威瑞信 (VRSN) 2003 Q1 法說會逐字稿

Welcome to the VeriSign Q1 Earnings Conference Call. Today's call is being recorded. At this time for opening remarks, I would like to turn the call over to Steven Gatoff, Vice President of Finance at VeriSign. Please go ahead.

Thank you, operator. Good afternoon, everyone and welcome to VeriSign's First Quarter Earnings call. I'm here today with Stratton Sclavos, Chairman and CEO, and Dana Evan, our Chief Financial Officer and Katie Oschner, our new Director of Investor Relations.

I would like to remind everyone that the matters we will be discussing today, other than the historical financial data, might be forward-looking statements and as such they're subjects to the risks and uncertainties described in our 2002 annual report, as well as other reports filed with the SEC. Additionally, we anticipate filing our Q1 Form 10-Q, before May 15, 2003. We would like you to know that our financial results were released to the news wires after the markets closed this afternoon. The press release can be found at our web site at www.verisign.com. And this call is being web cast live on our web site and at www.streetevents.com. We would like to thank everyone for taking the time to join us and let you know in addition to their availability on today's call, various members of VeriSign’s senior management team routinely appear at investor conferences and events throughout the year, to present insights on our business and the industry. We hope to post these on our web site in advance and they are web cast as opportunity is made available to us by the host of the event, and we typically provide any presentation materials shortly thereafter on the web site.

We will be holding our annual VeriSign analysts day here in the bay area and registration information is on our web site. As you know, VeriSign provides quarterly and annual financial statements that are prepared in accordance with generally accepted accounting principles. Along with this information, we typically disclose and discuss certain pro forma information in our quarterly earnings and press releases, during these earnings calls and at investor conferences and related events. We believe that the pro forma information enhances investors' overall understanding of our financial activity performance and the comparability of the company’s operating results from period to period. We've provided a reconciliation of this pro forma financial information we report each quarter with the comparable financial information prepared in accordance with GAAP and have made the reconciliations on our web site under the investor relations tab.

As to the format of the call, in a moment Stratton will provide a high level view of the quarter and a detailed discussion of the business units. Dana will follow with a review of the first quarter financial results and will provide guidance going forward; she'll then open the call for your questions. We anticipate ending at approximately 3 p.m. and with that I would like to turn things over to Stratton

Thanks Steve. Good afternoon, everyone. Let me add my welcome and thanks to all of you attending today’s call.

As you can see from our financial results, Q1 marked a reasonably positive start to the year for VeriSign. While economic, political and IT spending uncertainty remained a predominant theme throughout Q1, we able to achieve most of our business objectives in the quarter. We saw performance to plan on the P&L and modest overachievement on some key balance sheet and cash flow metrics that Dana will talk about. Our focus on delivering critical infrastructure services that help our customers connect, communicate and transact was the most significant aspect in Q1's overall performance. Our continued internal focus on expense management was also key. These two themes remain the foundation of our operating plan for the rest of 2003 as we look to become more and more indispensable to our customers in both the IT and Telecom markets as a catalyst for growth both near-term and long-term. As you recall, Q1 also marked the first official quarter under our new segment reporting model that calls for three distinct businesses. The Internet Services Group, the Telecom Services Group and the Networks Solutions subsidiary.

We believe this new organization structure will provide customers and investors with enhanced clarity about our key business units, their relative revenue and gross margin contributions and their organic growth process. I'll spend the next few minutes covering each of the new reporting group’s business metrics and highlights for the quarter. I’ll then try to give you some high level thoughts about the environment as we see it for Q2, before I turn the call over to Dana for the detailed financial review and forward guidance. Let's start with the network solutions subsidiary. This division combines our domain name registrar hosted web site and e-mail offering. We target a wide range of customers who are looking for high quality Web Presence and identity services. Q1 started out with successful re-launch of the Network Solutions brand. Our research indicates the Network Solutions is stilt most recognized name in the domain name services market, with largest customer base and overall market share. Our main focus for 2003 is to continue to improve customer satisfaction, operating efficiency and distribution reach.

During Q1, we added approximately 450,000 new names and renewed and extended just over 930,000. There were approximately 1.6 million names up for renewal in Q1, with the renewal rate coming in at slightly over 54%, up from Q4's 51%. We're currently projecting rate of 54% for Q2 as well. We ended the quarter with approximately 8.9 million names under management. Average term and selling price for new and renewed names remained stable during the quarter as well. Highlights during the quarter included continued improvement in our customer satisfaction metrics as we brought our new customer service center in Hazelton, Pennsylvania on line and enhanced services for our VIP customers.

