威瑞信 (VRSN) 2002 Q2 法說會逐字稿

Please standby. Good day and welcome to this VeriSign, Inc. Second Quarter Earnings Release conference call. Today's program is being recorded. At this time for opening remarks I would like to turn the program over to Steven . Please go ahead sir.

Thank you operator. Good afternoon everyone and welcome to VeriSign's Second Quarter 2002 Earnings conference call. This is Steven Gaydoff, Vice President of Finance and Head of Investor Relations. I am here today with Stratton Sclavos, Chairman and CEO of VeriSign and Dana Evan, Chief Financial Officer.

Before we begin I would like to remind everyone that the matters we will be discussing other than the historical financial data might be forward looking statements and as such they are subject to the risks and uncertainties described in our 2001 annual report as well as other reports filed with the SEC. We would also 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 and this call is being Webcast live, both on our Website and at www.streetevents.com.

As it relates to the format of the call today, in a moment I'll turn the call over to Stratton, who will provide a high level view of the quarter, and do deep dive into each of our business units. Dana will follow with a detailed review of the Q2 financial results, and will provide guidance going forward. She'll then open the call for your questions. We anticipate the call ending at approximately four p.m., and with that, I'd like to turn things over to Stratton.

Thanks Steven. Good afternoon everyone. I'd like to spend the next few minutes covering three key topics with you. First we'll discuss the overall business environment we saw in Q2, and our top-level results. Second, we'll dive into each of our business units, and discuss the operating metric and key challenges and highlights for the quarter. And lastly, I'll give a brief overview of our business outlook for Q3, and the management priorities we are focused on.

As we briefly discussed when we released our preliminary results on July 10th, we saw mixed results across our key business units in Q2. Revenues for the quarter totaled 317 million, with pro forma EPS at 15 cents per share on a fully diluted and tax-affected basis, in line with our pre-release expectations. Sequential bookings improvements in our domestic security and telecom businesses were offset by weak consulting revenues, and international affiliate contribution, as well as the expected decline in our domain name business.

Clearly, spending in technology and telecom on a global basis remained depressed in the quarter, and VeriSign was not immune. That being said, we still believe there is a compelling market opportunity for our collection of infrastructure services, and we remain confident in our long-term strategy. Given the overall environment however, we have, and will continue to take, proactive measures to match current expenditures with near-term market realities.

In this regard, we made good progress with our restructuring initiative in Q2, benefits of which should begin to be more fully realized in the second half of the year. We are also closely watching dynamics in our under-performing businesses, and we'll continue to manage expenses in each area, in line with current business momentum. I think it's important to also point out that we had several tactical and strategic highlights in the quarter, including the rollout of new telecom services, our phase one deployment of authentication services with eBay, and the announcement of our relationship with AOL to provide secure instant messaging services to enterprises.

The point is that we are continuing to see opportunities to develop new services and partnerships that will provide incremental revenues over the long haul. While we are clearly not satisfied with our overall financial results, we are somewhat pleased that we could continue to deliver significant pro forma operating income in an otherwise humbling environment, and that the cash flow dynamics of the business improved quarter over quarter. Dana will fill in the rest of the financial details shortly.

But first let me cover the business unit metrics for the quarter. The mass markets group, comprised of our retail domain name, Web certificate and payment gateway services, generated approximately 103 million in revenues in Q2, down eight percent from 113 million in Q1, but in line with our guidance from April. As we discussed last quarter, our goals in the retail domain name space are to clear out all of the promotional and speculative names as quickly as possible, in order to focus on high-quality customers who intend to use their domain names for email and Website services, and who are more likely than not to renew those names on a continuing basis.

As expected, we saw a decrease in domain names under management as we continue to aggressively deactivate and delete names associated with earlier promotions and speculation. We ended the quarter with 10.3 million names under management, down from 12 million in Q1, but in line with our analyst day projections. We added approximately 550,000 new names in the quarter, and renewed just over 600,000.

The renewal rate on revenue generating names came in at 45 percent for the quarter, up from Q1's 40 percent. To be clear, we calculate the renewal rate and always have based on names that are contributing revenue to the P&L. In most cases, the renewal rate calculation eliminates names from promotions and from large domain name speculators who receive free transfers into our base in 2000 and 2001. In Q2, there we approximately 1.3 million revenue generating names up for renewal. We anticipate approximately 1.1 revenue generating names to come up for renewal in both Q3 and Q4 of this year. As we discussed at our Analysts Day, we continue to believe and actually see more firm signs that the vast majority of non-revenue generating names should be out of the base by the end of this year.

In addition to the improved renewal rate, we are also seeing improved timeliness on the part of customers who choose to renew. We attribute this to several factors including the improving quality of the base, earlier renewal notifications and more timely deactivation processes. Significantly, the trends for the last few months suggest that we are now able to collect in excess of 90 percent of a given month's actual renewal fees by the end of that month. This of course is much higher than our historical rate and improves our ability to determine actual renewal rates much earlier in the cycle. Average term in selling price for both new and renewed names were consistent with Q1. In fact, average subscription terms for new names sold at retail climbed above two years. Upsell rates for value added services such as websites and e-mail were also slightly improved from Q1 levels and now sit above 30 percent.

Results in the web certificate and payment lines of business were as follows: we sold just over 105,000 web certs during the quarter with upsell rates above 45 percent for the first time ever. The total install base of active website certificates now stands at slightly over 400,000. The number of active merchants using our payment gateway services climbed to 75,000 up from 70,000 in Q1. We helped process approximately 58 million unique transactions with an aggregate value of over $3.4 billion up from Q1's $2.5 billion. Clearly, web certificates and payment services had respectable performance in Q2.

