jessica, I tell you it is our very strong belief we will be able to increase market shares in the segments retail and high-end wholesale that we're interested in, as we head into '02, and we have a lot of programs that we're putting in place to do that. On the affiliate side, the affiliates, we have some very, very strong affiliate, in fact some that are both profitable and above their royalties. We have other affiliates that are still on the ramp up space, so they are in a lost position, but they're signing on lots of customers. Then we have affiliates in some of the smaller markets that haven't materialized, whether it's the Middle East or others, that we think over time we may have to replace. That all being said, in the mix, we take that all into account as we plan out the affiliate business, it is likely to grow well over 100% this year in 2001 from last. And again, as we roll into '02, we think it's got significant growth prospects there, both because of the existing guys converting over and becoming royalty paying above the minimum and because of some of the new relationships. So in a group of about 50 affiliates, which I think we've said is our expectation by the end of next year, it would not surprise me at all to have 10% or 15% of those not perform and look to have to be replaced some time. At the same end of that, I will tell you we've had at least 3 of the best affiliates come to us and ask to expand their licenses throughout Europe, throughout Latin America, and throughout Asia. So we think the gives and takes there actually have put the affiliate program probably into a very healthy position as we head into '02, and we're pretty excited about it. On the WebNum front, we have our first customer there. We have shipped some technology to get that rolling. It is a carrier related partner over in Asia, and we've been asked not to announce that until they have set it up and rolled it out, but it is the prototype that we needed to get one done, right, and now that we understand it, we are working several other ones there, both in WebNum and in some other naming spaces that the registry team are thinking about. And just like we have with payments, you should expect us to incrementally roll out more affiliates around the naming services over the next 6 to 12 months.

Stratton, what are the challenges you've found so far in terms of building this prototype in Asia with this Asian partner?

You really have to find somebody who, WebNum or any other naming services are generally targeted obviously at wireless, and so you really have to find someone who is either a carrier or has connections into the carriers of the system-integrator partner. We've done that in Japan, right, as it relates to PKI through some of the larger carriers there. We're now doing it in another part of Asia. I think challenges are just are people ready for this stuff and do we have kind of the carriers ready to roll out the service. I think we were right on schedule with the first one we had planned for, and I think the team has about a half dozen others they are in discussions with.

Okay, thank you.

Thanks Jessica.

Ladies and gentlemen, due to time constraints, we do ask that from this point forward that everyone would restrict themselves to one question, so that we may answer as many questions in the time allotted. We go next to Todd Weller with Legg Mason.

It figures I'd get the one question, good timing. Stratton, with one question, could you talk a little bit about the authorization products you're coming out with, or services I should say, where you are with that and a little bit of the strategy behind that business?

Sure, I think just to start with the strategy the authentication engine as we call it, the PKI engine, has been moving upstream. It started with WebSearch. It then went to e-mail and browser search. It went into enterprise applications. We think the next big move there is from authentication into full-blown user management, which would include a solution for user provisioning, authentication, and authorization. We announced several things this year. First of all and most importantly the definition of XKMS, the XML-based specification for key management, and health certificates will be distributed through XML interfaces. Second, we announced our working with several companies in what's called SAML, the Security Assertion Markup Language, that is how we believe authorization will be handled in XML interfaces. Microsoft, webMethods, ourselves, Netegrity, and frankly all of our PKI competitors are onboard with all of those specs. We think that's important. We think that broke the logjam in terms of competitors not supporting each other's toolkits. Now you have moved it up to an XML piece. That's part one of getting of getting authorization out. Next piece is we have done a couple of joint deals with Access360 on provisioning and with Netegrity on authorization. The Access360 hosted service is up and running in our data centers in beta test right now. We are very excited about the way it's actually performing, and I think you will see us roll that out into some sales proposals here in Q4. On the authorization side, the Netegrity side is a little bit behind that, more likely a Q1 type of event. However, we are in fact also rolling out just some homegrown authorization technologies from our authentication service bureau as some of our own XML work, and so you will see package solutions around user management this quarter, and we will extend that next year with some of the Netegrity stuff, as well as other partners activities. The key we think is to provide it all in a single vendor solution deployable from an outsource side that customers can actually get to easily. How was that for an answer to a short question? Sorry.

