威瑞信 (VRSN) 2002 Q1 法說會逐字稿

Please stand by. CONNECT to BD-X Transcript Server at Thu Apr 25 16:48:38 2002OK - Ticker is VRSNOK - Call name is Q1 2002 EarningsOK - Start time is 04/25/2002 21:00 GMTREADY - Start transmissionWe are about to begin. Good day everyone. And welcome to the VeriSign Incorporated First Quarter Earnings Release conference call. Today's call is being recorded. At this time for opening remarks and introduction, I'd like to turn the call over to Miss Dana Evan. Please go ahead.

Thank you. Good afternoon everyone, and welcome to Verisign's First Quarter 2002 conference call. I'm Dana Evan, Chief Financial Officer for Verisign. and I'm here with Stratton Sclavos, Chairman and CEO and Steven Gatoff our new Vice President of Finance and Head of Investor Relations, who joined the Company several weeks ago. As you may have seen in the latest press release, Steven brings the unique combination of Corporate Finance, Capital Markets, and Accounting skills to Verisign and continues our strong commitment to the investor and analyst community. I'm sure you'll enjoy working with him. And on behalf of the company, we'd like to all thank you for joining us here today. I'd also like to take a brief moment to thank Katie (INAUDIBLE) our Director of Investor Relations, as she transitions out of her role here at Verisign. Katie has done a great job over the past four years with our Investor Relations effort, both inside the company, as well as with the street. As many of you know, Katie has been commuting from Chicago for the past year and is leaving us to get married in just a few short months. We wish her the best of luck and success in the future. Before we begin, I'd like to remind you that the matters that we will be discussing today, other than the historical financial data, might 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 31, 2001, as well as other reports filed with the SEC. Our actual results may vary materially from any such statement. Before I review the format of the call, we'd like you to know that our financial results were released to the news wires this afternoon after the markets closed. The press release can be found on our website at www.verisign.com. This call is also being webcast live first on our website, as well as www.ccbn.com. As it relates to the format of the call today, in a minute I'll turn the call over to Stratton, who will begin with a high-level view into verifying first quarter results, and the important business milestones that we saw during the quarter. I'll then follow up with the detailed first quarter financial results, and then turn the call back over to Stratton, so that he can discuss the overall strategy and outlook going forward, as well as give you a view into some high level guidance. We will then open the call for your questions. We'll anticipate ending the call at 3:00. With that, Stratton?