As you would expect, our rest of year plan in mass markets has continued to manage expenses in line with the evolving market dynamics. While we execute on our strategy of improving operational efficiency and quality, expanding our domestic channel relationship and establishing a stronger direct position internationally. In fact, the mass market established a direct presence in Germany in Q2 and you can now find us at www.verisign.de. Looking forward into Q3, we still expect to see a 5 to 10 percent decline in revenues for the mass markets group as we had previously indicated, with renewal rates for domain names essentially holding steady at 45 percent.

Let me now move to the enterprise and service provider division. As you know, we break revenues in the ESP division down into two segments: managed security and network services, and registry and telecom services. The managed security and network services business includes our based authentication and managed security solutions, digital brand management services, consulting services and international affiliates. The registry and telecom services business includes the full suite of directory and resolution services available from VeriSign global registry as well as the signaling, database and billing services of our telecom group. The ESP division generated $214 million of total revenues in Q2. This included approximately $80 million for managed security and network services and $134 million from registry and telecom services. Drilling down into Q2 performance for managed security and network services, we saw fairly mixed results reflective of both the overall economic environment and some VeriSign unique issues. Domestic authentication and security services saw sequential increases in booking while our consulting and international affiliate businesses saw sequential declines. We are encouraged by the improvement from Q1 in domestic business, however we will look for sustained momentum for the rest of the year before we believe that visibility is improved.

Highlights in the quarter included new PKI wins, and strong renewals in our target markets of financial services, health care and the public sector. We also continued to make good progress in our relationship with IBM, with several new customer wins, and joint work on Web services security were delivered in the quarter. Our announcement with AOL regarding secure instant messaging services has drawn significant enterprise customer interest, as we look to go to into beta testing in the next few weeks.

As I mentioned earlier, our consulting group saw weaker demand than expected in the quarter. Pricing pressure on third party products remained consistent with Q1, while the sales process for more lucrative network and security implementation projects pushed out beyond the quarter boundary. Customers and prospects remain interested in our expertise in designing, deploying and managing complex network and security solutions, but they are moving forward very deliberately based on their own spending constraints.

Our plan going forward is to manage operating expenses in this line of business very closely, while we continue to lessen our dependency on low margin third party product sales. In addition, we are bringing the marketing and sales efforts of the consulting team in under the management of the core enterprise services team. We believe there will be operational synergies and improved execution as a result.

Our international affiliate channel also saw continued weakness in Q2. An equally tough technology spending environment overseas led to several of our affiliates under-performing in the quarter. In addition, tighter capital markets are making it more difficult for certain venture backed affiliates to raise the additional funds they need to fully develop and expand their operations. Given both of these factors, we have taken a conservative position, and are not recording certain of the affiliate's revenues.

As we mentioned on the July 10th call, the loss of this high margin revenue and the increase in bad debt reserve for this channel, contributed significantly to the shortfall in earnings in Q2. Meanwhile, we are continuing to see good performance in the larger affiliates such as Gold Trust in Canada and BT Euro Trust and Telefonica in Europe. As most of you know, the majority of our international revenue has traditionally come from our PKI affiliate business. Clearly, VeriSign has a much broader portfolio of infrastructure services today.

Our focus through the rest of this year is to strengthen our overall international presence across all of our lines of business. We expect to broaden our distribution strategy to include a direct presence in key markets, and new or expanded partnerships in other areas. Direct presence will be based on proven models such as we have with VeriSign Japan. We formed VeriSign Japan in 1996 as a majority owned subsidiary in partnership with NTT and other leading Japanese firms. We currently own 65 percent of VeriSign Japan, and consolidate results in our financial statements.

We believe there are other distinct markets where this model makes sense. In fact, early here in Q3 we've decided to increase our stake in eSign, our Australian affiliate, from 19 percent to 51 percent, and to appropriately rename the company VeriSign Australia. We have been partnering with eSign since 1998, and believe that, much like VeriSign Japan, they have achieved market leadership in their region. The company has a small, but well-run operation and we are hopeful that the VeriSign brand will add to their momentum.

In some markets such as Germany, we will establish a direct presence from the ground up, rolling out services as the market demands them. And last but not least, we will continue to support our existing affiliates who are demonstrating good progress and growth in their markets. I want to be clear that we are intending to augment, not replace, the affiliate channel in order to ensure that we capitalize in the overall international opportunity for each of our lines of business. With international revenues currently making up only eight percent of total sales, this is clearly one of our most significant growth areas for the future. As we've said before, it's also likely we will terminate our relationship with certain non-performing affiliates over time.

Moving to the registry and telecom services business, we'll start with the global registry. The registry saw 2.7 million new registrations, up from 2.6 million last quarter and 2.3 million the quarter before. We also renewed 5.2 million names and enabled the transfer of 240,000 names for a total transaction volume of approximately 8.2 million, up from last quarter's 6 million. The active zone files for and contained 27.3 million names at the end of the quarter, essentially flat from Q1.

Other highlights with the registry included the announcement and initial rollout of the new ATLAS infrastructure. ATLAS stands for Advanced Transaction Lookup and Signaling System. As we have previously discussed, the main benefits of ATLAS include higher capacity and performance at lower costs and with an ability to support both IP and telephony database services. ATLAS has the potential to be the unifying element across all of our businesses.

