威瑞信 (VRSN) 2002 Q4 法說會逐字稿

Good day everyone and well welcome to the VeriSign incorporated conference call. As a reminder. Today's call is being recorded. At this time I'd like to turn the call to Mr. Steven Gatoff.

Thank you, operator. Good afternoon and welcome to VeriSign's fourth quarter and fiscal 2002 earns conference call. This is Steven Gatoff and I'm here with Stratton Sclavos chairman and CEO and Dana Evan our Chief Financial Officer Chief Financial Officer. Before we begin I'd like to remind everyone that subject to the risks and uncertainties described in your 2001 annual report as well as other reports filed with the SCC. Additionally, we anticipate filing our 2002 form 10K on or before March 31st. We'd like to you to know the financial results were released to the synchronous wires after markets closed. It can found at Www.verisign.com, and this call is being webcast live both on our website and at www.street events.com. West like to thank everyone for taking the time to join us and let you know that in addition to their availability on today's calls, various members of VeriSign's senior managed team appear at conferences throughout the year to provide insight on business and industry. We look to post the discussions are webcasted as the opportunity to do so is made available to us by the host of the event and we typically provide any presentation materials shortly that have on our website. Additionally, we will be holding our annual VeriSign Annualists day this May 13th, and you will find details and registration information on our website. We've got a lot to cover as it relates to the format. In a moment I'll turn the call over to Stratton. Dana will follow with a detailed review of Q4 and 2002 financial results and will provide guidance going forward. She'll then open the call for your questions. We anticipate the call ended at 3:00 p.m.

Thanks, Steven, and good afternoon, everyone. Let me add my welcome and thanks to all attending the call. As Steven mentioned , we've quite a bit to cover today. In addition to the Q4 and fiscal 2002 business and financial highlights, we'll discuss the organization structure and high-level outlook for 2003 . Jumping into Q4, I think it’s fair to say that while the IT and telecom markets remain choppy, there were signs of stability and renewed growth in our core infrastructure businesses as we were able to make reasonable quarter-over-quarter progress against most of our financial and business objectives. On the financial front, revenues and earnings were in line with our guidance, while the majority of our balance sheet and cash flow metrics came in much better as expected. On the business side, most of the key operational metrics we track in the domain name, security, and telecom lines of business improved quarter-over-quarter as well.

The discontinuation of our third party product resale business between Q3 and Q4 had the expected impact on revenue, and was also a main driver of our increased gross and operating margins. While we still have a relatively conservative outlook for IT and telecom spending in the near term, we do believe that our core security, registry and telecom markets will see modest growth in 2003 and that we are well positioned competitively in each market. We also believe that the combination of the proven Infrastructure, market presence, strategic partnerships, and cost efficiency will continue to provide market share opportunities for us as our customers return to normalized spending patterns. As I mentioned earlier, we will describe the new organization reporting structure in a few minutes.

As you expect however , we'll report our Q4 business and financial metrics according to the same segment that we have used throughout 2002, namely the mass markets division, and the enterprise and service provider division. Dana will also provide some comparative data in your remarks as a reference to demonstrate how Q4 would have looked under the new model.

The Mass Markets Division comprised of our Web Presence and Web Trust groups, generated approximately $95m in revenue in Q4, down 5% from Q3 but consistent with our forecast. We ended the quarter with approximately 9.3 million names under management, down from 9.7 million in Q3, but ahead of our year end projection of 9m .

We added approximately 450,000 new names in the new quarter and renewed and extended just over 700,000. There were approximately 1.1m names up for renewal in Q4. The renewal rate came in at 51% for the quarter, up from Q3’s 48%.

Overall renewal rates for paid names increased over 10% from Q1 to Q4 as our marketing efforts improved our capture rates and the overall quality of the base stabilized. We are projecting a renewal rate of 51% for Q1 '03 although there could be modest up side. Average term and selling price for both new and renewed names remain stable as well for the third consecutive quarter . While the macro effects of the domain name industry played against the web presence team all year long, they were able to I cleave a significant number of accomplishments along the way. In addition to improved renewal rates and a higher quality customer base, the web presence team dramatically improved customer satisfaction, operating efficiency and marketing effectiveness. The team also established new distribution relationships with AOL and four of the major U.S. airlines. Although we still expect revenues for the unit to decline in each quarter in 2003, the business will remain profitable on an operating basis and is better positioned to compete effectively with its new brand and updated product portfolio . Moving to the web trust line of business which includes web certificates and payment services, we sold over 90,000 web certs during the quarter with up-sell rates over 50% for the first time. The total installed base of active website certificates . Certificates declined modestly from Q3 to approximately 392,000. The number of active merchants using our payment gateway services climbed to over 83,000, up from 80,000 in Q3. W e helped process approximately 68m unique transactions with an aggregate value over $4.5b, up from Q3's $3.7b .. It has been widely reported that online sales this holiday season achieved record levels. VeriSign’s merchant base was no exception. Same store sales grew 35% year over year with average ticket prices up 40% for our top merchants. Overall, the Web Trust group had a good 2002, with revenues and operating margins improving year over year . The group also continued to develop new offerings, establish new marketing partnerships, and improve customer satisfaction. We're focused on incremental product introductions and international expansion in 2003 to continue the growth trajectory in Web Trust .

Now let me move to the enterprise and service provider division. Overall ESP division revenues came in at a $180m. Drilling down into Q4 performance for managed security and network services, we saw a continued improvement from Q3 in terms of customer interest and deal closure. New and renewal business came from organizations across the financial services, government, healthcare, retail and technology sectors. Noteworthy customer wins during the quarter included Wal-Mart, Honeywell, Bristol Myers, Coca Cola , Fidelity Investments and the state of Kansas.