The Network Solutions team is currently working on a major update to their store front and the bring up new billing system. Both projects are slated to come on line during the summer and should lead to improved conversion rate and operating efficiency. Summing up Q1 for network solutions, I think it's fair to say that the quarter came in as expected in most areas, with some overachievement in cash bookings and renewal rates. The unit also remained profitable on a contribution margin basis. That being said, we are still projecting a $5-8 million decline in revenues for the division in the each of the remaining quarters of the year. As we discussed before, this is primarily due to the continued flow-through of deferred revenues attributable to the installed base transition of the past 24 months.

Moving to our Telecom Services Group let me first describe the collection of services that reside within this unit. VeriSign Telecommunications Services currently provides SS7 base call signaling, intelligent network services such as caller name and local number portability, and wireless clearing, mediation and billing. We also provide specialized offering for newly mandated Telecom services, such as lawful intercept and Do Not Call. Our Telecom services are targeted at Tier One Tier Two carriers as well as alternative service providers. Our revenues are predominantly from North America today with modest contribution from Latin and South Latin and South America. All services are recurring with customers paying monthly for connectivity and subscriber billing, and on a per transaction basis for database clearing and messaging servicing. For Q3 increasing penetration of Tier One carriers with existing searches while we look to ramp up new services and further penetrate international markets.

As expected revenues for the Telecom Services Group in Q1 were flat on a sequential basis from Q4. Revenues would have been slightly higher but we chose to increase revenue reserves for certain distressed carriers. We believe this was prudent and puts news a conservative position regarding future revenues and receivables. Business highlights for the quarter include the signing of new service contracts for net discovery and do not call with several major carriers. While we do not expect these new agreements to contribute significant revenues until later in the year, we are pleased, nonetheless, to see early validation of these new services. We also had a significant number of competitive take-aways and a number of small long-term renewals in our billing group. On the date of services and messaging front we continue to see increase in volume of SMS inter-carrier gateway. We view this as a promising sign of increasing demand for wireless data services over the next 12 to 24 months. As we head into Q2 we are looking for additional Tier One and international penetration, we will also begin to lay out our road map for data services in both cellular and WIFI. While we remain cautious about the rate of Telecom recovery and continue pricing pressure within certain accounts we're still bullish on business model and untapped international opportunity.

Last but not least, let’s move to the Internet Services Group. The Internet Group combines all of our security, registry and emerging directory service offerings We target large and medium sized service providers examiners a wide variety of end markets, as well as public sector agencies and both federal and state governments. Internet Services Group also includes our trusted intermediary services such as dot-com and dot-net resolution infrastructure and the SSL security service that we operate for the public at large on a global basis. All services, with the exception of consulting, are recurring and are billed on a yearly or monthly subscription basis. The group’s focus for 2003 is to expand the footprint for our existing services by propagating our technology into new network and end user devices, while we also look to build a new series of integrated offerings for network infrastructure management, application security, and commerce and communications enablement.

The first quarter materialized as expected in ISG. We sold over 94,000 web certs during the quarter with up sale (ph) rates stable at over 50%. Total installed base of active web site certificate ended quarter at 383,000. The number of active merchants using our payment gateway services climbed to 89,000, up from 83,000 in Q4 as we helped to process approximately 75 million unique transactions with an aggregate value over 5.2 billion, up from Q4's 4.5 billion. While the enterprise markets for IT spending continued to be unpredictable, we saw strong customer interest and reasonable amount of contract closure for our managed Security and Network Services. Noteworthy customer wins and renewals during the quarter included Discover Financial, ADP, Comerica Bank (ph) and several significant public sector wins, such as the State of Kansas, PKI. It's clear that security remains a priority in customer spending intentions, and we hope to further capitalize on this throughout the year.

On the strategic alliance front, we participated in the formal launch of Intel's Centrino (ph) chip in March. The Centrino chip is designed to be wireless and land friendly and includes hooks to VeriSign security services. We are optimistic this will lead to embedded service opportunities in the future as Centrino becomes the mainstream processor for mobile computing.