We go next to Drew Brosseau with SG Cowen?

Hi. Thanks. Stratton, I wanted a little bit of clarification on the domain names base in your expectations. First, did the overall registry base grow in the quarter? I recall a 32.4 million number last quarter, and you are saying over 32 now. So I'm just wondered if it actually went up or not? And secondly, are you willing to make some projections about where that base will be at the end of '01 and '02?

Yeah! Those are good questions Drew. There is two pieces of data that everybody looks at. Bizarrely, they all come up with different answers because I have gone out to all the domains staff site, and who-is .Net sites, that you guys all go out to, and not a one of them has the real data. So we have been trying to dissect that and figure out why. There are two really interesting pieces of data; one is called the zone file. That is the active domains we put out into the constellation everyday. That number was about 29.4 million names in Q2, and it was about 30.2 million names in Q3, so we it actually grew. The active number of names in these zone files grew. The other piece of data that people go and look at is what's called the who-is data, which puts together all the data from all the registrars into the who-is files. That number was 32.4 in Q2 and was 32.5 here in Q3. So it grew, but it grew more modestly than the active, and what's going on there is this kind of the delta is really the names that are "in that 45-day window" from all 80 to 89 registrars that are going either for a deactivation or they are being billed or something else. So those are the two data points that are very clean is what's in the zone file which is active names and then what's in the who-is file which includes active names plus the delta of names that are in some special status pending resolution with any of the 89 registrars including our own. So set that base line, because I have been having people throw numbers at me all over the map on it, and these are the two data pieces that you can have. We believe the zone files will continue to increase, and in fact, the new registration stabilization and in fact up takes in common net is starting to make that look more and more true. This delta we think is the amount between net and what's in who-is we think will continue to shrink as all those speculative, promotional, and other names get wiped out from our own registrar and from the others. So long story short, it is our goal to start 2002 with a number that simply represents active names in the zone files that everybody can track, and we will give you what we believe is the number that the delta of that that is some suspended state that could renew at the renewal rate probabilities or not. But I think the active zone file is the right base number to start with, and it did in fact grow in Q3 here.

We go next to [_______________] with MFS Investment Management.

Hey guys, you there?

Hi Troy.

Hey, Mark has a question for you.

Hi.

Hi Mark.

One quick question. Shelf offering was 750 in buying stock back. I wonder if you could just talk a little bit about kind of your thoughts on that?

The stock repurchase program is something we put into place last quarter. It is a program that will occur over the next 12 to 18 months. We'll continue at appropriate prices to buy back stock. That's a long-term program. In shelf registration, we really felt like we were getting to a size that just is a matter of kind of conservative financial strategy, good corporate governance. Having a shelf registration in place that gives us flexibility for financing when we need it is just a smart thing to do, and we wanted to take advantage and get it done at this time. There is no specific transaction, Mark, that we're looking at that triggered that event.

We go next to Chris Kwak with Bear Stearns.

Hi guys. Can you hear me?

Yeah Kris.

Yes.

Just a couple of questions. In the 750,000 number, how many are transfers and did you include .info in that number?

Our 750,000 does include .info up to that point, right, the end of the quarter, and then a certain number of transfers, but generally, as you know, we are a net loser in the transfer game. So in essence, we had very few of those.

Okay. And second, just on the new services roadmap in 2002, exactly what should we accept in the first half and then in the second half, both on the security and the domain name sides?