In addition we began to see increased opportunities for our broader portfolio of managed security solutions as customers look to spend with vendors that can provide a fully integrated and managed solution. Looking back at 2002, it's fair to say that our managed security and network business had its challenges, both external and internal with the exiting of non-core businesses and the streamlining of our international affiliate channel , we believe we have addressed our most significant internal obstacles to growth. . I think it's important to mention that we also had several significant accomplishments during the year that included the introduction of several new authentication services, the announcement of strategic relationships with IBM and Intel, the integration of our MFS offering with our broader security solutions, and the establishment of VeriSign’s subsidiaries in Germany any and Australia.

Looking into 2003, we are confident that security services will remain a high priority in IT spending budgets, especially in the public sector and financial service markets.

Moving to the registry and telecom services business, we'll start with the global registry. The registry saw slightly over 2.6m new registrations consistent with the prior two quarters. We also renewed or enabled the transfer of another 3m names. The active zone files for ComNet contained approximately 28.3m names at the end of the quarter, up from 27.5m at the end of Q3.. The zone file has grown by approximately 1m names over the last six month.

As you know we have now transferred the operational responsibility for the .orgs TLD to the internet society as part of our agreement with ICAD. As such we will only be providing services and metrics for .com and .net as we enter 2003. The .com and .net zones at 22.1m and 3.7m names respectively at the end of Q4, for a total of 25.8 million names under our management. Current registration and renewal trends suggest that the zone files for common net will grow in 2003. The registry has also started to roll out incremental naming products over the last few months including automated CCTLD registration and internationalized domain names or IDN . These and other new products are expected to contribute modest incremental revenues this year. Now moving to the telecom services group, we saw a slight increase in overall revenues from Q3. Our core signaling, database, and mediation services performed as planned while our wireless billing group saw 4% overall subscriber growth quarter over quarter.. We also announce new services in customers for our SMS inter-carrier messaging, net discovery and “do not call” or “tele-block” services. Q4 capped off an exceptional 2002 for the telecom team. We are optimistic that growth in existing services combined with contribution from our new products , will lead to an equally successful 2003 . So that covers the key business metrics for Q4 and 2002 I'd like to spend a few minutes discussing our organizational realignment.

As many of you know, we set out through the second half of last year to refocus the company on its core mission of providing critical infrastructure services for the internet and telecommunications networks. The guiding principles for this effort were simple. Be the best in the world at everything we do, achieve world-class customer satisfaction and build a durable company that rewards our employees and shareholders over the long term. Although I think you’ll agree that none of these are earth shattering in concept, we believe this framework allowed us to pursue operational improvements with more discipline and rigor. As such, we took a series of actions over the past 6 months, that has significantly improved our competitive position both from a marketing and financial perspective. In particular we chose to exit non-core businesses and to reassert control over our destiny in international markets. We also streamlined our operations and improved our financial management systems while continuing to fund key R&D projects that will fuel our long-term growth. All told, these actions allowed us to improve our operating - margins and cash flow significantly in the second half of 2002, even in the face of declining revenues due to the discontinuation of certain lines of business. As we enter 2003, we remain very focused on continuing this progress, and positioning ourselves in the core-line of our business .

The organizational realignment we put into effect in early January is designed to provide better focus and simplicity in our day to day operations. In addition we believe it allows our customers, employees and shareholders to have greater clarity regarding our market opportunities and competitive position. The new structure is made up of three business units, the internet services group, the telecom services group, and the network solutions subsidiary. The internet services group contains all of VeriSign's managed security and transaction services as well as the global registries naming and DNS services.

In essence, all of VeriSign's utility-like services for enabling and securing internet communications and commerce. The internet services group is supported by world worldwide sales service organization chartered to develop both direct and indirect channels from each geographic market. The telecom services group contains all of VeriSign’s signaling, database, mediation, and billing services for wireline and wireless carriers, as well as a dedicated sales and services team. The network solution subsidiary contains all of VeriSign's previous Web Presence group which includes retail and wholesale domain registration, e-mail and website hosting services.

As we announce on January 6th, the group has returned to the network solution's name in order to capitalize on its strong brand recognition in the domain name market and as a platform for demonstrating its renewed commitment to customer satisfaction, ease of use and stability . We're very excited about the new organization and received very positive early feedback from customers, employees, and shareholders alike.

Dana will fill in a few of the other details about how we’ll report these business segments from a financial perspective in 2003 . Now using the new organization structure as a backdrop, let me provide a few high-level thoughts on our overall 2003 outlook before I turn the call over to Dana . Let's discuss the internet services group first. While it appears that overall IT budgets will be flat to down in 2003, recent CIO surveys suggest that the spending on security products and services will increase year-over-year. And of course the homeland security initiatives in the Federal Government look as if they will provide significant opportunity as well.

Given our strong market position in authentication and PKI services, and an emerging opportunity in the broader MFS market , we a optimistic that we'll see growth in our core security business in 2003, albeit most likely in the second half of the year. In addition with the .com and .net databases stabilizing and new incremental naming services ready for introduction, the overall internet services group has the potential to see sequential improvement throughout the year. As I note earlier, the telecom services group had a strong 2002 despite a very turbulent telecom market. In the absence of a short term telecom recovery we would still expect our core signaling and database services to see modest growth throughout the year offset by traditional pricing decline. New product ramp up and increased penetration in international markets are the key strategies for incremental revenue growth starting in Q3 . Utilization of our atlas infrastructure should also begin to provide us with operational advantages as we migrate certain database services to the new platform throughout the year.

The management team and network solutions did an admirable job in rebuilding the business from the ground up in 2002. The quality of the customer bases improved dramatically. We have exited low margin distribution relationships. We have improved renewable predictability and trends, and we have significantly improved customer satisfaction all while reducing overall operating costs. Although we still expect to see revenues decline by $5m to $8m per quarter in 2003 due to the deferred revenue runoff from prior years , we believe the team stabilized the business and is focused on increasing our penetration and share of the most profitable segments of the web identity market. All in all we feel cautiously optimistic about the market opportunities in front of us in 2003 and our ability to execute and grow effectively as we capitalized on them. With that, let me now turn the call over to Dana.