Thanks, Dana. Good afternoon everyone. Before jumping into the divisional metrix, I'd like spend a few minutes discussing the overall market conditions Verisign saw in Q1. I don't think it will surprise anyone when I say that the first quarter was marked by a tough selling environment in both the technology and telecom sectors that we participate in. While we saw some positive signs early in the quarter in terms of mass market and enterprise sales velocity, unfortunately the momentum did not last and the quarter turned out to be much more difficult than we had anticipated. As like many of our partners and peers, the sustained technology downturn definitely caught up with us in Q1. While we believed our plan for 2002 was conservative as we entered the year, Q1 certainly gave us reason to reconsider our external assumptions and internal execution plan. Statistically, we saw a deeper than expected contraction of the mass market domain name business, significantly delayed spending and some pricing pressures in the enterprise accounts, and price pressures and new product start up delays in our telecom group, even though network usage and database queries were up sequentially. I'll go into more detail in each of these areas in a minute. I think it is also important to acknowledge, however, that there were several highlights in the quarter, as we continued to execute in our long-term strategy of building the world's leading infrastructure services company. These wins were more strategic and therefore long-term in nature, such as our global alliance with IBM, the announcement of our digital trust services framework, and our [FMS] interoperability deals with Sprint PCS and Singular. In summary, while we still believe we have the right long-term strategy and very significant growth prospects ahead, we are less comfortable with our outlook for the rest of 2002, given the first quarter's weakness. That's why we've also announced a proactive restructuring plan today, that should keep our costs in line with current realities. While Dana will give more specifics, the restructuring is both a by-product of the integration of many of the acquisitions we've closed over the last twelve months, and focused expense management. By moving into the -- I'm sorry -- before moving into the divisional metrics, I also wanted to make a few comments about our financial performance for the quarter. There's been reported revenues of 328 million dollars for Q1, and proforma earnings per share of 28 cents. This of course, equates to 20 cents per share, when using a 30 cent effective tax rate for comparison to first call and the majority of analyst's models. Total revenue was approximately four to five percent less than we had expected for the quarter. Pro forma operating and net income were on plan due to effective expense controls we implemented towards the end of the quarter. While we are clearly not satisfied with our overall results, we are we are somewhat pleased that we could continue to deliver significant pro forma operating income in an otherwise humbling environment. Let me now focus on the division of business metrics for the quarter. The Mass Markets Group generated 113 million in revenues in Q1, down 13 percent from 130 million in Q4 '01. Although we had expected revenues to decrease sequentially in this division, the magnitude of the decrease was certainly more than we anticipated, especially given that new name sales actually stabilized in the quarter and value-added services grew across the board. The significant renewal rate decline in March led us to be much more conservative about overall renewal rates for the quarter and the year. While we believe that we have cleaned out the majority of the promotional names in the customer base, we now are seeing second order of effects of the year 2000 bubble and the demise of many speculative and impulse buyers. As the recent [snap mains] report implied, the renewal rate for Q1 was affected by several factors, including our refusal to support continued speculation by some large name holders, a shift of international domain name buying patterns, and overall volume reduction in the number of names that certain individuals or businesses continue to renew for protective reasons. We sold approximately 600,000 new names and renewed 1 million names in the quarter. Our estimated renewal rate for the quarter was in the 40 percent range, mostly attributable to the reasons I just stated. While we are still confident that these factors will stabilize over time, we intend to be very conservative until we see a more sustained reversal of the trend. The subscription terms for new and renewed names are relatively unchanged for Q1. Pricing was down, however, as the launch promotion for [Dot Name] and the new [TLDs], as well as our multi-year discounts took effect. Our goal in the mass market domain name business remains the same: To get to a high quality, renewable and upsellable customer base. Much of the speculative and international names we are now deactivating were bought in the Q1 2000 timeframe. We ended this quarter with 12 million names under management, 11.5 million of which are in the [com net domain.] While we are disappointed in the downward trend in the renewal rate, we still believe this base will turn up again at some point this year, while being significantly later than than we had originally forecast. I want to point out, that even in the face of these results, I believe the new Mass Markets Management Team has done a good job in a difficult environment and has continued to make strides in tackling various marketing and product development initiatives for diversifying the business's sources of revenues. They are also focused on maximizing the operating flexibility and efficiency of our cost structure and marketing spend. The Mass Markets Group did have a reasonably positive quarter in the value-added services, web certificate, and merchant payment lines of business. Value-added services upsale rates approached 30 percent for the first time ever with over 25,000 websites and 50,000 e-mail accounts sold. The web certificate business sold just over 100,000 web certs during the quarter. with upsale rates constant at 43%. And the merchant payment business added 10,000 additional merchants, bringing us to an active total of over 70,000. We also saw a record $2.5 billion of transactions pass through our gateway, while churn rates decreased to the lowest rates ever. As you would expect, our rest-of-year plan in mass markets is to continue to manage expenses in-line with the evolving market dynamics, while we execute in our strategy of expanding out channel relationships, establishing a stronger position internationally, and deepening our customer relationships and value-added services. Given our experience this quarter and current renewal trends, we would expect to now see a five to ten percent decline in revenues for mass markets in Q2 and Q3 with a potential flattening by Q4. Let me now move to the Enterprise and Service Provider Division. As you saw in our recently filed 10-K, we have tried to simplify the financial reporting structure of this division by calling out two distinct revenue categories. The first is Managed Security and Network Services. The second is Registry and Telecom Services. The Managed Security and Network Services businesses include our PKI-based security solutions, digital [INAUDIBLE] management and DNF solutions, and consulting and implementation services. In short, all the services and products that we deliver to enterprises in order to help them build and manage trusted infrastructure and applications. We believe this broader, solutions-oriented approach is more customer-centric and provides for much greater differentiation from our point competitors. Early feedback from customers has been very positive. The Registry and Telecom Services business includes the full suite of services available from the VeriSign Global Registry, Illuminet, an [ATL] system, and [pools to] service providers and carriers. The industry division as a whole generated 215 million of total revenues in Q1. This included approximately $98 million for managed security and network services, and 117 million from registry and telecom services. Drilling down into Q1 performance for managed security and network services, we basically saw what everyone else saw in the enterprise IT market in Q1: Significantly delayed purchase decisions across the board, especially for our higher margin offerings in PKI and other managed services. While we do expect a significant percentage of these orders to eventually close, the timing is unclear, as we do not yet see a return to freer spending actions in our enterprise prospect base. The net of this is that we now believe there will be at least an additional one to two quarter delay before normalized growth in the enterprise market resumes. On a more positive note, we definitely saw larger bid sizes, more VeriSign brand preference, and a stated desire to have us deliver a suite of managed services. Significant customer wins including Sharing Plow, Philip Morris, U.S. Bank, and a department of the Federal Government. We also saw sequential improvement in existing PKI deployment and some incredible growth in cable modem certificate deployment. In addition, we are pleased with the initial traction in our IBM relationship. There are four separate operating groups within IBM that are working with VeriSign to develop and deliver trusted infrastructure and applications services, including IBM Global Services. We belive the IBM relationship will be a catalyst for new enterprise wins in the second half of this year. Our consulting group had mixed results in the quarter, as well. Overall sales levels remained relatively consistent with Q4, but we experienced significant pricing and margin pressure on third party product sales. Customers and prospects remain interested in our expertise in designing, deploying, and managing complex network and security solutions, but they are pushing out the timeframe for larger, as well as more profitable transactions. Moving on to our international affiliate channels, we had a variety of challenges here, as well. Overall, affiliate revenue was down in Q1 from Q4 due to the anticipated [INAUDIBLE] in new affiliates signed on in the quarter, and, of course, funding losses upset licensing revenues. In addition, many of the existing affiliates saw an equally challenging sales environment within their region during the quarter, leading to less sell through. Both of these factors had a significant impact on revenues and gross margin pressure result in Q1. This transition in contribution model from the affiliates should continue through the next two to three quarters until sell-through rates accelerate. We'll talk more about this trend at the (INAUDIBLE) day. Moving to registry and telecom services business. We'll start with the global registry. Somewhat surprisingly, we saw a sequential uptick in new .com and .net registrations for the first time in seven quarters. The registry saw 2.6 million new registrations up from 2.3 million last quarter. We also renewed 2.8 million names and enabled the transfer of 690,000 names for total transaction volume of approximately 6 million. Renewal rates across the industry averaged 51 to 52 percent for the quarter down just slightly from Q4. The active zone files for com, net, and org contained 27.3 million names at the end of the quarter, down from 28.8 at the end of Q4. The registry also continued to diversify its product offerings with the integration of the Dot T.V. Registry, the broadening of our web (INAUDIBLE) relationship, and the enhancement of our managed DNS services. In addition, we began the role out of our Next Generation resolution infrastructure. Under development for the past 18 months, the new architecture will allow us to support upwards of 100 million look ups per day, for both data and voice services. The infrastructure upgrade should be complete by the end of the year. As we have said before, this new architecture is the key to our strategy for bridging the voice and data worlds, and for providing new services to enterprises, wire line and wireless carriers, and even consumers over time. Moving to telecom services, from Illuminet and [HL], we saw increased volume in our database services and message traffic, and we added over 35 signal transfer points from customers to our (INAUDIBLE) network. Given the weak telecom market in general, we are pleased that we could achieve our planned growth in these areas in Q1. Countering these positive trends somewhat were downward price adjustments that occurred with several of our higher volume customers. We see database and message volumes growing again in Q2, which should lead to higher sequential revenue. Additionally, the Telecom Services Group signed contracts for it's new SMS interoperability offering with Sprint PCS and Singular. We also announced our relationship with Open Wave to host their instant messaging gateway for wireless carriers. Bringing SMS and the voice world together with instant messaging and the data world was one of the initial milestones we had anticipated in the Illuminet acquisition. Course, we also closed the [HO Systems] transaction in early February and made significant progress in integration with Illuminet. We also saw positive initial reactions from Illuminet and HO's respective customers in regards to our expanded offerings. Just as we believe that IT customers are looking to consolidate network and security services with a few larger vendors, we think the same will be true in telecom, especially in the tier two and 3 carriers. We'll talk more about these synergies and our overall view of the telecom services opportunities at the VeriSign Analysts Day. In summing up the overall enterprise and service provider division for Q1, I think it's fair to say that we had a challenging quarter. We are pleased with what we accomplished in the product and integration areas, but concerned with overall spending trends above IT and telecom markets. We do believe our managed services model is in demand, and that the VeriSign brand will allow us get a disproportionate amount of market share as spending resumes in the marketplace at some point this year. I'll now turn the call over to Dana for some of the detailed financial metrics, and then I'll provide closing comments on our strategic direction and our outlook for the rest of the year. Dana?