Moving to the dot com and dot net registry, we saw slightly over 2.5 million new registrations in Q1 up 2.3 million in Q4. This was above our expectations, especially since dot org registrations are no longer counted in our numbers. We also renewed or enabled the transfer of another 4 million names. The active zone files for common net contained approximately 26.6 million names at the end of the quarter, up 3% from 25.8 million names at the end of Q4.

Other business highlights included our announced agreements with Japan and Korea's respective NIC organizations to cooperate on international naming standards and marketing. We expect the demand for IDNs will come from Asia in the next few years and are pleased to be working with these local organizations to establish a common deployment and usage model. As we move into Q2, we are looking for continued progress across most of the key operating metrics for the Internet services group. Current trends would suggest the active base of names for common net will grow again, as will the active number of merchants using our gateway and number of web certificates installed. We are also looking for continued progress in key vertical markets such as government and financial services, where our security and directory offerings are generating significant interest. Given that most of the division services are subscription-based with deferred revenues, these potentially positive trends will not materially impact top line revenues until later in the year. Consequently, we would expect ISG revenues to be relatively flat in Q2, although we still expect modest growth in the second half of the year. Overall, as we look at the increasing needs of our customers to reduce complexity, manage risk and increase their own agility, we believe markets for Internet services are vastly under-penetrated. With our technology and infrastructure assets, our managed services model, and our well-known global brand, we should be well positioned as the recovery begins.

Let me now sum up Q1 overall and make a few comments looking forward. We came into the quarter with conservatism about the economic environment and overall spending trends in IT and Telecom and we managed our business accordingly. As you can see there were few surprises, if any, in the quarter. On a qualitative basis, we do believe the critical nature of our services and the current business environment are making us a more important supplier to our customers, strengthening both our relationships and competitive position. We hope to build on this trend throughout Q2 and the rest of the year.

As we move into Q2 we are planning for overall economic environment to remain somewhat choppy. Nonetheless, we will continue to aggressively pursue opportunities in telecom, security and directory services that are demonstrating momentum. We also plan to remain vigilant in terms of expense management until a more sustained rate of recovery emerges. As I mentioned earlier, we will still expect a $5-8 million sequential decline in network solutions revenue in Q2, as short-term revenues burn-off and names up for renewal decline from Q1. And we expect basically flat quarters in both Telecom and Internet services. If we see continued progress in contract closure for both existing and new services in Q2, we would still look to see overall revenue and earnings momentum return in the latter half of the year.

With, that let me turn the call over to the Dana. Thank you.

Thanks, Stratton. And good afternoon, everyone. We are pleased to have delivered first quarter results that were in line with our expectations and in some cases slightly exceeded those expectations, particularly in the balance sheet and cash flow area. As you have seen over the past few quarters, we've been very focused on our core businesses, driving further efficiencies in our operations and strengthening our balance sheet. Before I go into the detailed results for the quarter, as Stratton mentioned, Q1 was the first quarter of operations under the newly realigned business unit. Therefore, in order to facilitate the comparability of results to prior periods under this new reporting structure, we are reporting the revenue and gross margin numbers by business unit for each quarter of 2002 on our web site as of this afternoon.

Now, let's turn to the detailed results starting with the income statement. On a consolidated basis, VeriSign reported $270 million of revenue for the first quarter, down from $275 million reported in Q4. We had anticipated a decline in revenue for the quarter but results did come in slightly ahead of the $265 million we had guided to. . Segmenting the Q1 revenue by the three reporting units, internet services group delivered approximately $103 million or 38% of total revenue for the quarter, as compared to $105 million and 38% in Q4 of '02. The dollar decline was due primarily to the continued weakness we have seen in consulting services and a slight delay in the start-up of several customer contracts. The Telecom services group recorded $101 million or 37% of total revenue, basically flat over last quarter, as increased user volumes offset pricing pressures in some of the database services. As Stratton mentioned, revenues for the Telecom group would have come in a bit higher but we had conservatively booked certain revenue reserves for distressed carriers during the quarter. And finally network solutions delivered $66 million, or 25% of total revenue, as compared to $69 million in Q4. A $3 million decline sequentially. This came in slightly higher than previous guidance for an anticipated decline of $5- 8 million.

Customer concentration has always remained extremely low for the company as a whole, and as a byproduct of our diversified business model. Overall, no single customer accounted for even 5% of total revenues in the quarter. We would still note, however, that there are several large customers in the Telecom services business, including SBC, Verizon, and Leap Wireless, that together make up a meaningful amount of quarterly revenues within this business unit.