Thanks, John, and good afternoon everyone. Before I begin our discussion today about the fourth quarter and fiscal 2002 financial results, I wanted to first highlight how these results reflect our continued efforts throughout the past year in driving a new-level focus on our core businesses, improving efficiencies in our operations and implementing increased rigor in managing our operating costs and capital spending measures across the entire company. In the face of what was an extremely challenging year for technology spending, we were pleased to emerge in the second half of 2002, seeing our key financial results in metrics delivered inline with expectations with a few areas coming in even better than we had anticipated.

Over the course of 2002, we generated revenues in excess of $1.2b and operating income of approximately $200m. Throughout the course of the year we increased our focus on managing the balance sheet and monetizing our assets. This resulted in a significant reduction in our accounts receivable balances of over 50% from last year, the generation of operating cash flow in excess of $230m, and increase in cash balances over the past two quarters.

We now enter 2003 well positioned for the future with a much stronger balance sheet and financial position, which includes cash and equivalents in excess of $400m. Now, let's talk about the detailed results starting with the income statements. On a consolidated basis, VeriSign reported $275m of revenue for the fourth quarter as compared to $301m in Q3. The $26m decline was in line with both our expectations and what we communicated to you previously in that it was a direct result of the company exiting the third-party product reselling business early in Q4, as well as a moderate and also anticipated 5% declined in the mass markets domain name business. For the full 2002 year, including third party product sales of approximately $130m , the company reported revenues of $1.2b.

To segment the Q4 revenue into the two divisions under which were reported for 2002, the Enterprise and Service Provider Division delivered approximately $180m or 65% of total revenue for the quarter, and the Mass Markets Division reported $95m or 35% of total revenue. Within the EPS division, registry and telecom services was approximately $137m or 50%, and Managed Security and Network Services contributed $43m or 16% of total revenue. This compares to 44% and 22% respectively in the prior quarter. Customer concentration has remained relatively low throughout the year as a reflection of our diversified business model. No single customer accounted for even 5% of total revenues on a quarterly or annual basis. Regarding reciprocal transactions or barter revenue, as it’s commonly referred to , VeriSign had no new reciprocal revenue transactions in Q4 just as we had none in Q3 or in Q2.

And importantly on a cumulative basis, the flow through revenue from all prior reciprocal transactions contributed about a half a percent to total revenue in the fourth quarter and approximately 1% for 2002 overall. Moving to our international presence, the percentage of total revenue that was driven from our international affiliates and subsidiaries was approximately 9% for both Q4 and 2002 as a whole. As Stratton just reviewed with you and as we’ve stated for the the past couple of quarters, we started to refocus and evolve our international strategy by consolidating certain market opportunities overseas and entering other markets directly as we did with VeriSign Germany and VeriSign Australia during the all latter part of the year. Looking at cost of revenues and gross margin, our cost of revenue fourth quarter $117m.. This compared to $137m in the third quarter, down approximately 15%. This translates into a 57.6% gross margin for the fourth quarter as compared to 54.5% in Q3. The 310 basis point increase was primarily due to the decrease of low margin third party product resell revenues in the quarter. The margin improvement was also positively impacted by the realization of benefits from our restructuring efforts announced in the middle of 2002. Moving on to operating expenses and related items, we saw meaningful benefits from the on going cost control measures across the company and total operating expenses for Q4 were $112m as compared to $118m in Q3. The expense decline quarter-over-quarter was primarily due to the realization of benefits from restructuring and our continued efforts to drive efficiency through increased cost controls and managing our expenses in line with current levels of business activity and anticipated revenue. These savings were partially offset however by increases in insurance and bad debt expenses and marginal increases in depreciation, legal fees and office rent in Q4. Insofar as bad debt expense, we have been diligently analyzing our accounts receivable balances across the company for the entire year and taking a conservative stance given the external macro-economic environment. Accordingly, we booked a bad debt expense in the fourth quarter of approximately $14m, up $4m from Q3’s $10m. This increase was primarily related to the cleanup of domain name customer accounts in preparation for the conversion to new account management and billing systems.

As we entered 2003 with a healthier accounts receivable Balance, and as we continue to manage our credit and collection much more vigorously, we would expect the quarterly bad debt expense this year to return to a more normalized rate of approximately $6m to $8m per quarter. Pro forma operating income was $46.9m for the fourth quarter, translating into a 17% operating margin. Despite the previously discussed decline in revenue in Q4, operating income was essentially flat over Q3, and our operating margin increased 160 basis points from 15.4% in the prior quarter. For the full year 2002, the company generated pro forma operating income of approximately $200m, translating into an operating margin of 16.4% for the full year. The expansion and operating margins on a sequential basis certainly reflects the exiting of the third-part product reselling business as well as our continued focus on cost controls and efficiencies during the quarter and throughout the year. We will continue to conservatively manage our expense growth and would expect modest incremental improvements in margins through 2003. I'll provide more color on our thoughts in 2003 later in the call.

As you know we announced a corporate restructuring in the second quarter of 2002 in which we have been rationalizing, integrating, and aligning resources across the company. As we mentioned, we continued with these efforts in Q4 with our restructuring of consulting services group and our exiting the non-core third party product reselling business. As we addressed on our Q3 call in October, we anticipated a total restructuring charge of approximately $90m to be taken over several quarters to reflect the full restructuring effort. We took $15m in charges in Q4 and to date have taken approximately $89m of restructuring and other charges. We anticipate an additional charge of approximately $10m related to the restructuring during Q1. The nature of these charges is consistent with what we've discussed the past several quarters, and includes employee severance, lease and contract termination, and write downs of certain property and equipment including leasehold improvement. We ended the year with total employee headcount of approximately 3,190 people, compared to 3,270 at the end of 2001. On a year-over-year basis, these numbers do not reflect the full scope of the reduction of more than 400 people in 2002 as more than 350 people were brought on board in Q1 of 2002 with the acquisition of H.O. Systems.