Moving to the telecom services group, we saw increased sequential volume in both database services and signaling. We also added another 10 customer signaling points to our SF7 network bringing us to a total of 985. On the billing side, we are now actively servicing 40 customers and saw subscriber revenue growth quarter over quarter. Given the weak telecom market in general, we were pleased that we could achieve organic revenue growth on a sequential basis in the telecom business. We are still cautious about the second half of the year but believe our usage based model is as good as it currently gets in the telecom space. The telecom group continues to roll out new services to help carriers offset costs and increase subscribed revenues. In addition to the intercarrier messaging services for SMS that were announced in Q1, the telecom group also introduced the net discovery service for and the do not call service for telemarketier called compliance. All of these offerings are expected to start generating modest revenues this year. The billing team also plans to roll out several new services in the second half.

So, summing up the overall enterprise and service provider division for Q2, I think it is fair to say that our results were mixed with some areas performing at plan and others in need of additional focus. We are pleased with what we accomplished in the product and integration areas but remain concerned with overall spending trends in both IT and telecom. We see that our managed services model is in demand and believe that the VeriSign brand will allow us to get a disproportionate amount of market shares as spending resumes in the market place.

While Dana will provide the detail guidance for Q3, I wanted to give you some color on what we are currently seeing and expecting. As I mentioned, we would expect the mass markets group revenues to be down quarter over quarter in the 5 to 10 percent range. The mass markets team is focused on improving the contribution margin across its lines of business as the number of domain names under management stabilizes towards the end of this year. Obviously, like most other companies in the technology space, we believe visibility in the enterprise markets remains very limited. Customers and prospects are still very cautious about IT expenditures and there are very few, if any, conclusions to draw about future catalysts. We anticipate that traditional summer seasonality could also delay any meaningful recovery. That being said, we would expect our domestic enterprise bookings to be flat to modestly up this quarter. We do not expect to see the top line improvement in the affiliate and consulting businesses this year. But we will continue to adjust our expenses to make sure the bottom line impact is minimized.

We believe our exposure to the current telecom industry woes is relatively low but nevertheless real. Our plans are to continue to win new customers for our existing services while we roll out new incremental services such as Kalea and Do Not Call. On the positive side, we do feel good about competitive position across the board. We also believe we have more partnership opportunities with top 25 technology companies than we have ever had. We like our current product portfolio and are somewhat optimistic about new products in the pipeline. All in all, the markets remain tough but we are confident that we are focused on the right opportunities externally and the right priorities internally.

Thanks for your attention and now let me turn it over to Dana.

Thanks Stratton. As you just saw, our overall business unit results were certainly mixed in Q2 and so were the financial results. While we were generally not satisfied by the overall financial results, we were encouraged by what was delivered in key areas such as operating income and cash flow, given the reduction in revenue for the quarter.

Now, turning to the detailed financial results for the second quarter, and the income statement, on a consolidated basis, VeriSign reported $317 million in total revenue for the quarter, coming in at the high end of the $315 and $317 million range provided in our preliminary earnings announcement. To segment this revenue further by business division, the enterprise and service provider division delivered approximately 214 million, or 67 percent of total revenue, as compared to 66 percent last quarter.

And the mass markets division reported 103 million, or 33 percent of revenue, down from a 34 percent contribution in Q1. With in the ESP division, registry and telecom services was approximately 134 million, or 42 percent of total revenue, and managed security and network services contributed 80 million, or 25 percent of the total.

This compares to 36 percent and 30 percent, respectively, in the prior quarter. Overall, on a sequential basis, total revenue declined $10 million in Q2, or approximately 3 percent. This is attributable to three primary factors, an eight percent decline in the mass markets group, which was within our previous guidance of the anticipated 5 to 10 percent decline, a decline in the revenue contribution from our international affiliates, and continued weakness in our consulting services group.

The revenue shortfall from these factors was partially offset by an increase in revenues from our telecom services businesses unit. This was a result of increased traffic and transaction volumes and relatively stable pricing. In addition to the moderate organic growth we saw here, telecom services revenue also in Q2 as a result of the inclusion of a full quarter of revenue contribution from , which we acquired in February of this year.

Customer concentration remained relatively low for the quarter, with no single quarter accounting for 10 percent of total revenue. Some of you recently asked about the company's exposure to WorldCom. In our telecom services group, WorldCom revenues represent less than 2 percent of revenues, and for the company, less than half a percent of total revenue.

Insofar as reciprocal transactions, or barter revenue, as it is more commonly known, we note that VeriSign had no reciprocal transactions in the quarter. Turning to the global nature of our operations, the percentage of total revenue driven from our international affiliates and subsidiaries was approximately 8 percent in the quarter, as compared to 9 percent in Q1. The primary reason for this decline is certainly a result of the decline in affiliate revenues, coupled with an increasingly difficult enterprise spending environment.

In addition, we had a full quarter of results included in Q2 that had no international component. As we've expressed to you before, it's important to note that we expect the number of affiliates across the various geographies to decrease over time as markets consolidate, we participate -- participants terminate, and as Stratton indicated, where we enter certain markets directly.

As it relates to revenue from strategic investments, approximately 2 percent of second quarter revenues were from companies in which VeriSign had an investment, as compared to 3.4 percent in Q1. Further, as a component of this, approximately 1.8 percent of this revenue was from international affiliates in Q2 versus 2.4 percent in Q1. Looking at cost of sales and gross margins, our consolidated cost of revenue for the quarter was 146 million, compared to 149 million in the previous quarter.

This translates into a 54 percent gross margin for the second quarter, consistent with gross margins in Q1.

While we saw a shift in the revenue mix this quarter, the net affect was essentially mutual to growth margin as the loss of high margin revenue from the international affiliate area was offset by similarly decreased revenue contribution in the very low margin consulting business. Growth in telecom revenue drove gross margin consistent with the overall company's margin which also contributed to our maintaining gross margins in the 54 percent range.