Thanks, Stratton. As Stratton just discussed, our first quarter results reflect a challenging quarter for VeriSign across the entire company. In addition to a deeper than expected contraction in the mass markets division, we also experienced greater than anticipated softness in most areas of our ESP division. As you all know, we closed our Illuminet acquisition on December 12th of last year, and included 19 days of Illuminet's activity in the reported results for Q4 of '01. Our Q1 results, therefore, reflect the full impact of an entire quarter's activity for Illuminet in the the consolidated VeriSign number. In addition, we closed our acquisition of HO Systems during the beginning of February, and therefore our results for Q1 of '02 reflect slightly less than two months of activity from HO. As you know, in order to comply with purchase accounting, historical figures have not been restated for any prior periods. Now, turning towards the actual results for the quarter, as Stratton said, on a consolidated basis, VeriSign reported $328 million of revenue for the quarter. To segment Q1 revenue further into our business division, the Enterprise and Service Provider division delivered approximately 66 percent of total revenue for the quarter, as compared to 54 percent last quarter, while the Mass Markets division made up the remaining 34 percent of quarterly revenue. To break the ESP division down a bit further, and to be consistent with our reporting in our recently filed 10-K, the Registry and Telecommunications Services revenue was approximately 36 percent of total revenue. The increased contribution you see from the Enterprise and Service Provider division is primarily related to the full quarter of Illuminet's revenue being included in the quarterly results, as well as the contribution from HO Systems. In addition, as both Illuminet and HO Systems drive monthly subscription-based revenue streams, we would expect our that overall recurring revenues would increase as a percentage of total revenues in a given period, while deferred revenue, driven from some of our original core businesses such as mass market and enterprise [authentication], becomes a lesser indicator of future revenues. Customer concentration has remained low throughout the quarter, with no single customer accounting for even five percent of total revenues. The percentage of revenues driven from our international affiliates and subsidiaries was nine percent in Q1, as compared to 13 percent last quarter. The decline you see here is mostly driven by the addition of Illuminet and HO Systems revenue streams, which are primarily domestic-based. Also, while we added three affiliates during the quarter, overall, as we expected, new affiliate license revenues decreased in the aggregate. Consolidated cost of revenue for the quarter was $149 million compared to 73 million in the year-ago period. This translates into a 55 percent consolidated gross margin for this quarter as compared to 63 percent last quarter. The significant decline you see here in the gross margin line was attributable to several factors. First off, the Illuminet and HO acquisitions brought lower gross margins into the overall mix, coming into the low 50 percent range. Secondly, gross margins also came under pressure in some of our traditionally higher gross margin businesses, where we saw either flat to lower than expected revenues, such as in the mass markets and affiliate areas, or where we saw pricing pressure and a shifting product mix, as in the enterprise consulting business. In addition, the acquisition related cost of sales for other acquisitions in Q4 such as Dot T.V., are reflected with the full quarter's worth of expense and have not been fully synergized. We ended the quarter with a consolidated employee head count of approximately 3500 people, as compared to 3270 last quarter. The majority of the head count increase relates to the acquisition-ready head count from HO Systems. Total consolidated operating expenses for Q1 were 117 million, compared to 113 million in Q1 of '01 and 117 million last quarter. As you can see, operating expenses and absolute dollars across all areas, other than sales and marketing, actually declined quarter-over-quarter. These reduced expense levels reflect our continued strong cost control measures across the entire organization, which drove efficiency in margins. This reported operating expense level delivered consolidated operating income of $61 million, translating into a 19 percent operating margin as compared to a 13 percent margin in the year-ago period, and a 22 percent margin last quarter. As you may recall, we guided to a lower operating margin for Q1, in the 19 percent range, due to two factors. The operating expenses that would be fully accounted for in the current quarter for Illuminet, HO, and the other acquisitions that closed in Q4, and the one-time expense benefit we received in Q4 of last year from the purchase of our Mountain View facilities. As with gross margins, these acquisition-related operating resources have not yet been synergized across the company. That being said, the decline in operating margin you see here from the prior quarter, is primarily related to the gross margin decline, which I discussed previously. As you can see, on an operating basis, we continue to manage our expense growth with conservatism. In fact, as Stratton said, this afternoon we announced plans to restructure our operations to fully rationalize, integrate, and align the resources of the company. The realignment and integration measures will take place as rapidly as possible and result in the reduction of work force in approximately 10 percent, driving a consolidation of the sales, marketing, and administration work forces across the existing organization. In addition to the severance for employees, the company plans to include lease in contract terminations, and writedowns of certain property and equipment, including lease hold improvements, as well as other anticipated costs. We expect to record a restructuring charge of approximately $70 to $80 million in the second quarter associated with this restructuring effort. Furthermore, we would anticipate that the actions taken today will generate between 30 to 40 million in annualized cost savings, which will be fully in place by the third and fourth quarters. To this point, we are continually looking at realigning and restructuring our organization to improve our cost structure, to better focus on our core business and strategy going forward, and to optimize the resources of the company across all business units. In addition, the overall softness in the economy and continued technology spending (INAUDIBLE), we are taking the necessary steps to right-size the company and to achieve an even sharper focus on our key lines of business and our customers. Now getting back to the remaining P&L items. Other income from Q1, which consists primarily of interest income, was approximately $7 million dollars. VeriSign reported pro forma consolidated net income for the first quarter of $68 million dollars, versus the income last year of 49 million, a 39 percent increase year-over-year. This translates into pro forma consolidated EPS in Q1 of 28 cents, compared to an EPS of 23 cents in Q1 of '01. As you know, VeriSign is not currently in a tax paying position and does not expect to be for the foreseeable future. With that said, on a fully taxed basis using a 30 percent tax rate, EPS for the quarter was 20 cents. This EPS is calculated using a diluted weighted average shares outstanding at the end of of the quarter of 241 million shares. Now moving on to the balance sheet, as it relates to the cash balances, VeriSign ended the quarter with cash in equivalence of approximately 306 million, which takes into account approximately 350 million that was used earlier in the quarter to purchase HO Systems. Operating cash flow in the first quarter was in the range of $20 to $25 million dollars, which represents a substantial decrease over last quarter's cash flow of approximately 60 million. The decline in the operating cash flow was primarily related to the decline in deferred revenues that I was -- that I will talk about in a minute, as well as the weakness experienced in revenues and related pressure on gross margins. Turning to the accounts receivable area, the consolidated AR balances totalled 283 million, down from approximately 315 million in Q4. Excluding the approximately 19 million of accounts receivable that was booked as part of the purchase accounting related to HO Systems, accounts receivable actually declined by approximately $50 million dollars. This translates into a net DSO of 81 days, within our guided range of 75 to 85 days. The entire decrease/increase you see in the net DSO from the 74 days reported last quarter is related to the decline in deferred revenue. With that said, we would expect net DSO's to remain in the range of 75 to 85 days, based on the continued growth we expect to see in the enterprise business as a percentage of the overall business, and the inclusion of Illuminet and HO Systems into the accounts receivable mix. Total deferred revenue decreased five percent to 588 million in Q1, down from 622 million last quarter. The decline in deferred revenue in the quarter is related to the weakness we saw in the renewal bookings on the mass market side of the business that Stratton just discussed, as well as the softness in the enterprise and affiliate bookings, both of which are typically significant drivers of deferred revenue. Capital expenditures for the quarter were approximately $70 million dollars, as we had the majority of expenses incurred to consolidate the East Coast data centers, as well as the Illuminet and HO capital expenditures in the quarter. And with that, I'll conclude my results, my review of the financial results and turn call back to Stratton for some final high-level comments.