VeriSign reported pro forma pretax income for the fourth quarter of $48m, and a pro forma net income of $42m.down slightly from $44m records in Q3. Based upon the pro forma pretax income, on a fully taxed basis at a 30% tax rate, pro forma earnings per share for Q4 was 14 cents. Consistent with the expectations we had discussed at the beginning of the quarter. For the full year 2002,pro forma pre-tax EPS on a fully tax basis was 62 cents. The earnings per share as calculated using a fully deluteddiluted weighted shares outstanding of approximately 238.5 million shares for Q4 consistent with Q3. Moving on to the balance sheet and cash flow items, we continue to strengthen our balance sheet to the second half of 2002, and reported a healthy increase in cash and equivalents, which as of December 31st, 2002, was $404m. This represents a $77m increase over the Q3 balances. The increase was due to our continued efforts in cash collections, the sale of publicly held securities, as well as the reduced capital expenditures for the quarter that I'll discuss further in a moment.

In the accounts receivable area our concerted efforts in improving our credit and collection team and processes throughout 2002 have provided significant improvements in this area. Accounts receivable balances totaled $134m as of December 31st, 2002, representing a decrease of $72m from Q3 and down from a balance of approximately $300m at the end of 2001, a decrease of over 50%.

The primary factors contributing to the decline in AR are, one, continued improvements in credit and collection efforts and processes; the increased advanced billing for renewals of domain names; and the continued clean up of customer accounts that I just spoke about; and three the discontinuation of third-party product reselling business. This all translates into a net DSO for 52 days for Q4, down from 68 days in Q3. While we're pleased with these improved results coming out of 2002, we expect net DSOs to be in a range of 60 to 70 days on a more normalized basis. At it relates to our long-term investments, the portfolio consists of primarily of equity securities of privately held companies that represent technology, distribution and strategic partnership investments for VeriSign that were made over the past four years. Each quarter we review the individual assets in our long-term investment portfolio to determine whether there are impairments in valuation that are other than temporary. As a result of our Q4 review, we determined that there were modest impairments in the valuation of certain investments. Accordingly we recorded a non-cash charge of approximately $4m against our long-term investment portfolio, bringing the balance to $37m as of December 31st, 2002. During the fourth quarter, we also sold the vast majority of our publicly held securities. This resulted in an $8m gain, which is excluded from the pro forma results. The total revenue balance came in at $484m as of December 31st, 2002, down approximately 8% from last year quarter. This decline was slightly higher than our expectations as a result of the continued cleaning up of customer accounts in the web presence group that I just spoke about. For the fourth quarter, approximately 20% of the company's total revenue came from deferred revenue from the web presence business. Let me now move on to the cash flow metric.

While 2002 had a challenging start, our focused efforts throughout the year gave us the ability to exit the year with a solid cash flow profile. Our diversified business model continued to generate consist, healthy cash flows and drove approximately $80m of operating cash flow in Q4. The key drivers of operating cash follow in the fourth quarter were consistent with previous quarters. On top of strong operating income of the quarter of $47m, the additional components were a $72m decrease in accounts receivable, approximately $28m of depreciation expense and an $8m decrease in prepaid expenses, all of which were offset by a $19m decrease in accounts payable, and a $43m decline in deferred revenue that I just discussed, among other balance sheet fluctuations. As we stated in the past, while we're encouraged to see our credit collection and focused cost control efforts rewarded in the form of meaningfully improved cash flow, we would not expect to generate this level of cash flow on a consistent or sequential basis throughout 2003. Capital expenditures for the fourth quarter were down sequentially as expected and came in at approximately $24 million as compared to $37 million in Q3.

For the full year, 2002, capital expenditures were approximately $175m. To give you an idea of how the Q4 CAPEX breaks down by division, telecom services was approximately 30%, mass markets represents approximately 25%, and corporate communication and common infrastructure were 33%. Enterprise is about 12% of the total CAPEX.

With the delivery of solid operating cash flow and the modestly reduced capital expenditures in Q4, free cash flow for the quarter was approximately $77m versus the $45m in Q3. And similar to Q3, while better than expected operating cash flow certainly drove much of the increase in the free cash flow, our original expectations for essentially flat sequential cash flows and reduced capital expenditures would have driven positive free cash flow for the fourth quarter in any event.

Before I go into some guidance and color for 2003, I'd like to spend just a moment on how the organizational realignment will affect the way we report divisional results in 2003. As we talked about recently and Stratton discussed earlier in the call, we have undergone a realignment of our business units which are now organized into three main reporting units: the internet services group, the telecom services group, and network solutions.

While this reporting structure will begin with the 2003 results for Q1, we thought it would be helpful to provide what the revenue numbers would have looked like for Q4 under the new reporting basis. In braking it out Q4 revenues by these new business segments, the internet services group would have been approximately $105m, telecom would have been approximately $101m, and network solutions would have been approximately $69m of the total revenue in Q4.

I'd like to now talk a bit about guidance and what we're seeing as we enter 2003. As you can see from VeriSign's quarterly and annual results, while it was a challenging year for technology spending and the economy in general, by continuing to focus on our core businesses, driving efficiencies and operations, and implementing cost and capital control measures, we were able to deliver solid financial results for the year. We were pleased to emerge in the second half of 2002 as a stronger company while positioned with for the future with a strong balance sheet and financial position, and a much more efficient organization.

We also recognize that the macro economic and technology spending environments continue to be unclear and that they are certainly not within our control. Therefore, we believe it's appropriate to continue to be conservative in our guidance and, accordingly, we would like to lay out some specific quantitative guidance for Q1 in addition to sharing qualitative thoughts of what we are seeing in 2003.