Turning to operating expenses and operating margin, overall, consolidated operating expenses for Q2 were $126 million compared to $117 million in the first quarter. This increase is attributable to several different factors. First, while the restructuring had some impact during the latter part of the quarter, we did not receive a full benefit in Q2 as the restructuring effort occurred mid way into the quarter. Second we took a reasonably conservative stance in analyzing our accounts receivable balances across the company and booked a bad debt expense in the second quarter of approximately $10 million which I will talk about more in just a moment. In addition to the full quarter of operating expenses from HO systems in Q2, we also lost approximately $7 million in gross margin contributions. That being said, we continue to drive strong cost control measures across the entire organization in order to drives efficiencies and margins and to stabilize the bottom line.

During the second quarter, we took two measures to conservatively reflect the continued difficult business climate and general economic conditions, especially as it relates to some of our international affiliates. Consistent with previous quarters, we did not recognize revenue in the quarter on certain affiliates designated to be at risk or non performing and second, we recorded an expense to reserve for certain accounts receivables associated with these affiliates as well as other enterprise customers. The result of these actions impacted our operating margin in two ways. Typically high margin revenue did not get recorded and at the same time, additional expenses for bad debt charge did. Overall, pro forma operating income was $46 million for the second quarter, translating into a 14.5 percent operating margin as compared to an 18.7 percent margin in the first quarter. The decline in the operating margins in the prior quarter is related to the several key factors that I just touched on. The increased reserve for receivables further depressed operating margins in the quarter.

As you know, we announced a corporate restructuring at the end of April that aims to rationalize, integrate and align resources across the company. As we stated on our Q1 call, we anticipate taking a total charge of $70 to $80 million over several quarters to reflect the full restructuring effort. Consequently, we took a $68 million restructuring and other impairment charge in the second quarter that reflected that activity. These charges included employee severance, lease and contract terminations and write downs of certain property and equipment including leasehold improvements. In addition, we would expect to receive a full quarter's benefit of the project $30 to $40 million of annualized cost savings in the third and fourth quarter. We entered the quarter with a consolidated employee headcount of approximately 3,190 people as compared to 3,500 as of March 31st reflecting the restructuring efforts.

Other income for Q1 which consists primarily of interest income was approximately $4 million in the quarter. VeriSign reported pro forma consolidated net income for Q2 of $50 million as compared to Q1 of $68 million. While VeriSign is not currently in a cash tax paying position and does not expect to be for the foreseeable future, EPS for the second quarter on a fully taxed basis using a 30 percent tax rate was 15 cents. This EPS number is calculated using a fully diluted weighted average shares outstanding at the end of the quarter of approximately 239 million shares.

Now, moving onto the balance sheet and the cash flow items, as it relates to the cash balances, VeriSign ended the second quarter with cash and cash equivalents of approximately $282 million. The primary factor for the decrease from first quarter's cash balances was attributable to capital expenditures, the final payments made for transaction costs for the and acquisitions, as well as the severance cost relating to the restructuring activities.

Turning to accounts receivable, consolidated AR balances totaled 247 million after June 30, down from 283 million at the end of Q1. This translated into a net DSO of 78 days, showing an improvement over the 81 day net DSO recorded for Q1, and within our guided range of 75 to 85 days. In connection with the company's annual assessment under Financial Accounting Standards number 142 for evaluating goodwill and other intangible assets, VeriSign wrote down goodwill and intangible assets by approximately 4.6 billion.

This charge relates to predominately stock based acquisitions made over the past two to three years and is a non-cash charge. In accordance with FAS-142, the company will be reviewing its goodwill and intangible asset balances annually going forward. As it relates to long term investments, each quarter we review the individual assets in our long term investment portfolio. The portfolio consists primarily of equity securities of public and privately held companies that represent technology, distribution, and strategic partnership investments for VeriSign made over the past four years.

As a result of our review in Q2, we determined that there were impairments in the valuation of certain investments that were other than temporary, and accordingly, we recorded the non-cash charge of approximately 95 million on our long term investment portfolio. Total deferred revenue decreased $32 million, or 5.5 percent. The decline in deferred was consistent with the percentage decline last quarter and our previous guidance.

The trends we had anticipated in the mass market side of the business drove the decline in the consolidated deferred balances, which was partially offset by growth in the deferred revenue attributable to the enterprise side of the business. In addition, it is interesting to note that only 23 percent of the company's total revenue in the quarter came from deferred revenue from domain name sales in mass market.

Moving on to the cash flow, operating cash flow in the second quarter was approximately $45 million, a $21 million increase over last quarter's cash flow of 24 million. This is obviously somewhat better than the conservative estimate we had provided previously during our pre-announcement call. Capital expenditures for the second quarter were approximately $42 million, as we continued to incur expenses for several one-time initiatives to consolidate our east coast data centers, drive our new Oracle , and other business system implementations as well as for routine capital expenditures.

To give you an idea of where our capital expenditures, year to date, break down by division, mass markets represents approximately 30 percent, telecom services, 20 percent, enterprise, 15 percent, and corporate and common infrastructure of approximately 35 percent.

We would expect capital expenditures to decline in total for Q3 and Q4 as we complete several of these one-time initiatives and we enter the second half of the year where our capital expenditures are typically lower as compared to the first half.

That concludes my review of the second quarter financial results. I'd like to now turn towards our expectations for the third quarter and lay out some high level guidance for top and bottom line results, as well as from other key areas.