Well, Dana and I and the management team get to review all those plans in the next four weeks, as we finish the planning, but just think about it very basically. Each of the engines, let's talk about security, will continue to roll out new services, as we just talked about with Todd. The user management stuff is coming, more uses of the authentication service bureau, first introductory offers around .net, and of course the other things we are doing in single sign-on under the Liberty alliance, and the rest. So much of this is just very simple rollouts of the existing stuff. In payments, we will augment the payment stuff with workflow engines in the first half of next year. And then on the domain name stuff, really there is quite a bit of Greenfield going on there. We will certainly, at our analyst day that we plan to have early next year, roll out the whole roadmap for you. That's probably, as I was saying before, the area where there's the most new products and services that we have been working on this year that will launch as we head into next year, and whether it's using the distribution channel for things like keywords or country code TLDs or some of the new voice and location based services that we have been talking about, all of that is ready to go, and in fact, most of it is production worthy here at the end of Q3 and as we move into Q4 and going through some level of testing. So quite frankly there are about half-a-dozen to a dozen new services in the first half and probably equally as many in the second half, but very importantly, they are built on 2001's R&D budget.

We go next to Jordan Klein with UBS Warburg.

Good afternoon. I was wondering if you could talk a little bit about what you are seeing in terms of when renewals of domain names come up, your ability to up-sell. I know you've talked about some of the metrics but that seems to be a critical driver for the growth also in the reported and deferred. Because if you throw out that $73 number, I know it didn't have the impact of the new TLDs, but that would suggest essentially that the core business was weakening in terms of the ability to up sell. Am I wrong there or what are you seeing?

I think you are wrong there, and I think the only issue we have got to wrestle through is basically cleaning out the renewal base of non-renewing customers, right, and then focusing on the new store front and its opportunity to package the new offerings. I am not going to tell you that I believe one month's worth of data is sufficient to declare victory, but we do know that the new storefront and the way in which it packages the services, both for renewal customers, as well as for new customers, is leading to better up-sell rate, and you got to give us a few months of time. I wish the new TLDs had been there to offset that here in Q3. They weren't, and we will see, but we will be very clear about that metric every quarter, as you know. You will be able to judge for yourself.

Ladies and gentlemen we do apologize, but due to time, constraints we have time for one last question, and that question will be from Dane Lewis with Robertson Stephens.

Thanks. My questions are on deferred revenue and specifically current deferred. I know that that was up $7 million sequentially, but as a percentage of my forward 12-month revenue estimate, it drops at 34%, down from 36% last quarter and 46% in Q4. It seems to me that that would suggest some deterioration in revenue visibility. Why or why not is that the case?

Well, I think we've addressed it a little bit earlier today, but let me try to do it for you. As we've said that is certainly a smaller percentage of the go forward than it has been before. What makes up for that is obviously the much higher percentage that the affiliate revenues do, as well as the new services that are charged for monthly. So from a visibility perspective, in terms of recurring services we get paid for on a quarterly basis, we still have more than 80% of our services that are charged for on a recurring basis and generate revenues. The yearly subscription type has gone down as a percent of that, and you are probably in the 30% to 40% range is where it's going to stay. Does that tell us we have less visibility? No, because obviously we have the monthly churn rates that we get to see on those services, plus we have the affiliate commitments in the contracts that are being paid and that escalate over time.

I think the other thing too that's important to remember is deferred revenue long-term is not a static number. So the average turn for renewals is 2 years. So what that means is when that base of renewals ticks into a 12-month column from a 24 plus column, that it's in on the long-term, that moves up into short-term. So every month you've got a rolling amount of long-term deferred that moves into the short-term. So it's not correct to assume that long-term deferred is not fueling next year's revenue. It's a rolling number.

And frankly, Dane, you probably would have asked us the other question had .biz and .info been in there for a full quarter's worth of selling, the short-term probably would have gone up significantly, you'd say does this mean you are getting better visibility? Right, and I think you have got a couple of gives and takes there, but all in all, we are still as comfortable with forward projections as we have been before.

And Ms. Evan, I'll turn the conference back over to you for any closing remarks.

Well, I'd like to thank everyone again for joining us today, and as always, please feel free to call us with any further questions that didn't get answered, and I apologize for running out of time. Thank you. Bye-bye.

Ladies and gentlemen this does conclude our conference call for today. You may disconnect at this time.