Moving to our international presence, the percentage of total revenue that was driven from our international affiliates and subsidiaries was approximately 9% for Q1, consistent with previous quarters. Looking at cost of revenues and gross margins, our cost of revenue for the first quarter was $116 million, which was down slightly from $117 million in Q4. This was due primarily to gross margin compression in the Telecom group, as a result of the pricing pressure I just spoke about. This translates into a 57.1% gross margin for the first quarter, down marginally from the 57.6% reported in Q4, but consistent with our guidance for relatively flat gross margins for the first half of 2003.

Moving on to operating expenses, total operating expenses for Q1 were $109 million, down from $112 million in Q4. The expense decrease quarter-over-quarter was primarily driven by continued cost controls which resulted in lower spending levels. As we entered 2003 with the healthier accounts receivable balance, and as we continued to manage our credit and collections much more vigorously, we saw quarterly bad debt expense in Q1 of $4 million. This $10 million decrease from Q4 also contributed in part, to the decline of G&A and was partially offset by increases in insurance and employee benefit-related expenses. Pro forma operating income was $45 million for the first quarter, translating into a 16.7% operating margin, down modestly from 17% at the end of last quarter. Continued effective expense management drove our ability to deliver operating income on an absolute dollar basis over the past few quarters that has been relatively consistent even as revenues have declined.

As you know, we announced a corporate restructuring during the second quarter of last year. Consequently, over the last four quarters we have been rationalizing, integrating and aligning resources across the entire company. As we previously mentioned, we finalized the charges associated with these efforts in Q1 of this year, recording final charges of $21 million, slightly higher than anticipated. The nature of these charges is consistent with previous quarters, and includes employee severance, lease and contract termination, and write-downs of certain software, property and equipment and lease-hold improvements. We ended the quarter with total employee headcount of approximately 3,160 people, down marginally from 3,190 at the end of 2002. The slight decrease primarily the result of efficiencies realized with the consolidation of the Internet services group.

VeriSign reported pro forma pre-tax income for the first quarter of $48 million, compared to Q4 and pro forma net income of $43 million, up slightly from $42 million reported in Q4. Based upon pro forma pre-tax income, on a fully taxed basis at 30%, pro forma earnings per share for Q1 was $0.14, consistent with last quarter and our previous guidance. This earnings per share was calculated using a fully diluted weighted shares outstanding of approximately 239 million shares for Q1. Looking forward through Q2, we would expect a fully diluted share count to be in the 240 million range.

Moving to the balance sheet and cash flow items, we reported another healthy increase in cash, cash equivalents and short-term investments for Q1, which, as of March 31st, totaled $475 million, representing a $71 million increase over Q4. This increase was primarily due to consistent sequential operating income, continued benefits from increased accounts receivable collection, a modest increase in deferred revenue, and reduced capital expenditures for the quarter.

Stepping back for a minute, it is noteworthy to point out that our cash balances have increase by nearly 70% over the past four quarters. During 2002, our efforts to improve our credit and collections team and processes, brought large efficiencies in the accounts receivable area. During Q1, we saw modest improvement again with accounts receivable balances coming in at $119 million, as of March 31st, a decrease of $15 million from Q4 of last year. This translates into a net DSO for the first quarter of 38 days, down from 52 days in Q4. We are pleased with this reduced DSOs number for the first quarter and we would expect net DSOs in the short-term to continue to be in the area of 45 days. However, over the longer term, as revenue grows and the revenue mix changes, we would expect DSOs to increase to the 50 to 60 day range.

As you know, each quarter we review the individual assets in our long-term investments, to determine whether there are impairments in valuation that are other than temporary. As a result of our review this quarter, we determined that there were impairments in the value of certain of these assets that were other than temporary, and accordingly, we recorded a non-cash charge of approximately $17 million to our investment portfolio. This brought the balance of long-term investments to $23 million as of March 31st. Total deferred revenue on the balance sheet came in at $495 million at the end of the quarter, a net increase of approximately 2% from last quarter and better than our expectation of a modest decline. In fact, this marks the first quarter in over a year in which the deferred revenue balances grew sequentially. This growth was mostly attributable to the increased terms we saw for the sale of both new and renewed domain names at network solutions, driving growth and long-term deferred which partially offset a decrease in short-term deferred. In addition, the increased number of total names being sold at the registry also contributed to the deferred revenue growth in the quarter.