As we discussed previously, visibility in the enterprise space remains limited. We hold a cautious outlook for the telecom market in general. And we still expect the mass markets division to decline 5 to 10 percent in Q3. Overall, we remain cautious in a challenging environment and going into the seasonally slow summer quarter, we are conservatively providing guidance for only Q3. At this point, we look for total revenues in Q3 to be approximately $300 million, gross margins to be relatively flat, operating margins to be marginally up and pro forma EPS to be approximately 14 to 15 cents. Lastly, we would also guide for deferred revenue to be down again consistent with Q2. And with that, I would like to now open the call for your questions. Operator, may we have the first question please?

Thank you. Again, that is star one for any questions at this time. We will take our first question from Steve with RBC Capital Markets.

Thanks very much. Just a question for you on the mass markets division, specifically the registrar. Can you give us, Stratton, a little bit more color on the steps that you are taking to improve that business? Is it a customer service issue, a marketing and upselling issue and is there any way that you could quantify how long and how much it will cost to get the division operating the way you think it should be?

Well, you know Steve, I think we had talked about at the Analysts Day with and John , I think they have been proactively cutting costs in that group all year long. And have substantially reduced operating and head count expense and they did early in the year and they will continue to do that over the course of the year and increase operating income there. I think at the same time some of the new tools that Dana talked about on the capital side, customer service in particular, we expect will improve the quality of those services and make us more efficient. But I think on the back end side of the business we are feeling pretty good and I think now it is around new entrants into the marketplace and getting our fair share. One thing I think is important to note that I had forgot to mention in our comments earlier, is that although our overall market share of new units in the quarter was around 18/19 percent, our market share - our dollar share at the registrar was about 31 percent. So we are tending to do what we had anticipated which is go after the higher dollar value customers there, the one's that we think they are going to be higher attach rates. What the normalized rate of new entrants into the markets is going to be I think it is still early to tell but I have a lot of John and that team to continue to refine the marketing messages at the same time as we increase the bottom line performance there. So, I think we are feeling ok about it going in. The renewal rate is improving and getting better visibility and renewal is helping as well.

It looks like you saw a stabilization in the registry flat at about 27.3 million names. What are you expecting for that business over the next couple of quarters? Have we seen a bottom in that number yet?

You know how ineffectual I have been in calling the bottom on that number previous times. I do think though that we are not seeing, at least not here in July, any noticeable decrease in new name traffic and of course as you saw us state, there are fewer names coming up for renewal in the second half of the year from our registrar than there were in the first half. So, all in all, it is likely that we are approaching stabilization there.

And just the last question. Can you give us an update on the ATLAS rollout? You have indicated it has begun to rollout. What should we be looking for in terms of additional value added services based on ATLAS coming online?

I think the major theme with ATLAS for probably the next 12 months is to get all the VeriSign database services, you know, starting to be delivered off of , so clearly that will happen with . We will move the CCTLBs and the international names that we provide there, and we'll begin to move some of the telephony databases over there, probably at the beginning of '03, or the first half of '03. So I think in the next 12 months what you're going to see is just us utilizing Atlas to get better capital efficiency and higher performance in our database deliveries.

It does give us the ability to provide new services like the do not call registry, which in fact will utilize the Atlas infrastructure, as well as some of the things we're doing in secure messaging. So some of those new products are probably slated for, you know, the first part of next year as well, but most importantly for us is getting the infrastructure upgraded to Atlas to see the capital efficiencies improve.

OK, thanks a lot.

Yes.

And we'll move on to with .

Hey, good afternoon, guys. I have a really quick question on cash flow from operations. For next quarter -- excuse me, for Q3, are you expecting it to be roughly in line with what you saw this quarter?

Yes.

And then lastly, there've been -- there's been some talk about some exposure to some telephony companies within the HO Systems division. Could you just comment quickly on that?

Sure, HO Serves about 40 customers, their largest two subscriber bases come from , which is Cricket, as well as , and clearly there has been some, I think, pressure on those companies. But remember, , we've started the year with fewer customers there and with growing subscriber bases, and since we are paid on a monthly basis based on the total number of subscribers across that base, even if they grow a little bit less than they had originally projected, for us, it's still growth month in and month out. And so we'll continue to see revenues go up there.

So you don't have any concerns that -- that either of those two might actually go out of business?

We don't have those concerns at this point. It's likely, as you know, that subscriber bases are generally viewed to be fairly valuable. We think those -- we have pretty strong relationships there, long term contracts, should those properties be, you know, sold off in pieces or in whole. It's likely we've maintained, you know, billing revenues from them for some period of time.

Thanks a lot.

Yes.

And moving on to with Technology.

Hi, just two quick questions. Wondering if you could tell us how much of the -- in the enterprise business, how much third party revenue is there left?

As I think you'll recall, we've said before that it's that overall consulting was about 12 to 15 percent of revenues, about half of that coming from third party. You know, it's still probably in that range and it's coming down. You know, we're going to focus on a couple of core products that we have great experience with and that we can wrap VeriSign VPN services around. And probably reduce the number of SKUs we sell in third party products by two-thirds.

I think then you'll see is going into '03, we'll have a very trimmed down and focused line of add-on products there, all that are tied into some other VeriSign recurring service when we sell it. As opposed to today where we will sell it .

OK, and then one other question on the affiliate base. Wondering if you've got any more revenue that's likely to come out of that base due to -- you know, financial troubles those guys have had or have you reserved adequately and now we're going to see that business stabilize.

Well, we certainly feel that we've reserved adequately for this quarter, and every quarter we will go in and analyze analyze accounts receivable balances just as we have always done and should we see weakness in further affiliates relationships, we will take appropriate reserves in. But that is factored in right now currently into our guidance.

OK. Just to be clear, it could stabilize this quarter and possibly grow just organically or do you think it will be down again?

I think the best we can tell right now is it is looking like it will be flat or so.