Consistent with what you had likely expect in the first quarter in our industry with a conservative view towards Q1, we look for revenue to be down marginally to approximately $265m. Looking through to the full year 2003, as Stratton indicated, we would expect modest revenue growth starting at Q2 and continuing throughout the second half of the year in our telecom and internet services group. On the margin front, growth and operating margins should continue to expand marginally on a sequential basis, yet we could see some potential periodic fluctuations from quarter to quarter. Our current forecast would indicate that we expect to see gross margins relatively flat in Q1 and relatively consistent in the range of 56% to 58% as we exit 2003. Similarly, we would expect our operating margins to continue to expand modestly such that we exit 2003 with operating margins in the 18% area.

As we said previously, we drove strong expense controls in the second half of 2002, which led to a solid operating margin, showing 160 basis point increase sequentially.

On a more normalized basis, and given what we have historically seen with traditional beginning of the year spending trends we look for operating margins in Q1 to be flat to modestly up. This all translates to earnings per share guidance for Q1 of $0.14 on a fully tax basis using the 30% effective tax rate. Similarly to our outlook for revenue growth, we would also look for quarterly earnings growth in the second half of 2003. We continue to expect moderate sequential quarterly decline and deferred revenue throughout 2003 largely as a result of the continued expected burn off deferred revenue from the networks solutions business which is offset by modest increases in deferred revenue from the internet services group. Insofar as operating cash flow, as we said earlier, our normalized sustainable expectations are for a quarterly cash flow run rate in the $50m range. Accordingly in a reasonable environment for 2003, it would not be unrealistic to expect that this quarterly operating cash flow rate would drive a 2003 OCS number in a $200m range.

Looking at capital expenditures, we've just come off a year where our capital expenditures were higher than what we would normally expect due to several significant one-time projects, such as our data center migration and consolidation on the East Coast and the Oracle among other projects. As we've indicated on a normalized basis, we expect annual cap ex for the foreseeable future to be in the 10% to 12% range of annual revenue. The 2003 capital budget will be significantly lower than the approximately $175m spent in 2002, coming in $120m to $130m.

It follows then that we would expect to be free cash flow positive for 2003 with operating cash flow in the $200m range and cap ex in the $120m to $130m range. We would say, however, that had we would expect potential quarterly fluctuations in the free cash flow, and capital spending tends to be weighted heavier towards Q1 in the first half of the year. We expect to see cash used in the first half of the year and built back up in the second half. With that, I'd like the now open the call for your questions.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, press star 1 on your telephone. We'll pause for a moment to I assemble the roster.

And the first question is from Thomas Berquist from Goldman Sachs.

Thank you. As you think about the spending environment and your guidance for the first quarter, you know, there's been a lot of surveys that talked about the strength of the enterprise security market and for the most part the results of the last quarter have shown a lot of strength there. I'd like you to comment a little further Stratton on that market and your area of it. And then secondly, as you think about, you know, just in general, your expense structure and where you're cutting costs if you could talk at all about Apollo and it's impact on existing business as well as any opportunities to leverage that into Telco.

Sure. In the first part as we sit on the Q3 call which we had started to see a little bit better interest level, pipeline growth, closure rate in PKI and security business, and that momentum continued into Q4, up sequentially in all those attributes, and you heard the roster and some of the names we had in Q4. So, yeah, Q4 was positive in that respect and we do see similar to the surveys you and others have conducted, that security will get a larger disproportionate [inaudible] in '03 and more than likely not be up, not flat or down. So we're feeling pretty good about that, although Q1 is always a quarter in which people are gearing up for the start of the year, and we're not yet clear on exactly when the '03 spending will start. And, of course, in the public sector, they will be approving those budgets in the Government here in early February, and it's likely to have a little detail. So for an year as a whole we're excited about security and taking a cautious view of Q1, although Q4 showed strong momentum. On the atlas, as opposed to the Apollo.

Sorry, the wrong god..

That's all right. We deployed several of the super sites that have atlas technology in them in 2002. We will continue to play more of them this year, and we expect to take at least two or three of the telecom databases onto the atlas infrastructure by the end of the year. So that program is on target and we have fairly detailed schedules for implementing various of the database services. The first one that will go on there is one of the new services, the “do not call” or “tele-block” services, and we'll be moving the more traditional databases there in the second half of the year and pretty excited what that does for us not only in operational efficiency as we’ve kind of done all the math now and have proven what we believed would be true, which is this will be the most cost effective way to deliver database look-up in the telecom market as it is in the DNS market. We also believe that it starts to lay the ground work for the synergies of our long-term strategy of starting to mix the telecom and internet databases, such that we can provide new services in the '04 and '05 range.

Great thank you.

Next question from Todd Raker.

A few quick questions for you. I apologize. I missed the start of the call. In terms of how your going to report of business going forward, did you map what various buckets flow into those three categories? Can we define what's in each of the three buckets relative to the current structure?

In the network solutions subsidiary, of course, is really the registrar and evaluating e-mail and website hosting. So it's John Donohue's group, the e-mail, the website hosting and then, you know T other operations and engineering that Champ runs. So very clean if you will from retail and wholesale domain name side, the internet services group has the registry and the security businesses and then the payment business. So all of the transaction and security business stuff. And then telecom is the pure telecom asset, you know, that you would know as Illuminet, H.O., and the variety of things there around signaling, database, and billing.

And if you look at these three business units on a longer-term basis, what do you think the relative growth rate of these three businesses are going forward?

Let me caveat the answer by starting with in a normalized spending environment, '03, we would expect to have kind of a recovery period in both telecom and IT, to look out in the '04 and '05 range, we believe those businesses can grow at 10% to 15% annual rate or as far as we can see.

And can you give us some insight? You signed some additional distribution deals. Any changes from an economic perspective? Anything going on in the distribution deal like AOL that shows a significant shift and can you talk about the competitive landscape in winning some of the distribution deals.