Moving on to the cash flow metrics, our focused efforts on rigorously managing our operations as well as the balance sheet generated healthy operating cash flows of approximately $100 million in Q1, up $17 million over the last quarter. The key drivers of operating cash flow in the first quarter were consistent with previous quarters. Solid operating income of $45 million, in addition to favorable changes in working capital, particularly in accounts receivable, accounts payable and deferred revenue. It is also important to point out that on a run-right basis cash flow from operations over the past four quarters has been approximately $300 million, and free cash flow had been has been nearly $170 million.

Capital expenditures were $22 million, down modestly on a sequential basis, as continued uncertainty in economic environment led to a more reserved capital spend by most of our business units and the corporate IT group. With the delivery of strong operating cash flow and modestly reduced capital expenditures in Q1, free cash flow for the quarter was approximately $71 million.

And with that, I'd like to now turn towards the expectations for the second quarter and lay out some high level guidance for both testimony top and bottom line results. There seems to be little evidence that current IT and macro economic environment we are currently experiencing will change appreciably in the near future. Therefore we continue to take a thoughtful and conservative approach to our forecast. Our visibility in the securities spending space remains limited. We continue to hold a cautious outlook for the Telecom market in general, and as we've discussed for some time, we expect the network solutions division’s revenue to decline in a range of $5- 8 million per quarter throughout 2003. In fact, for Q2, we look for the network solutions revenue decline to be at the high end of that range.

With that said, we look for revenue in Q2 to be down slightly in the range of approximately $260- 265 million. This is driven by the expectation that our core Internet and Telecom services businesses will be essentially flat in Q2, in addition to the expected decline in network solutions. Gross margins for Q2 should continue to be relatively flat and we would look for operating margins to increase slightly. This all translates to earnings per share guidance of $0.14 on fully taxed basis using 30% effective tax rate.

We were pleased with the modest growth we saw in total deferred revenue on the balance sheet in Q1 and based on what we're seeing so far in Q2 we would expect total deferred revenue to be flat to up marginally on a sequential basis. Consistent with Q1, we would expect to see another increase in long-term deferred as we continue to add longer term names at network solutions. This will likely be partially offset by another moderate decline in short-term deferred. Insofar as operating cash flow, based on a significant and relatively consistent cash flow generation we've seen in the last few quarters and our solid efficiency gains in operations, we are raising our quarterly cash flow guidance from $50 million per quarter to a range of $60- 70 million of operating cash flow for Q2.

Looking at capital expenditures, as we've discussed previously, we expect to see periodic fluctuations in our capital spending and tend to see expenditures weighted toward the first half of the year. While Q1 was white lighter than anticipated, we would expect capital spending levels in Q2 to increase. We still look for the 2003 capital budget to be in our anticipated range of $120-130 million on a conservative basis. It follows then that we continue to expect free cash flow to be meaningfully positive for 2003, with the operating cash flow and capital expenditure guidance I just gave you. I would note again, however, that we would not be surprised to see potential quarterly fluctuations in the free cash flow if capital spending continues to fluctuate between quarters. I will open the call for questions.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the “star” key followed by the digit “1” on your touch-tone telephone. If you are using a speaker phone, make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us and will take as many questions as time permits. Once again, it is “star” “1” to ask a question, and we'll pause for just one moment to give everyone an opportunity to signal. We'll take our first question from Steve Jue with RBC Capital Markets. Please go ahead.

Thanks, congratulations on the quarter. Dana, I just wanted to revisit the issue of deferred revenues for a moment. You're saying deferrals on the short-term side might be down next quarter but offset something of an increase in long-term deferrals?

Flat to down

Just wondering; that primarily a function of longer term domain contracts and if so, does that have any adverse pricing that we should be building into our model?

Short-term deferred coming down is related to the Network Solutions name. The term has been going up, but the pricing has remained relatively constant.

Okay, and then for Stratton, can you talk about linearity in the quarter in the Internet services group. Did you see any significant volume of deferrals towards the last couple weeks of the quarter the way a number of other companies have seen?