Thanks, Dana. Before I give you our outlook for the rest of 2002, I wanted to spend a minute talking about our long-term strategy. Our starting assumption has been that global commerce and communications over both data and voice networks will continue to see dramatic growth through the rest of this decade. We also believe that as the networks become more intelligent and secure, businesses and consumers will be able to take advantage of innovative new applications and services that drive productivity, cost effectiveness and convenience. VeriSign's goal is to provide a set of trusted infrastructure and application services that can aid in the development and the deployment of these solutions. To that end, we have purposefully assembled the resources and infrastructure necessary to do this with our naming services, security services, transaction services, and telecom services. We believe we now have the technology, infrastructure, people, and market presence to be the leading provider of these types of solutions globally. And our neutral positioning lets us act as a trusted partner to the leaders in both the technology and the telecommunications industry. Although industry initiatives, such as web services and ENUM, are still several years away from mainstream adoption, we are confident they will materialize and that services like those that VeriSign can now provide will be crucial to the ultimate success. While it was a tough quarter, we are focused on near-term execution, we still feel that our mission is clear, and that we now have all the pieces necessary to deliver on our long-term goals. Let me come back, now, to our outlook for the rest of this year. As you have heard from us and others, visibility in the enterprise space is very limited. Telecom is still under pressure, and mass market domain names are taking significantly longer to stabilize than we thought. Accordingly, we are very cautious about the short-term. Given the decline in the domain name business and overall flatness in the enterprise, we only feel comfortable setting Q2 guidance right now. At this point, we would expect revenues in the range of 320 to 330 million, and tax affected EPS of 18 to 20 cents. This estimate takes into account the expected decline in the mass markets group, the addition of a full quarter of HO, and flat to low single digit growth in other areas. It also assumes the effects of the restructuring will not be fully in place until Q3. We don't intend to provide revised full-year guidance until the picture becomes clearer. We are confident, however, that should spending come back in the second half of the year, we would still see organic year-over-year growth in both our enterprise and telecom markets and for the company as a whole. With that, I thank you for your attention. And we'll open up the call for your questions.

Operator?

Our Q&A session willing be conducted electronically. To ask a question, please press the star key followed by the digit one. We'll take as many questions as time permits, and we'll proceed in the order that you've signaled. Again, it's star one to ask a question. Our first question will come from Todd Raker with CS First Boston.

Hey, guys, a few questions for you. Can you give us some more insight on where you expect gross margins to go, and can you give us a better understanding of what's putting the pressure there? Can you talk about, kind of, pricing, trends in the mass market and quantify that for us?

Sure, Todd. So, you know given the guidance that Stratton just gave for Q2, we expect the gross margins to stay in that mid-50 percent range. You know, some of the pressure that you saw during the quarter obviously was related to the pressure we saw in bookings in the mass markets area, because that obviously is delivered off a fixed cost infrastructure in the enterprise (INAUDIBLE), again, the fixed-cost infrastructure and pricing pressure was primarily within the consulting group, were the main drivers of the decline there.

and can you talk about the magnitude of the decline you guys are seeing on the pricing of the domain names on the mass market side? And, you know, how severe is this, and do you think it's going to get worse before it gets better?

I think the pricing decline there was a few dollars on the domain name side for the quarter. I think, you know, we're somewhat gun shy about predicting going up, going down, and by what level right now. But it really wasn't a dramatic price decline as much as volume and the names. That, you know, hitting the 40 percent renewal rate takes a lot of names out. Takes a lot of, obviously, the deferred and therefore the margin. Um, pretty much everything else in mass markets, value-added services per containment were roughly flat in the pricing.

Right. I would characterize that the majority of the gross margin pressure from mass markets was more attributed to the renewal volumes than the new name pricing.

If you look at the 11 1/2 million .com, .org, .net names under management; are all of those revenue producing? And then the same question for the zone file. The 23.7 million.

Um, as it relates to our 11 1/2 million are they all revenue producing? Yes, definitely in the 90 percent, you know, plus. Um, I'm sure there are some speculative transfers in still left in that pot that aren't, but the majority are probably revenue producing at this point.

And of the zone file?.

Um, again, from the -- I know I can kind of attribute the VeriSign side of it. Very revenue producing to us, Todd, every name in the zone file is.

Right.

Um, as it relates to the other registrars and whether they have done deals to put them in there, I don't know.

But you [receive] approximately $6 for every name in the zone file?

That's correct. There is no --that 100% revenue producing.

Okay. And last question, on the operating expense savings from the restructuring, you said 30 to 40 million; is that all going to be across R&D sales marketing and G&A? I mean, to kind of model this being further out in Q3, should we be forecasting, you know, operating expenses down 30 or 40 million from where you are?

Yes, and they'll come from all areas. They'll come in the cost of sales area as we consolidate some facilities. They'll come from other areas as we have head count reductions. So it's not an even distribution, but they definitely will show up in all the different margin areas.

And our next question comes from Steve Sigmond with [ARB] Capital Markets.

It's RBC. Thanks. Um, Just a couple of housekeeping questions. Dana, can you give us -- or Stratton, the average annual revenue per customer in the ESP division?

On the enterprise side, customer account and average revenue was roughly the same, Um, as before. Um, and on the affiliate side, obviously from the royalties perspective, pretty much the same. Not any new licensing to speak of in affiliates. You know, that obviously used to drive about a third of that component.