I think when we talk about the economics of them are very much pay as you go, if you will. So, you know, in contrast to the early days in these markets, I think all of the new distribution relationships really revolve around, you know, revenue sharing on business taken in. And, so, in the AOL case, for example, they are marketing to small businesses, you know, domains and e-mail services, and we get a revenue share, you know, on accounts that do that. And very similar, in the airlines case there is some advertising that we're doing with them in their traditional advertising, markets, if you will, through their, you know, envelope stuffers and other things, and then we are sharing revenues for customers that come in and buy domain names. So they're more traditional, and I'd say each one of them is, you know, there as an incrementally, you know, small add to the distribution channel, not necessarily any particular home runs there. And we'll continue to look for more of those in what John and Champ believe are alternative channels as opposed to, you know, trying to expand the pie rather than, you know, just go after everybody else's -- all other registrar customers.

Just one quick question. Webster declined. Can you talk about -- is this competitive? What's driving that business right now?

It doesn't seem to be competitive. As we look at you it, our renewal rates there for what our renewable customers are over 90%. And, so the only thing that we exclude there are customers that are basically out of business. And that's really where the decline came in the second half of the year is just it was renewal time for many of those servers whose businesses had gone away in the prior 12 months. We would expect to see that business grow again here in 2003 in addition to introducing new products beyond the traditional environment for things in the Wi-Fi (ph) area and content protection areas that look to be pretty interesting.

Thank you.

Moving on next question from Steve Ashley with Robert W. Baird.

Maybe you could comment about after the first quarter you have relatively large number of names coming up in the first quarter. Do you have any feel maybe qualitative of what percentage of the remaining customers in the registrar will have renewed with you at least once?

You know, Steve, we have those exact numbers, and I don't have them in front of me, so I'll try to get them for you before the end of the call here. But I believe it's accurate to say more than half the names coming up here in Q1 have renewed at least once, and that number increases in each quarter of 2003. So we're -- and by the way, that is true not just at the registrar or network solutions, it is also true in the general market of common net.

Okay. Great. As we look at IDNs and you're pretty clear in your comments that this is not the year we may be able to tap that, but as we look up to 2004, can you maybe talk a little bit about what the opportunity might be in that area?

Yeah. I think, you know, again, our market estimates, if you will, as you go out into '04, is first of all you have to have a product that works. So in addition to being able to register the names in their languages, users have to be able to type them in into their browsers.

It would have to be represented in that language. Not be converted into some URL string that incomprehensible. We believe that through the course of this year with the work we've just cone over the last few weeks in Korea, Japan, mainland China and Taiwan, that we've now got plug-in technology and redirect technology on our constellation that makes the names work. We've also done partnerships with the local providers of the country codes, the dot JP and the dot KR to make sure we're marketing internationalization together as opposed to a differentiated competitive change. So I think the infrastructure and the ground work as you say is being laid in '03 much more effectively than it had been in late '01 or '02 as we started out assuming the infrastructure would just kind of come along.

What we do believe now differently than we did at the end of '01 is that internationalized domain names are a regional play, not a global play. I think it makes sense. For example, people in China in the mainland want to use those names that I type into their browsers. People here in the U.S. are clearly much less inclined for the most part to need or even know about them. So our marketing efforts will all be focused on regional plays, and that the where you'll see our partnerships develop. We think the number has been kind of a 3m to 4m name total market opportunity over a couple of years. But again, those are early, early estimates that we won't have an ability to validate probably till closer to late this year early next.

And we do have a question from Sterling Auty with J. P. Morgan.

Can you clarify for me Stratton, --I think you talked about the web presence business through 2003 declining at 5 to 8 million per quarter, as you map that to the to to the new network solutions in the other two segments, --would that fall into them? You're saying the networks solutions peace declined at 5 to 8 million per quarter throughout 2003.

That's correct.

In the second quarter, would you expect to see a sequential uptake in the second quarter, or do you want to wait until the end of the first quarter before you talk about it?

No I think what I said is we would expect to see some modest growth in Q2 in the internet services group and telecom services group. And then in the second half of the year, you know, expect to see more growth overall as well as growth on the earnings.

Okay. And then, lastly, on the affiliates side, can you give us an update as to what your feeling is going into 2003? Is there further cleanup that's necessary and what some of the additional opportunities are?

Yeah, I think the way to think about it is you separate it into, you know, the financial side and distribution side. On the financial side, as we, you know, have been saying for most of the year that we expected we would be pretty much done with the financial cleanup as we exited '02. And we believe that to be true. I don't think you will see a further decline there. On the distribution side, we have a very aggressive plan to go in and meet with every affiliate. And to really redefine the relationships in each market. As you saw we took a control stake in VeriSign Australia. Our Germany affiliate decided it was not core to their business so we went into Germany and established a direct presence. In the U.K. and Canada, our two affiliates are very pleased with the relationship as are we and we will be strengthening those relationships and looking for new ways of marketing together. It's a country-by-country, affiliate-by-affiliate model. But the good news from a financial side, we believe our exposure there is pretty much over with and now we'll begin to build back both direct and indirect channels.

Last question with the names under management on the registrar at the 9.3 million level above the target, is there any metrics you can share with us in terms of what you're target targeting as you look to 2003 on the registrar and maybe also on the registry.

In terms of total names?

Yeah.

We really have not thought through how to guide for the whole year on that. We're going to go quarter by quarter, as I said. In the common net databases, we would expect the number to grow in 2003. If current registration trends for new names pulled up and we kept seeing the improving rates in renewals. On the network solution side, we expect to see modest increases in renewal rates as the base continues to improve, and then they will only go after new names that they believe have can be profitable. So it's harder to predict that number.

Thank you.

Just one editorial comment for Steve and the group. About 67 names up for renewal in 2003 have have renewed at least one time before. Late-breaking news.

Moving on, take the next question from David Joseph from Morgan Stanley.

Hey, guys. Actually, I think I have really just two housekeeping questions. Research and development, R&D, I think you touched on this briefly, but it did pick up in the quarter as did G&A. And I was wondering if in both categories you would be able to provide a little more detail as who what was behind that.

If you remember from the last quarter, the research and development was actually a little bit lower than what we expected, so the Q4 rate is at a more normalized rate. And on the G&A, it's predominantly due to the increased bad debt that I talked about.