OK. Thank you very much.

And Gene with Piper has our next question.

Can you guys give us any color in terms of breakout between the register and the telecom sales?

Well, I think - we obviously do not split those out but registry clearly had more names generated this quarter than last and the quarter before that had more names than Q4 of '01. So you are starting - and those are all obviously paid for transactions at the $6. One of the odd benefits of losing unit share at our registrar is that we obviously are able to then take more units at the $6 at the registry because we do not have to do the inter-company elimination of that. So, in some respect the registry is doing fine. Telecom service as we said a couple of weeks ago grew organically in the quarter and we also got the extra month of HO, I would say you should assume that they are both doing modestly well at this point, single digit type growth characteristics but - and about the same trajectory.

Just in terms of the teleco side and the modest growth, is there any - just given some of the difficulties that have been out there with some of the players, is there any catalyst or any sort of one or two you could point to for sequential upward organic growth in that business?

Well, I think it is summertime and I think we are somewhat cautious like everybody is. But we have new services that have been announced, launched and we are in contract discussions with dozens of carriers on. So, that is good news. Probably will not turn on in Q3 but Q4/Q1 likely to see some incremental revenue from new products like the offering has been very well received. I think second in the billing side of the house, as most wireless carriers get ready for Christmas season promotional activity, we tend to see an upkick there. So, I think Q4 feels decent in the telecom side and I think Q3 we are insulated and we have fairly low exposure to various dramatic effects that are going on in telecom but we are somewhat limited in our visibility there.

But you just mentioned that Q3/Q4 some of the drivers are new services with regards to the just reported quarter. Can you sort of color in terms of where the organic growth came from?

Organic growth in telecom came from more database accesses and more route sets on the SF7 network. The traditional drivers that used to see where when call volume goes up, then tend to drive more revenue. We also are bringing some more carriers on to the existing services. For example, in Q3 and Q4 you will see some existing carriers start to use our 800 database look up services versus their own and that will drive more per (dip) lookups especially it looks like in Q4. So, database accesses continue to go up. Connection sets and route sets continue to go up and then of course every month, as the 40 or so wireless carriers we bill for add subscribers, billing revenue goes up.

So it would be safe to say that your per (dip) - dollar value per dip has been pretty consistent?

Yes. As you will remember, when we talked about Q1, we saw some pricing pressures there because of some contract renegotiations at larger firms. Less of that in Q2 and good growth in overall access. Q3 and Q4 look like they will be more like Q2 in that respect. Not as much pricing pressure.

Just one final question. In terms of some of the prior quarters, some mass market and Web service accounts had transferred to the enterprise division. Was there any sort of transfer between division in this quarter that we should be aware of?

Yes, I mean, I think we always -- we factor that in when we say the 5 to 10 percent down. The DBMS as we call, digital brand management services on the enterprise had a decent bookings quarter, certainly better than Q1, just like the PKI business. Not back to historical norms yet, but again, it's a pretty solid business and you see a few million here and there that will transition over the quarter.

And what's the rationale between transferring revenue between the groups?

If you have to put an account manager on it and direct sales person, it comes out of the enterprise team, so that's how we count it here.

OK, thanks.

Yes.

And moving on to with Credit Suisse First Boston.

Hey guys, few questions for you. At the analyst day, you gave guidance for and their management, I believe 9 to 10 million at the end of the year. I think you're at 9.6 million now. Do you see that guidance changing at all?

I went back and looked at that slide recently, , because you and I had had that conversation. I think the slide is total names under management, and if you pulled it out it said about 10.5 million at the end of Q2, we came in at about 10.3. So we're a little bit below that number. Based on what's coming up for renewal and the slightly improved renewal rate, we still think we'll make the -- you know, somewhere above 9 million names for the year.

OK. And did you guys put any other equity investments into affiliates with the exception of the Australian one in the quarter?

We did not.

OK. And can you quantify the revenues coming from Australia.

As it turns out, the revenues that will come from Australia in Q3 are basically the same as we would have gotten from royalties from them. It's fairly small at about 1 million 1.5 million kind of number. So obviously we're not doing this because it improves revenue -- and it certainly doesn't improve, it hurts margin because now we have all the costs associated with it. This is a -- you know, reformulation of the international strategy in markets, to go in direct and have VeriSign brand there locally now that we start to see these markets get traction.

And on the bad debt side, I know you're reserving ongoing revenues from weak affiliates. But do you expect any additional receivable write offs in Q3 and Q4?

Well, we booked bad debt reserve time every quarter, so -- you know, we will certainly analyze the accounts receivable accounts next quarter and, you know, take the appropriate charges. This quarter had, you know, a bit more incremental charge than past quarters, but it certainly was in line. If you went back over the last six quarters, it certainly was in the range of the charges that we've taken in the past. So -- for ongoing ...

And the . I don't think we would do anything that is substantially higher than kind of tradition would say in that line.

OK. And then last question for you. When you look at the -- the change in the deferred revenue, it's interesting, the current deferred revenue was only down slightly, and long-term was down almost 20 percent. Is there anything driving that?

That's predominately driven because of the amounts that are coming out from the domain name business, where you see more multi-year bookings there. The growth in the enterprise business all goes into short term deferred, and that division saw growth in deferred this quarter.

Great, thanks guys.

And we'll move on now to with JP Morgan.

Hi, guys. Back on the HO front. Did you -- just tell us, was there actually organic growth at HO Systems in the quarter?

Yes, we saw subscriber growth probably between 5 and 6 percent quarter over quarter.

OK, great. And then just - can you take a step back on the restructuring and just give us an idea - a review for us what is it in total and what now has been done? In terms of employee head count reduction?