Okay. Thanks. What was the amount of third party product revenue within the consulting division? And are you still expecting, in terms of barter revenue, are you still expecting that to be down as a percentage of revenue in '02 over '01?

On the consulting division it remained -- the third party product revenues remained kind of in the, you know, mid-20s or so across the board. Although the margins there were significantly depressed. And frankly, as you would expect, Steve, we will be looking over time, as we really integrate these offerings into the enterprise to be looking for higher margin opportunities and probably pushing out or pushing away from just the plain reselling. But it was in the range that we talked about, and that's kind of 12 to 15 percent range for the quarter.

And then as it relates to the barter revenue deals in the quarter, they represented approximately 2 percent of revenue this quarter. And that's down from last quarter. And one percent of that two percent was monetary versus non-monetary.

Okay. Thanks.

Our next question comes from Mary Meeker with Morgan Stanley.

Thanks. David, I have a couple questions. First, if you could give us a sense of what you think the operating expense run rate will be in the third quarter and how we should think about that given just, I guess, a stable state of the market or unchanged state of the market in the December and the March quarters of '02 and '03. And then, to spend a little bit more time on the domain pricing issue, if you could talk about the expected mix of the new names, and how that might change. And then talk about pricing pressure potentially in the categories within that market. You indicated, I believe, five to 10 percent revenue decline from mass market, potentially, in June. Also sequentially, I think it's September, correct me if I misstated that. And maybe flat in December. Obviously, it's hard to project that far out, but maybe you could give us a sense of what gives you some confidence that flat is potentially a real and practical prediction for the December quarter? Thanks.

Mary on the operating expense side, we would anticipate those would be flat to down over the next couple quarters as the cost efficiency measures are put in place and take effect.

So kind of 110 to 115, maybe?

That's fair.

That's fair?

Yep.

And then that flat throughout the year. Okay. Thanks.

I'm not quite sure what you meant by the mix of names and what that would do to pricing there.

It's actually domain names in both ESP and mass market. Sorry.

Okay. So let's talk about mass market. Domain names in mass market.

I'll take a step back. Domain names, in aggregate. laughter ].

Right.

Because it's -- there's clearly renewal issue at the margin there's clearly a pricing issue. There's a little bit, it's a little -- there are a lot of moving parts, and I think all of us need to understand the best assessment of how to think about that on a go- forward basis. Because if we don't see anything that's gonna make it get better, what makes it stop getting worse?

Right. So, I think -- let's talk about mass markets, in particular, who focuses on retail and some wholesale. You know, predominantly, our sales come through retail although we will, most likely, add some wholesale channel partners this year in both international, as well as some new domestic partners. But in essence, we haven't seen a tremendous amount of price pressure in the retail side recently, other than when we are testing things like 29 versus 35 and three-year versus two year-rates with some discount on those. And again, those are things we have been testing over the course of about 12 to 15 weeks and there is marginal, you know, change in velocity based on those things. In terms of renewal rates, I think that's obviously the more than the $64 million question at the moment. I think we are, you know, in a period where at least the base is people who paid for names before. Right, and, ah, we thought renewal rates on that base in Q1 would be higher, although it's very clear that there were names coming up from the two-year-ago period, and a significant amount of those at least through our registrar had been from speculators who were paying, right, as well as customers buying 10 but now only keeping four, right, or five. So, you know, what gives you any sense that that bleeding stops, is I think you are coming into periods in future quarters where the prior one and prior two year timeframes had less volume coming up for renewal and, obviously, less speculation in there. But, again, we are, you know, expecting five to 10 percent declines in that through the next two quarters. Um, you know, we think -- we haven't seen anything that would suggest to us it would be worse than that right now. On the corporate domain side that business still remains healthy in the quarter, you know, lots of big opportunities with lots of big brand firms. Um, and, you know -- it's still a small contributor, obviously, to overall revenue.

You know, one more cut on this, Stratton, if you could talk a little bit about market share objectives, because those obviously relate to price, as well, potentially. And then we will shut up here.

I think that, you know, our market share objectives probably remained that we should be getting 20 percent plus, heading towards 25 percent of "new names" sold in a quarter. And I think we have seen progress towards that. Our overall market share, I believe right now is somewhere around 39 percent of the total base of com, net, and org. Um, you know, my view would be that we'll probably stay in the 30s on that for some period of time. Um, you know, hard to imagine going below that at this point. But, again, I think we need to divorce ourselves from the thought of, how many names are in that database, and really be focused on how many of those names are renewable, upsellable customers. And that may end up being a lesser number of the total base than the 30 to 40 percent, you know, that I just said. But I think, you know, it's hard to know right now.

Thank you.

And our next question will come from Chris Kwak with Bear Stearns.

Hi. A couple quick questions. Let me just ask them in a row and then you can answer them in a row. Um, number one, the projected cash flows from operations this year. Number two, Um, can you just comment on what percentage of your revenue was essentially non-cash, that is recognized out of deferred and balanced out of by shareholders' equity. Number three, the global name registry, the [Dot Name guys], Um, it's my understanding that you took an equity stake in that company. If so, could you give details on that? Um, and then the last thing is international domain names, that is, those, you know, of the 12 million roughly domain names that you have, roughly what percentage of them are registered by people abroad?

Okay. So, I'll take the first two. I think I'm jotting down your list here, Chris. Um, on the cash flow from operations, and given that Stratton just gave guidance for Q2, we would expect cash flow from operations in Q2 to be relatively consistent with this quarter, and that's in the 20 million range or so. Um, you know, percentage of revenue in the quarter coming from deferred is just not something we've ever broken out and, you know, don't give out that data. I'll let Stratton take on the Dot Name and the last question.

Ya, I mean, you know, we have made no announcements with [CNR] in any capacity, other than that we are selling those names. So, at this point, I'll have no comment there. On international names -- sorry, on names that come to us from abroad, Chris, I don't have those numbers with me. We'll try to provide some kind of breakdown of that regional segmentation at the analyst day from the mass markets guys. That's not something I have on hand.

Thank you.

And our next question will come from Todd Weller with Legg Mason.

Yes, I just want to revisit the mass markets and the domain name side of the business. Stratton, if you could expand a little more on what happened in the quarter for the business to be so much weaker than expected, particularly given the radical recognized revenue mostly in that business?