Okay, great. Then also I guess for both of you, in terms of the new breakout, where does brand management in consulting fall within the new breakout. At one point brand management was kind of a crown jewel for you guys and we assumed it might get to 100 million at one point on an annual level. Could you provide us with an update on brand management specifically.

Yeah, the brand management group is part of the internet services group as it's related to larger customers and their overall web presence, brand protection, monitoring of addresses and the rest. So it's in the internet services group. That group did, in fact, turn profitable during the year 2002 and is continuing to show growth here in ’03. Although, again, it was a small group coming in and it grew significantly in 2002. We expect it to grow again here. It's a pretty small number of the overall internet services group. Consulting is also part of the internet services group, but we've restricted it to being focused solely on security solutions that are delivered as part of VeriSign recurring services.

That's perfect. Thank you very much.

And now we have a question with Bear, Stearns, Mr. Chris Kwak.

Thanks. Just a couple of questions as well. It seems the balance sheet, it looks like, clearly, your accounts receivables have fallen pretty dramatically over the past 12 months, by 50% by my calculation, but the payables have stayed relatively flat. As a corollary to that, last year I think in the first quarter, there was a large outlay that negatively impacted the operating cash flow line. Could you comment on that and also as it’s related to the first quarter potentially.

Right. Part of that is why we are guiding to the $50m kind of normalized cash flow range. As you remember from last year, Q1 is the quarter in which all of our insurance policies come up for renewal. And, so, those will definitely be hitting payables and prepaid for the most part in Q1. So that number will go up, and that number is typically, you know, $15m to $20m.

Got it. And then just on -- one more question on the receivables and the cleaning up of the domain names. Obviously the decline in the deferred revenue as well that was a little bit higher than expected. Can you qualitatively describe what percentage of the decline in AR and DR were attributed to that cleaning of the DNS?

It was about $20m.

Okay. And actually, one last question on the domain business, question for Stratton. If 57% of the names are coming -- that are coming up for renewal were renewed at least once, what's the -- and just refresh my memory, please -- what's the renewal rate generally for the names that are renewed at least once.

)) We're digging for that number. It is -- I believe it's in the mid 50s, Chris .

That sounds right.

It could be a little bit higher.

You're saying not ones that have renewed once but once or more, right?

That's correct. That answers my question. We can talk about that offline. The last question is in terms of the second half of the year in 2003, are there specific macro assumptions or indications that you have that are leading you to look at the second half being possibly sort of the inflection points for both revenue and EPS? Thanks.

Sure. Just because as you know now we're focused on all this data, the number is about 53% for second-time renewals or more. But, anyway, to the second half of the year, a couple of Things. We are certainly starting to see, you know, a pickup in the sales activity and prospecting as it relates to the security business, Chris. And because we won't have declines, per se, in the affiliate lines again this year as we did last year in such a dramatic fashion, it's our expectation that bookings will improve in the first and second quarter. The security business as you know throws off deferred revenue, generates deferred revenue but then starts to filter into the revenue line. So that's why it will be early Q1, Q2 bookings momentum that will translate into security revenue growth in the third and fourth quarters.

On the registry side as you've seen the base has turned now into up about a million over the last six months. But in the first half of the year, of course, we're losing the .org name. The net starts to burn off. So it's the growth minus the, you know, kind of one-time displacement of .org that has us a little conservative on the registry side till the second half.

On the telecom traditionally Q1 is a quarter in which you see less usage volume than Q4 because Q4 is a big period with holidays, and it's also the quarters in which we start to do our price negotiations with some of the larger contracts that have come up. So, in any respect, we would expect telecom to kind of be flat in Q1 and then start growing again in Q2. So we're trying to take a conservative view, based on the activity we have today and the way the revenues follow. The second number we're comfortable with on the top line.

One last question. Last year, there was a large account on the Illuminet side that did come up for renegotiation, can you comment on any large customers that, or just Illuminet type of deals like last year that might be merging sometime this year.

Yeah, there's probably three main contracts between Quest, BellSouth, and then the properties of SBC that include Ameritech and Pac Bell. Quest and BellSouth were done and have been done in the fourth quarter and been factored into the forecast. And SBC is likely to get done in February or March, and then we'll have a ramp up or ramp down in price decreases through the year. So that's factored into the guidance we just gave.

Terrific. Thank you so much.

We'll move to Rob Owens with Pacific Crest.

Could you talk a little bit about the enterprise PKI business, what you're seeing out of the Federal Government now with the federal bridge going live here?

I think the activity level has gone up dramatically in the last six months. That is a very accurate statement. And the federal bridge is a good, you know, catalyst. The home land security is a good catalyst. The general electronic government paperless work act is a good catalyst. All those things are starting to flow through program funding and pilots. However, you know, counter balancing that was, of course, a continuing resolution in the federal government at the end of last year so that no budgets were approved for fiscal '03, and it looks like that will happen in the first week of February. So they're getting a slow start to the year. The activity level is way up, and we would expect that to be one of the significant contributors to PKI growth this year.

Stratton how about an update on the AOL relationship.

The AOL relationship has a couple of different components to it, Rob, one is the deal we have been talking about in the small business side with AOL where they have integrated with the network solution team for small businesses who have an AOL e-mail address and domain address to be able to get a domain address from us and have it be their own. That started in Q4 and is really targeted to -- AOL has told us they are going to be kind of doing their marketing spend and flash there in the first half of this year. So it started in Q4, you know, modest early returns, but it looks like they will start to get it energized here in the first quarter. The other piece of AOL that we work with is on the instant messaging side where we have integrated our security and encryption technologies with their enterprise aim product. That was in beta in Q4 and is scheduled to go to production in Q1, and I would say we have about a half dozen to a dozen bid customers that we'll be looking to convert either our sales or AOL this quarter.

Okay. And lastly could you talk about the SMS opportunity, what types of usage and adoption rates carriers are seeing at this point? What type of benefit you might expect in '03 or '04 there?