You know, Steve, because we have very little international affiliate contribution coming in, and because there's very little consulting and no third party product anymore, the quarter tends to be much more linear than it ever has been. So while we saw a few contract deferrals, in fact we had I'd say, two or three or four of them sign the first week of April, they didn't necessarily impact the linearity of the quarter too much. That's kind of a normal number of deals to slip over.

Okay, and the last question I had was just on the metric you gave on the number of digital certificates. It sounds like you're expecting that to be up next quarter. Can you give us any color on your progress with Ebay and some of the other partnerships you've entered into and the consumer side, and what you see driving the increase in certs?

I was talking about in that particular case SSL web certs. We've continued to see good demand, we’ve continued to see renewal rates improve and we see there might be some new market opportunities that are starting to emerge. Wireless, land, access points are pretty much SSL certs. We're starting to see inter-domain types of opportunities within an organization around e-mail servers. We just think the market opportunities on the SSL side continue to materialize, some of what Microsoft is doing in its 2003 server, and announcing today, will also drive additional use in terms of SSL certs around rights management. We're relatively positive on new opportunities, and we think our market share is staying stable in the core business.

Great

Just a comment on the Ebay side. The Ebay relationship is one we announced last year to use our Consumer Authentication Service. And we have continued to see very strong volumes there, all throughout Q1, pretty much record levels on a weekly basis, and that's a good sustainable business, which we'll look to leverage into other partners and relationships like it pretty soon

Thanks, congratulations.

Thanks, Steve.

We'll go ahead and take the next question from C. Eugene Munster with Piper Jaffray.

Thank you. If you could -- this is probably a difficult we do ask given the environment, but just some top level, Stratton, guidance in terms of growth in the Telecom and Internet services--you've been pretty clear on the Network Solutions business, but is there some general numbers we could use for our models?

You know, I think we believe those businesses, you know, can grow at 10% or more rates. We think that we're still in a period, as the rest of the world is, in terms of kind of a coming back around on spending, so as we said, we look for Q2 in both of those businesses to be flat, you know, small growth, flat to small growth in Q3 and then in the later half of the year we're seeing it. In Q3, while you see improving trends there, you know, we're somewhat like everybody there, cautious about summertime frame in general. So we would expect to return to more normal growth rates here exiting the year and into '04.

Okay, so throughout the year just to recap, slight growth in each of those businesses sequentially?

Yeah, again, we've given guidance for Q2 that they'll both be flat, Jeanne, and that's as far as the guidance goes. We're hopeful that the trends in the market play in our favor as we get to the second half of the year.

Dana, can you give me just a little more clarity in terms of CAPEX, you said the CAPEX is going to be weighted towards the front half of the year or the back half of the year?

The budgeted capital for the first half of the year is about 60-65% of the total amount for the year. Now, we didn't spend to budget in the quarter as I'd mentioned because most of the business group are still, you know, holding back on some of the capital spending until we see more what's happening from a macro economic standpoint.

Okay. And then just in terms of the certs-this is off of Steve's question-you increased the price of the software back in the fall of '02, can you give me a recap in terms of pricing on the certs, and lastly next version of Acrobat is going to have PKI insertion, I suppose that's just a fractional of a positive, but if you have any thoughts on that?

Let me take the last one first. We've been working with folks at Adobe over the last year or so, to jointly improve both the user experience and the handling of PKI, within Acrobat, and I think in the 6.0 product its gotten better and the 7.0 product is slated to be even improve from there. The notion of digital signatures on forms and especially, in the ubiquitous platform that Acrobat is, bodes well for future use there, and I understand we’ve been highlighted effectively in some of their product demonstrations on that. We're keen on that. Again, it’s another market where we think the technology can play. As relates to the pricing on the (inaudible) I apologize, we did take those up significantly. I think we went from 125 to 195 per cert, Gene, but I will check that for you.

Overall, they have been positive?

Increasing.

Okay, thank you.

Actually, I just got the data put in front of me and they went up about 5-10%, within the quarter.

Great, thanks.

We'll go ahead and move on to Drew Brosseau with S.G. Cohen.

Thank you. I have a couple of things. First on, Dana, I think you said that you'd have on the web site some comments about margins by division. I glanced, and didn't it, do you have those numbers handy at the moment?

I don't have them with me. What you are going to see on the web site, it should be up momentarily this afternoon is a complete schedule, by quarter, by business unit showing revenues, costs and gross margins in excruciating detail.