Well, I think a couple of things, right. You have a significant amount of renewals that start out throughout each quarter in January, February and March on a ratable basis. Velocity of renewals -- and you know the story as well as I do, Todd, this is an estimation game until you've got enough time that you can see what has happened with the January renewable names, the February renewable names, and the March ones. January and February renewal rates actually looked pretty decent on -- from the way we estimate that. March really fell off dramatically. And so, as that happens, you have to go back and then prospectively look at January and February, because you don't want to have a situation where you've overestimated January and February and the rest. So you know how conservative we all are about that. When we saw March's results in early April, we went back and re-estimated January and February before reporting. So that's really what occurred. When you drop-off, you know, a 10 percent or more of renewal rate across a three-month period where you've got millions of names, there you have the 30 million in deferred.

Thanks.

And our next question will come from Drew Brousseau with SG Cowen.

Hi guys, it's Adam. Actually, I think all of my questions have been answered. Thanks.

So, go to, Jessica Kourakos with Goldman Sachs.

Hi, everybody. Just a few questions. Um, actually, if you can talk a little bit about pre-paids and why, exactly, there was this huge run-up there on the balance sheet. And, also, given the fact that the renewal rates in the domain name business have come down quite substantially, are you going to revisit how you Um, book deferred off of the receivables that are invoiced on the renewed domain name business? Will you take the percentage down causing potentially deferred revenue to decelerate at a faster rate? Thanks.

Okay, so, on the first one, the pre-paid there's a couple components in there. One, you have the acquisition related pre-paid and other assets that came from HO. That was a big piece of it. The other significant piece is our insurance renewals all come up in the first quarter. And every single one of our insurance coverages went up by more than double just due to the insurance market and the softness in the market out there. So, that was the bulk of the pre-paid increases there. And then, I'm sorry, on the deferred?

The deferred, I think historically what you typically do, if I'm not mistaken, is you invoice, Um, 100 percent or whatever is up for renewal and then you take 50 percent of that or whatever is invoiced on the renewed domain names, and you put that into deferred, if I'm not mistaken. And, given the renewal rates coming down, do you expect for what you put into deferred to also then come down as a percentage of what's invoiced, and therefore making the deceleration or the decline, and um, in deferred actually Um, accelerate?

So actually, a lot of the decrease that you see in the deferred revenue this quarter is a direct result of us going in in the quarter and adjusting prospectively, every month as we saw those rates coming down to make sure that we've a realtime correcting deferred and correcting accounts receivable. That's the whole methodology that we've always used in that business. So that's being adjusted prospectively every month, depending on what we see happening in the renewal rates. And since those renewal rates dropped off dramatically in March, we made a very large adjustment in March to take that into account so that we didn't have any overstatement in the balance sheet.

So as of right now, Dana, where are we in terms of the percentage of what's being invoiced going into, Um, into the deferred line?

Everything that gets invoiced goes into deferred for domain name.

100 percent?

No. No. No. We book it at the renewal rate.

That's what I'm saying. So, but I guess at you exit the quarter in terms of right now going into the June quarter, I guess, what rate are you using currently?

The low 40 percent range.

Okay. Great. And that --is that what you expect going forward right now to continue to be at?

I think, you know, as we have said, Jessica, we are surprised by its down tick, so we are being conservative. Right now, we have no reason to expect it's going to change dramatically in Q2. Obviously, as it does, we will use the same, you know, conservative methodology for adjusting that.

Okay great. Thank you.

And our next question comes from Jordan Klein with UBS Warburg.

Hi. Thanks. I don't know if you are going to answer this in terms of maybe not breaking it out, but I would be curious, can you give us an idea on Illuminate and HO in terms of revenue contribution, or at least were they at or -- how much were they below plan, maybe, if that's the way to ask it?

I think that Illuminate saw roughly the same thing we saw, right, which is , you know, a little bit of growth in its core, but not on necessarily the plan. And then the HO, as we said last year was about 60. We've only got two months in. We really have not projected that all out as to what product lines we'll carry forward. But, a, I think they were, you know, roughly what we expected there, as well, as was the registry way is all in that kind of registry and telecom business.

Okay, and then, Dana, maybe one for you on the cash and equivalents seem to be down. I'm just wondering, if I look at the Q4 to Q1, it seems to be down more if I add in the cash you generated, and I also take into account the 350 from HO. Is there something I'm missing here? And also, what of the charge you are going to take is going to be come out of cash? The restructuring charge?

So a couple things. When you look at the balances at December, the balances include equity investments, as well. So your kind equivalent cash, and equivilance number would have been about 700 million in December. You took the 350 from HO out of that, and then the capital expenditures in the quarter, as well as a few other investment-related items, and you're effectively at the 306 number we talked about. And, as it relates to restructuring, we would expect about five to six million of that number coming out of cash in the quarter on the severance and such. And then going out through the other two quarters in the second half of the year.

So that's five to six million in total or per quarter that's going to be out of your cash?

Five to six in this quarter, and then probably another 10 or so in the second two quarters.

Okay. And then just lastly, Stratton, you talked about maybe purging a little bit of the affiliate -- not purging, but I guess you'd maybe pull out some of the guys that weren't pulling their weight. You said maybe five to ten percent in the international affiliates. Um, is there any change in that in the timing?

Um, you know, I think we will still do that. Our expectation is that, you know, that'll come sometime over this year. You know, in general we're very conservative on what -- on how we will count, you know, the revenues from those folks. We'll still do that at some point this year, and we have, you know, a few larger partners who'd like to step in in some of the markets. So, again, obviously the affiliate program has been of a lot of interest, and we'll spend some amount of time on it at the analyst day.

Alright, thank you very much.

And our next question will come from Gene Munster, Piper Jaffray.

Could you give us a little bit of guidance in terms of the gross margin on the web presence business. And I know you probably don't want to give specifics, but, Um, given it's been a focus on the call, is there any sort of help that we can get on that line?

Actually, I won't break out the actual number, because we don't do that. But in the web presence business, the gross margin remained relatively constant, but then you a lost contribution because of the decline in the revenues. Gross margin was actually fairly constant.

Greater than 85 percent?

No. No.

Greater than 60 percent? laughter ].

I think the important point to take away is that Um, contribution margin, on a renewing name, is obviously much higher than contribution margin on a new name. Right, and that's why it made such a significant difference.

Okay. And if you could just talk about as you have been piecing together the elements in the past year, what elements do you think -- are you looking for new elements? Is it, Um, Are you guys still internally building or looking externally or any color guidance on that strategy?

I think, as we said, I think earlier in the year, we are very confident that with the pieces we have and the development work we are currently doing between all of those technology groups, that we have what we need to kind of fulfill the promise that, or at least argue of what the promise is that this infrastructure services company.

So we should see --is this be digesting more over the next couple quarters?

Absolutely.

Okay. Thanks.

And our next question will come from Sterling Audi with J.P. Morgan.