Right. So we in April talked about a total restructuring charged of between $70 to $80 million to be taken over several quarters. We booked $68 million of that this quarter. We talked about approximately 10 percent reduction of workforce off of the 3,500 employees and that will stream out - those reductions stream out over the next few quarters. Obviously, some people were let go immediately. Others are on transition and there are some that were factored in to later dates but it is all still part of the same amount.

And of course head count was down about 300. So there is just a few - a small percentage of that left.

Right, right. Could you review for us kind of where we stand in terms of employees by general operating segment? So kind of sales and marketing, R&D, etc.

We do not have that info in front of us. We will certainly chat with you about that off-line.

OK. And then just last question, Dana I think you mentioned cash from operations definitely differed from the pre-announcement level. What was the surprise difference?

Well I think certainly as we continued to go through the numbers for the quarter and finalize things with the auditors, we saw some benefits from some of the other balance sheet accounts that originally had not been reviewed yet.

OK. Great. Thanks.

And now we will hear from Thomas with Goldman Sachs.

Thank you. Dana, in terms of the gross margin, just on a kind of go forward basis, I heard your guidance for Q3 but is this the level we can expect sort of on a long term basis of gross margin? Or will there be additional sort of downward pressure on it?

I think this level is a good level to look for in the near term. Certainly what will drive operating expansion - gross margin expansion is when we start to see volumes in the enterprise business and the domain name business increase again substantially so that you are getting leverage off of that paid for infrastructure again.

So, I think your question - we do not think it is going down from here

Right.

Yes. But it probably does not have much upside opportunity over the next couple of quarters unless business really starts to pick back up.

That is right.

That is right.

OK. And secondly, just in terms of kind of looking out over the economic environment, trying to understand sort of what is happening with a lot of the internet companies, it seems like for most of this year, we have seen an uptick in interest in consumer ecommerce related initiatives. Is that translated into any other things that are impacting your domain name business?

Not that I think you could draw a straight line correlation to at this point. Obviously, the payments business, which is a small business for us, is adding thousands of merchants still every quarter and it processed another almost 30 percent more dollars through its gateway although we get paid mostly a fixed fee there from that. So we do not necessarily get the benefit of that. But that is certainly, I think attributable to more people going online, buying more things. And then of course web certs was up about 5 percent in the quarter from 100,000 units to 105,000 units. Those products are used to secure websites. Mostly for type transactions. So, those are probably second order effects but I would not say anything in the domain name business currently looks like that.

OK. Thank you.

And moving now to Chris with Bear Stearns.

Hi. Can you guys hear me?

Yes Chris.

We can.

Just a couple of quick questions just as a follow up to the cash flow question. That was a real pleasant surprise. Is there anything within the balance sheet guidance that you're referring to, Dana, that you can sort of talk about in a little more detail?

Well, certainly what we -- what you'll see in the balance sheet obviously is that accounts receivable and deferred kind of went down in line with each other versus last quarter there was a significant variance there. You didn't see, you know, a huge increase in pre-paids, right? So I think it's a lot of little things in addition to, you know, predominately the benefit we saw from the decrease in the accounts receivable. And we had a very good increased this quarter in the cash collections and accounts receivable.

OK, and then just a second question for Stratton. As you said, the July numbers look much more favorable on a sequential basis. Is -- are there any other trends that you're seeing in the domain name industry that makes you a little more optimistic going forward, that you haven't indicated yet?

Well, I think the -- you know, our own renewal rate going up was good news. I think, you know, we're a little reluctant to predict, you know, it continues that rapid an acceleration, so we're kind of predicting it's stable here for this quarter. But as you get fewer names coming up renewable for us, at least, in the next few quarters, you know, that tends to say you're probably dealing with higher quality names from prior periods. I think another thing, , is that as you head into 2003, it looks like -- to the best of our ability to tell right now, the base coming up for renewal in each quarter has more than 50 percent of those names that have been previously renewed at least once.

And as you know, as we've, you know, talked about a little bit, previously renewed names tend to renew at a much higher rate than first-time renewers. So that's I think a trend coming up. And then overall general volume in the market at least, certainly having stabilized for the last few quarters tends to make us believe that the base as a whole probably is near bottom, potentially even could grow this quarter.

One quick question. I know this is a long shot, but -- just, do you want to comment on 2003 numbers that are already out there?

I don't think -- not at this point.

OK, terrific, thanks.

with Robert Baird has our next question.

Stratton, thank you first of all for providing the forward look on the number of names up for renewal. Do you happen to know what the number of names was in the first quarter of this year?

I'm looking it all the sheets in front of me, so one second.

Great.

Well, what I do know is that Q1 was the highest, Q2 was second, and then Q3 and Q4 as the 1.1 each are obviously the same.

And do you know when the names are not renewed, do you know what percentage of them are going to competitors and what percentage of them are just going vapor?

Yes, in fact, we do know, and that's been relatively consistent, really, for about the last six quarters at about 11 to 12 percent who don't renew with us are transferred out prior to that. So they're still in the base, right? But they're with another registrar.

OK.

The number in Q1, just to be clear, was 2.1, the number -- 2.1 paid revenue generating names up for renewal, and as I said in Q2, it was 1.3, 1.1, and 1.1, Q3 and Q4.

Right. And Dana, you did mention cash usages in the period and you'd said property and equipment was 42 million, but then you mentioned there was severance. Do you know how much of the dollar out of pocket in the quarter was severance?

It was approximately 5 million.

And do you know, you also said there were some dollars kind of as a follow up to the acquisition of and HO, do you know what was?

That was approximately $12 to $14 million.