I'm going to be in shock. That's great, thank you. The other one was on the registry, can you work through the addition and subtraction dynamics just so we understand what came out with dot organize and what additions and subtractions that there were to the common net basis?

Let me pull that up for you here. There were 2.4 million, a little more than 2.4 million dot orgs at the end of Q2. I'm sorry, at the end of Q4 '02. So that, you have to take those out from the number. And that leaves you with about 25.8 million in common net. So last quarter, if you recall we reported 28.2 or 28.3 million total names in common net and organize and you take out the 2.4, 5 million of dot org, and you get to 25.8. And from that 25.8, we got to 26.6, in the first quarter, up 3%

How many new were there this quarter?

2.5 million new.

2.5 million new, okay.

Versus 2.3 million last quarter in the common net only.

Right. Okay. And Dana, back to the deferred revenue question, how do you anticipate this shift to longer term domain names continuing, and is that additional on the long-term side going to peter out at some point or you think might continue for several quarters in 2003?

Well, what we've seen, basically, is within the renewing name base, the customers extending term and that term is well over two years now, versus several quarters ago it was at 1.9. So, you know, we would expect it, as you continue to get the old names out of the system and you have this sustainable recurring customer base that those terms should hold. I don't know that we're expecting them to increase dramatically from where they are today.

Okay. Great, that's all I had, thanks.

Thank you.

We'll go ahead and move on to Todd Raker with Credit Suisse First Boston. Please go ahead

Thanks. On the Telecom business, it looks like STP pairs came down. Can you give insight on what's going on there and then can you try and quantify some of the new Telecom services, do not call what kind of uptake and how meaningful they are to the business unit?

On the FTP pairs they did go on what we call signaling points in the quarter and as you know that's something that Aluminet (ph) used to talk about. Most of that is re-homing of network stuff by some of the larger carriers. That's been a constant theme. We actually added signaling points from other groups during the period as well. There's not much revenue tied to signaling points so we don't really watch that as an indicator, if you will, of connectivity fees. What's more important in STP connection is route sets per customer set and those have continued to grow. More or less on the database side of the business, we're continuing to see about a billion database queries a week, across CNAM, LNP, IS41, 800 number stuff. That's really the driver of a significant amount of the revenues in the core Telecom, net discovery which is the Collea (ph) intercept and do not call are new services, we've got a handful of contracts in place, some of those are relatively large potential contracts, with Tier One carriers, but the ramp-up times on those are probably going to be three to four months, so we expect those to be meaningful in the second half of the year and I think what's positive from my perspective on it is that we are actually getting some of the Tier One guys to sign up and work with us to get the turn up come on in Q2 and Q3. Those we would expect to be 5-10% kind of revenue contributors over a 12-month period.

And if you look at wireless LNP, do you think it gets past November, and if it does, what kind of revenue opportunity is there?

Well, like most things, Todd, whenever I think it's just about gone, it comes back, kind of like wireless data, but it looks to us like there's pretty decent momentum that it's going to go through. We still, from a business planning perspective, have nothing in '03 or '04 currently planned for it. But we've begun to, you know, do the product development and kind of systems work, if you will, to be ready, you know, if it does kick in. So that would be a nice positive to the '04 numbers.

And turning back to CAPEX for a minute. With the annual guidance of 120 to 130, you know, it you're spending well below that. Can you give us some insight, Dana, do you really expect to spend to that level here in the second quarter and if you can kind of just allocate it among the three business units. How is it really getting spent?

Right. So, the range, we're still looking for a range between 120-130 million. I think the business units and the corporate IT group did the right thing in the quarter because we're not seeing any meaningful difference in spending externally, so they're kind of holding back on non-critical projects and such. That being said, you know, we expect the CAPEX then to go up in Q2, don't expect for a complete catch-up to what the original first half of the year spend will be, so I think we're going to continue to see a shift throughout Q2, 3 and 4, and as it relates to how the CAPEX broke out within the quarter, it's a little bit skewed because the network solutions group is in the process of finishing their billing system in the first half of this year. So they actually spent about 37% of the amount in the quarter, but in total for the year, they're at about 15% of the total spent. The rest of the quarter, the Telecom services group was about 33%, corporate about 17% and Internet services about 12%.

And one last question for you. From an infrastructure perspective, are you running Atlas in the Telecom business and is there any impact on gross margin as you extend to Atlas to broader business units?