Hi, guys. Can you give us a sense as to the customer diversification in Illuminet. Specifically, what the exposure to [CLEX] at this point?

Let me give you a data point that I picked up just yesterday from the folks at Illuminet. Um, as is obviously been reported, Williams Communication filed for bankruptcy. First of all, Williams is still paying Illuminet on a pre-paid basis for services. However, Williams represented their 103rd largest customer. So, these are not substantial, there was no change at all in the exposure to the [CLEX] component of Illuminet that we would think of as potentially risky. As we've said before, that's in the three to six percent range of their revenues, Um, and really don't feel that's much threat. In fact, having another, you know, 35-plus switches added to the network was probably a little more than we expected. And that's existing carriers adding more.

Okay. And then with the deals with the Sprint PCS and Singular, can you give us a sense as to, are they seeing good growth in SMS messages being processed per week?

Um, they are. Now, Sprint has turned on the service, and we are operating that gateway for them. Singular will go live relatively shortly, but there are hundreds of thousands of messages that have gone over to that gateway. And, within the next few weeks, we will turn on the peering arrangement with the other carriers that are not using our gateway, but are either doing it themselves or together. So, I think by the end of this quarter, you will have full IM interoperability - I'm sorry -- SMS interoperability between the five, you know, large wireless carriers here in the U.S. Just a point that we had not made before that I would like to point out is, that service will charge on a per message basis.

Charge on a per message when it's intercarrier?

Intercarrier.

Okay. And then, on the HO side, can you give us a sense as to were there any new customers added in in the quarter, just qualitatively, Um, what's happening there?

Yeah, they saw two or three new customers. Again, when they get a customer, obviously, in the billing market there's conversion time. So, none of those newly-signed contracts are up and running yet, but they will be over the course of probably, I think it's about 120 to 150 days is what they view as conversion on existing guys. They do have a few new carriers that have started up and are going already and seeing nice growth. Again, while there's a lot of, you know, concern about that billing space and the tier one guys, some of the tier two guys, some of these new models are doing fine and coming off of a very small base. You know, HO seems to be on track.

Okay, and then, last question. In terms of web server certificates, is there any sense that -- is there any correlation between what you are seeing in the domain name business or what's happening with the retail payment guys and what you are getting in terms of either new certs, as well as upsale?

No, actually more on the new side. I wouldn't expect the renewal side.

We certainly, the story there has not changed much over the last few years. Generally, when people get the name, if they are going to use it immediately, they put it on an insecure server and then, over time, you know, they will get a [INAUDIBLE], so there's not a direct at-time-of-purchase upgrade path that makes a lot of sense for people. But we do go back and directly market to them afterwards. Generally, seeing the upsale rates on web certs continue to stay high has actually given us some confidence that that product line will continue to expand. We've seen, you know, descent performance there. The payment stuff is actually, you know, a small little victory story. I think adding another 10,000 merchants in that quarter, Um, having about, you know, I think it was up 30 percent or 40 percent the dollars through that gateway, we clearly now believe we've got about a third of the overall dollars being processed on a quarterly basis or coming through our gateway. So it's, you know, a good story starting to see lots of interesting ways to monetize that. We'll be, you know, changing and repackaging some of the stuff later in the year to, I think, more balance the contribution from larger merchants contributing more to that line. But that's a good story, and I think, you know, there is some correlation there to the domain name growth.

Thanks.

And our next question comes from Scott Phillips with Merrill Lynch.

Hi. Thanks. Um, I was wondering if you could drill down to what caused the weakness in the Illuminet business. It seems like, you know, that would be less pegged to the IT spending environment, and more contingent on call buying. Why would that be all?

Their largest carriers have the best pricing rates and their largest carriers do the most volume. Um, as they either get to new tiers or as we renegotiate pricing with some of the carriers, as we did in December and January for longer-term contracts, that's really what you saw in the first quarter, Scott.

So, it's more pricing pressure due to the volume itself?

That's correct.

All right. And then, I guess, on the PKI business, to what extent are you seeing pull-through from other security areas? And what would you expect to have to happen before you see an uptick in that business?

Well, you know, I'm -- just to be, you know, clear, let's all remember that business grew substantially last year. We saw good uptick there. We absolutely saw a complete freeze, right, on spending by these large customers in Q1. And so I think it's a little hard to use those two data points and try to decide exactly what's going on yet. Um, our sales force tells us they are, you know, in very good discussions with customers across, you know, all sorts of spaces. VPN's, we think, [extra NET] will pull, we are starting to see some nice traction in the device market. You know, two stats we used to talk about, at least in the PKI side, was certs out the door on kind of a weekly basis. That number is significantly up. So that means existing guys who are already signed are, in fact, deploying more. In the cable modem area, at least for the last 12 weeks that I've looked at it, we never shipped less than 100,000, you know, a week and in some cases, significantly more than that. So, the pull through is coming. I think it's the new accounts, you know, delays that really were the impact there.

Would it be fair to characterize that as contingent on an improvement in the IT CAP-X environment?

Yea, it seems to be.

Thanks.

And our next question will come from Laura Letterman with William Blair.

Yes. Just following up on the whole issue of what's going on in the domain name business. Earlier I think last quarter you got about -- [INAUDIBLE] 97 percent of speculative names were gone. How can you really determine what's speculative and what's not speculative? I don't quite understand that process.

Just to be clear on the definitions, Laura, what we had said is 97 percent of the "promotional" names. Promotional names were names that were given away that we know of being given away for free to folks who maybe have a .com, and we gave them the matching .net and .org, or from channel partners who did something similar. Promotional is what we were focused on cleaning up. And frankly, you know, the good news is that is being done. What we're talking about in speculative names is someone who has come in, either through us or through some other registrar, and bought a thousand or 10,000 names and, a, you know, kept them from a year, or then gone and transferred them from one registrar to another on a promise of paying for renewals and not doing it. That's what occurred in this market place. As you ended up getting 80 resellers of names, the speculators would go round robbing all of them. Frankly, we just decided in Q1 to stop supporting that model. And so, you know, I think you are seeing a lot of, at least our decline being from the fact that we will not -- we will no longer do business with those folks. And that's, you know, significant. I think an interesting set is about 10 percent of the names that come out of -- when we talk about renewal rates, about 10 percent of what comes out of is non-renewals from us, moves into somebody else as a new name. Right, and our expectation is that a significant percent of that is speculation. So, it's kind of one of the oddities in the market which is we may have a "nonrenewal," someone else will count that as a "new name." And it's kind of an interesting, you know, challenge to sort out what that really means. But for the most part that seems to be speculation.