Thank you. And just lastly, Stratton you mentioned that you are now on a renewal basis collecting 90 percent of those renewals within the same quarter and that had improved. Can you give us a little background, a little perspective on where that had been and what the improvement has been over time?

Well, what I said, just to be very accurate, is that we are getting 90 percent of the renewals for a given month in that - by the end of that month.

OK.

So that is - as you know, we track it monthly and then do prospective adjustments to the rates. So the fact that we can now get 90 percent of them in by the end of the month is obviously very good in terms of giving us better ability to accurately forecast month by month. I think historically, a couple of things. Let me just go backtrack a little bit. We used to send out renewal notices at 45 days and 30 days prior. Now we send them out as early as 120 days prior. That we think is a big - it starts, if you will, it starts the cycle earlier.

Yes.

Second is obviously we have in the first couple of quarters of this year, deleted close to 5 million names that had been deactivated but not deleted. And the actual process of deleting has of course created a lot of customer dialog around gee I want my name back and the rest. And so what happens is the closer or the less difference there is between the deact and the delete timeframe, the more attention people have started to pay to making sure they renew on time. And then I think lastly is obviously we are seeing the base because of the erosion of speculative names promotional the base is now starting to show a higher quality profile of people who want those names and want to keep them. So, it is all those factors. We are pretty pleased with that 90 percent number. I think that is a big help for us going forward in renewal rates and it obviously means that - we used to see probably, this is actually a guess but I would say it was probably no more than 60 to 70 percent by the end of a month. Maybe even lower than that.

Great. Thank you.

And we will hear now from Todd Waller with Legg Mason.

Yes. Thanks. Hey guys. Just a couple of questions. Stratton, obviously the first couple of quarters were heavy in terms of deletions. It looks like it slowed down. Should be we expect any more kind of mass deletions here in this quarter or the next?

Well I think at least from the VeriSign registrar perspective, you are going to see less deletions in Q3 and Q4 from us than you clearly saw in the first two quarters because a lot of Q1 and Q2, as you know Todd, were 2001 names that we were deleting in addition to current period names. Really cleaning up the base as we migrated databases and did a bunch of cleanup. I think we are pretty much within a couple of hundred thousand names right now of catch up between deacs and deletes and so when you have got that few names difference there, I think you are going to start to see that all stabilize. As it relates to other registrars and a comment I had not made is we did see other registrars kind of blended renewal rate still maintain itself in around the mid 50's. So that also was encouraging that now that the majority of names coming up in a quarter are coming up from registrars other than us and the fact that their renewal rates have maintained in the mid 50's even through a cycle of renewals is pretty encouraging.

And last question. Just could you talk about the average selling prices you're seeing on the Web site certificates and where they sit now on the mass market side?

Well, you know, let me talk about domain names first. Average selling price in domain names was consistent with Q1, so we saw no degradation there at around the $21 level.

OK.

On Web certs, I actually, to be honest with you, don't have that in front of me either. I don't think there was a noticeable change there. I did say that we say upsell rates improve to 45 percent there. I think they were 43 percent last quarter. That is the number of people buying, you know, the 128-bit certifiates, which tends to drag prices up.

So, you know, I think we're roughly -- no degradation there to speak of.

Thanks.

And due to time constraints, we'll take our last question today from with UBS Warburg.

Well, I just slipped in there under the wire. Most of my questions have been asked, but Stratton, maybe you talked a little bit about the timing -- you've mentioned before telecom services opportunities overseas. And that seems to be a big green field opportunity as you look to, you know, stabilize your revenue and then generate more growth. Can you give us an update on initiatives or timing and when you might expect to try to go after that?

Yes, I think. We're pretty, let's see, optimistic I guess is the right word rather than excited, optimistic about the opportunity to drive international revenues higher than 8 percent contribution. I think that's a pretty simple statement to make. I don't think you're going to find us, you know, building it and assuming they will come.

So what I mean by that is I think we'll be very judicious in going after increases there on the telecom side, say in SMS messaging, or potentially in some of the new database services, and even on the registry side. We've got a full team traveling in Asia for the last month working on some new international opportunities there.

But I think you're going to see us spend as a biproduct of those deals coming in as opposed to in anticipation of them. So it'll be slow, it'll be a big push for us in '03. We'll put a lot more marketing resource into it, but I think it's going to be slow and deliberate.

And then a quick one, Dana, have you guys seen any change in the kind of margins in that business since you've -- you know, from the end of last year what it was running at versus kind of what it's running at now?

No, actually their margins is made, have been maintaining very consistent in the low 30 percent range.

OK, and then lastly, Stratton, maybe just touch on your thought process over time if things don't get that much better in some of the business lines, you know, what are you and the management team thinking of. Would you ever consider, you know, we've got to move and maybe divest some areas here. Is that -- how proactive would you think you might be if some of the areas that are underperforming just don't seem to -- to pick up the pace?

Oh, I mean, I think the simplest thing to say there is that, you know, obviously it's been a tough environment for everybody, including us. We've taken what we think are the necessary steps to stabilize things. We are, you know, very focused on watching the day in and day out operations and velocity of sales in all the businesses.

So I think it would be fair to say, if the businesses continue to underperform, we'll continue to look to draw expenses out of them, and, you know, should we be in a position where we think something's a non-core asset, then we'll -- a non-core asset -- then we will, you know, obviously avail ourselves of other options there. But we're not in that position yet, I think we're more focused on having stabilized the bottom line and gotten the restructuring done.

OK, thanks a lot.

Yes.

We would like to thank everyone for joining us today. And as always, we look forward to talking with you and answering any additional questions that you may have. Thank you, bye, bye.

That does conclude today's conference. Have a pleasant evening.