Yeah, I think the SMS is, you know, clearly starting to get traction in the North American market. We've certainly seen our message volume, you know, double every quarter from the second quarter through to the fourth quarter to where I think we're now somewhere on the order of I want to say 2 million messages -- I'm sorry -- something on the order of 6 to 8 million messages a week --and again, we only carry messages between carriers, so we don't get see what traffic is going on each carrier zone network. But between carriers, we're starting to see that get traction, and would expect it to continue to kind of grow at those rates throughout this year. Now, last week or the week before, we did a press release announcing that, with our partner, we have also now brought that into Latin America. And, so, we would expect through BellSouth wireless to begin to see traffic on our network from Latin America into North America, you know, starting here in the first quarter. And that's the first time you've actually had that capability for people to be able to do that. So we think that might also -- but it's a small, you know, small double-digit type of business for us in terms of millions but one that we think is a good precursor to the kind of growth in '04. I think I just got handed something that said it's about 20 million messages a week. I apologize.

Great. Thanks guys.

The next we move to Tim Klasell with Thomas Partners.

Good afternoon. Just a few quick questions here. First of all, can you give us a good pro forma on the revenues? Can you give us sort of -- can you give us a breakdown by headcount, and then maybe with CAPEX as well a to help us with our modeling.

Again, I have these numbers under the 2002 reporting framework.

Uh-huh.

So at the end of the year out of the 3190 employees, about 30% of those were in mass markets, about 55% were in the enterprise and telecommunications services reporting division, and about 15% were corporate.

Okay.

Okay? And of that telecom is about 25%. On the CAPEX side, about 30% of the CAPEX this year was in the mass markets reporting division. About 40% in the enterprise and telecommunications and about 30% in corporate.

Okay. And jumping back to the Illuminet side -- telecom side of your business, what sort of traction have you been able to -- or are you seeing internationally? I think there's been a focus there to bring Illuminet into some new markets? And what are you seeing there as far as traction and what should we be looking for in 2003.

I think our main focus in 2003 is, really, the Americas. So further penetration into Latin America and South America, for that matter. And, you know, we are having, I would say, good early success. We're starting to make inroads there and have brought on some talent from competitors that now drive our business down there and are starting to see good activity. Asia is probably our, you know, next area probably not until later in '03 or early '04, but there are, obviously, you know, still substantial wireless growth occurring in Asia, certainly in particular markets like India and China. And we'll look to bring over our atlas technology and some of our telecom services there, you know, later in the year. And Europe is not really something that is a core focus at the moment, just a very difficult market to crack. And frankly, we think the growth rates in South America and in Asia are going to be much better.

Okay and one quick follow up. On the PKI business, what have you been seeing on the pricing side particularly of businesses and enterprises.

You know, really have not -- I don't have any specific data, but about totally tell you that we're not seeing much pricing pressure within the PKI side of the business. Still more to have the phenomenon is to do something today or do something later versus, you know, any type of price sensitivity because, again, if you look at our model. Up front costs are so much less than buying the software and instrumenting it yourself.

Sure.

We tend to be the low-cost alternative no matter what the customer is looking in doing.

Okay. Great. Thanks a lot.

Due to time constraints the last question is from Drew Brosseau from SG Cowen.

Two questions, the first thing is whether you can provide any color on either current or long-term margin prospects for each of those new business lines. And the second is sort of a bigger picture question which Is, as you describe those divisions, they're essentially VeriSign network solutions and the two telco businesses that you acquired. You've sort of gone back to the individual pieces that were pulled together through acquisition. So I'm a little curious as to what the strategy is and where the synergy is as an overall organization across those businesses?

Sure. On the first part of it we're not breaking down by margin yet and we didn't report that way in '02. So there's no real way to do that. But I think it would be fair to say that the network solutions group, you know, is a profitable business, probably currently maybe below the operating margin of the company as an average. The combined security and registry businesses are really right around the current company production, and then the telecom assets are really higher than that. So I think -- I'm talking about operating margins, Drew.

Yeah.

And, so, that's kind of a mix. So as we go to Q1 reporting, Dana will do more around the margins structures at least at the gross margin levels accrossacross the businesses. As it relates to the strategy, the network solution business is really the registrar, right, so different than when we acquired network solutions, then it was a registry and a registrar. The new network solutions, if you will, is the registrar peek, right. And that has its brand name back. It is marketing in a fairly confined market with that identity where it has the lead brand, the largest market share, etc. So they're going to compete vigorously in that space. The VeriSign brand is an infrastructure services brand and that's why you have an internet and telecom group under the VeriSign brand.

That internet group does include the registry and the atlas technology and all of the things we had talked about doing with atlas technology and merging of those data bases and putting the security and payment technology there are still happening within that internet services group. In addition, we are taking atlas from that group and beginning to map out conversion of the telecom databases onto it.

So it is highly likely, by sometime in 2004, all the database its in telecom and internet services are running on atlas, and that's where, you know, the synergy that we had laid out kind of comes to fruition.

So I guess it raises the obvious question of whether network solutions newly defined as the registrar only needs to remain in your hands, or whether you're thinking of other options there.

Yeah, I'm not going to comment on the, you know, wide-spread speculation around all of that. All I will say is that Champ and John have rebuilt that business from the ground up from a customer service side, and offering side, a marketing effectiveness side, and now with the brand, they're going to go compete, if you will, unconstrained by the VeriSign brand, and it kind of infrastructure heritage. So we're pleased with what we've done. Feedback from their customers is actually very positive on the name rebranding. It remains a profitable business and, you know, we'll keep running it as long as that makes sense.

Okay. Great, thanks a lot..

I'll now turn the conference over to our speakers.

Thank you, operator. We'd like to thank everyone for taking the time today and for your attention. As always we look forward to talking with you afterwards and answering any additional questions that you might have. Thank you and good evening.

This does conclude today's program. Thank you, everyone, for joining us.--- 0