How do you know when this bottoms out? The bottom line.

I think that's a good question, and I was wrong, right, as we went through this last year. We thought the promotional was the big piece of it. We thought that we had, you know, the majority of people who had bought one-year names during the boom through that first cycle. What we had, you know, not anticipated, is kind of the second order effect, where you've got people who actually bought two years ago when competition just opened up -- that was still the part of the boom, paid for two years instead of one at the time, and they are now, kind of, releasing those names. Whether it's because it's speculators or people who bought five and are keeping two, you know, something like that. That's the part we're now trying to analyze critically. And, you know, not to push anymore of the answer off to the analyst day, but we will have the whole mass market team there. As I said, I have a lot of confidence in their ability to get their arms around it. Um, they're as frustrated as anybody, in kind of what they've inherited. But I think you will find them to be very thoughtful about that approach.

But, there's any thought, I know you guys want to talk about, and analyze that, but any thought on how to even analyze that, I mean, how do you know what's in the minds of the customers that bought and therefore how much they're going to renew? I mean, how can you even know that.

Yea, in many respects, it's like any large database problem. You can only analyze the trends, right. And you can only analyze, you can only go out and then do primary research on certain pockets of it, and that's certainly what they've been doing.

Thank you.

Our next question will come from Israel Hernandez with Lehman Brothers.

Thanks. My questions actually have been answered. I'll pass on to somebody else.

We'll go next to Chris Hovis with Sun Trust Robertson Humphrey.

Hi, Thanks. Can you give guidance on what you expect in terms of CAP-X IN Q2 and maybe for the rest of the year?

So, our annual guidance is 150 million. Clearly, with the current environment, we are looking for that number to come in at a lower amount. Um, we spent early on some things this quarter, like the data center, like a few other initiatives we're trying to roll out within our MIS group, and so I would anticipate that the CAP-X this quarter would be significantly less than what -- this quarter being Q2 than what Q1 was. In terms of formal guidance, I don't really want to give out a number, because obviously we're working on -- looking at that right now. Bit it would definitely not be more. It's definitely going to be less.

Okay. Thanks. And if you look at long-term deferred revenue, Um, you know, I assume part of it's between one and two years. And then beyond two years, can you characterize the percentage split between that?

I think the beyond two years has always been roughly, you know, between two and four percent. Um, yeah, and that's probably still consistent. Although, the team is now beginning to market three-year terms.

Right.

And are seeing some uptick there, so, although it's a small number on the total base of the new names, we are starting to see that term lengthen a little bit.

Okay. And then one final question. How large a customer is Worldcom of Illuminet, in terms of percentage of revenue, or where does it rank on the top 100 scale?

Fair question, Chris, we don't have that at our finger tips.

Okay.

Alright, they did not have a five or 10 percent customer within their revenue base. So, I don't know if that's helpful at all. But we can check on that and get that for you.

Okay great, thanks.

And out next question will come from Tim [Clauselow] with Thomas Weisel.

Good afternoon, everybody. Just a quick follow-up on the contracts with Illuminet and HO Systems: How long are those contracts typically written for? And how often are they up for renegotiation? And were these renegotiations, Um have any sort of, term to them so that we could see some price stability? Thanks.

Yea, I think the traditional Illuminet contracts were about three years, on average. And, you know, the ones that were done in price negotiations in December and January, you know, were expected. And now those terms are, I think, back in place. Um, because of the complexity of billing, HO Systems generally have longer-term contracts than that; you know, four and five-year contracts. Um, And, you know, again they are smaller carriers, but that tends to be the current contract length.

Okay. Great. And do you feel that you will have some pricing stability over the next couple of quarters, or do you think the pressures will continue?

Um, I think the honest answer is, we think we've got some of the bigger ones taken care of. Um, there may be a few others in the second half of the year. But, you know, on a relative basis it will be less than what we saw.

Okay great. Thanks a lot.

Our next question -- our final question will come from Michael Carboy with Deutsche Banc.

Good afternoon, Stratton. Good afternoon, Dana. A couple of quick questions for you here. I guess sort of staying on the HO theme, Um, a number of HO's major customers I think are now part of AT&T Wireless. Can you tell me a little bit about whether there are any minimum contract provisions, Um, Um, on those contracts? Are they strictly volume and quality related?

Um, help me with that one, Michael?

In particular, your contracts -- the contracts that existed between HO and Telecorp and Telemedia that are part of AT&T Wireless, I'm curious as to whether they were minimum contractual commitments between those service providers, back to HO that you would now enjoy, or whether those were contracts that didn't have any minimum pricing floors or minimum commitment floors on them?

Again, I apologize for not having that at the tip of my finger tips. I know that the HO Systems does have minimum time periods in the contract. So they tend to keep, even if these carriers are absorbed or becomes affiliates of others, they tend to keep the billing relationship for some longer period of time. They all do have minimum pricing floors in them. But as it relates -- I think that's the simple answer.

I kind of wonder whether there's a potential for erosion in some of that business as AT&T Wireless moves to transition a lot of their operations onto conversion fulfilling platforms.

Probably some, but I don't think those are significant at the moment.

Okay. Dana, Um, with regard to the invoicing in the mass market business, Um, we've seen instances of folks who have set up domain names with other registrars receiving invoices for renewals, which I think are also, essentially, sort of potential transfers back to VeriSign. How are you handling the invoicing for such domain names at VeriSign?

Let me just clarify. These are transfer and renewal notices, right? They are not renewal notices. The action is actually a transfer, which becomes a new name in our base. Dana can talk about the invoicing.

Right. And when those are sent out, those are not invoices. Those are notices, and then when somebody actually would come in and purchase the name and transfer it, it would be recorded as a new name on that actual hard transaction.

Okay. And then when does that end up being -- when does the full amount of that end up in deferred revenues rather than just an estimated amount?

There is no estimates there. That is when -- that is, again, to VeriSign's mass market group, that looks like a new name sale like any other we would do in our retail site. Therefore, as the customer pays us either by credit card or check, that's when we credit it to the cash and the [barrel head]. And the total number of unique customers in the web presence segment this quarter was, I belive, about 5.5 million. I think that's in the press release.

Okay. Terrific. Thank you very much.

Thanks, Michael.

That does conclude our question & answer session. I'd like to turn the conference back over to Miss Dana Evan for any additional or closing remarks.

I'd like to thank everyone, again, for joining us today. And as always, feel free to give us a call with any further questions. Thank you.

That does conclude today's VeriSign, Inc. First Quarter Earnings Release conference call. You may disconnect at this time.