We plan to, you're stealing my thunder for Q2 call. We plan to have one service up on Atlas by the end of Q2, that would be, you know, generating or revenue-generating, if you will. By the end of the year, probably at least one more, and we'll continue through, as I said last time, kind of through the end of '04, to move all those databases over, and yes we will start to see some gross margin benefit on that. The first services going in the second quarter are brand-new services, so it doesn't necessarily help, but when we put them on some of the more traditional services on, like LNP, potentially, CNAM and 800 (ph) that's where you would see the margin improvement. Look for that toward the ends of the year, early next year

Great, thanks, guys.

We'll go ahead and move on to Matt Barzowskas with First Albany. Please go ahead.

Thank you. Two questions. First of all, on the deferred revenue, can you break it up between each group, kind of what the percentage of the deferred revenue is, and second of all, I think on the last call, you talked about renewals of renewals and kind of a percentage and I don't know if you had any more feel of that or had any good number on that.

Right. So on the first part of your question; we don't break out deferred revenue by group. I mean, most of our businesses have deferred revenue components. The biggest driver right now is still the network solutions, domain names services as well as all the names that get sold at the registry. We are looking up your number for the renewals of the renewals. So if you are -- bear with me just for one second here. It's a number significantly higher than the average renewal rate.

It looks like -- if we measure it from times previously renewed, what you would see is after the second time -- on the second time of renewal it's close to 60%, and third time is 65%, fourth time is close to 70%. So it looks like after renewal two, you're starting to get back to what are those traditional rates, the network solutions had a couple years ago where you're into the mid to high 60s.

Okay, great, guys.

And just as a reminder, if do you have a question, please press “star” “1”. And we'll go ahead and move to Steven Ashley with Robert W. Baird & Company. Please go ahead.

Actually, I’d just like to drill down on the question Todd asked about wireless NLP. Would there be a revenue opportunity with tier one carriers for VeriSign or would it just be with the smaller carriers?

I think there would be a revenue opportunity. We don't today have any of the tier one guys signed up for wireless LNP. But there are other competitors in the market that suggest they do. My view is that none of that business is really been let right now because everybody is trying to figure out if there's really a need to move forward. So, yeah, we will definitely target tier one as well as our more traditional carrier base for that.

And in the Internet services group, you talked about getting starting to get a little bit of traction in your managed security offering. Is that the IBM-hosted services or is it more than that, and can you give us a little color on that?

I talk about managed security, what I'm really doing is kind of lumping in, there's clearly the traditional managed PKI, and that's seeing some traction in public sector in particular, as well as financial services. We're talking about our MSS business that's managing network devices for customers, and that saw some fairly significant new business, if you will, as we got out of Q1 and into Q2. And then lastly, is some of the stuff we're doing with IBM. So I actually used them kind of all together, Steve.

Okay, great. In terms of the outlook for bad debt expense it fell down here, Dana, to 4 million. Is that kind of an expectation that level going forward?

A more normalized rate for us is probably in the $4-6 million range.

Okay. And lastly, in past calls you've talked about trying to have a direct presence in international markets and moving some of your security products there. Can you maybe bring us up to date on the initiatives there and what you're seeing?

Yeah, so we've proceeded down the plan in Q1 to begin to do more direct and international, Japan had a very strong quarter for us. Australia was in on plan. Germany came in roughly on plan as well. Those were kind of our first three direct presence points. We'll continue to leverage our European headquarters in Geneva to build out more of a presence in Q2 and Q3 and we've hired a new general manager for all of Europe for all of VeriSign services, we'll be talking more about international and in particular Europe and that new manager at our Analyst Day in a few weeks. I would say Q1 we hit the plan on international and expect to continue to drive more direct presence throughout the year.

Thanks, guys.

We'll go ahead and take the next question from P. Sterling Auty with J.P. Morgan. Please go ahead.

in the prepared remarks, you alluded to a little bit of pricing in the Telecom database. You alluded in your prepared remarks to the Telecom database pricing Can you give us some more color is that some of the pricing changes you saw previously just working through?

Yeah, that's what we talked about on last quarter's call with SBC and with some of our other care customers, in particular around CNam pricing (ph)and the rest where we had been in negotiations to extend those contracts and as part of that we would be doing some discounting on database transaction. So that had some impact in Q1 and it will have some impact in Q2, which is one of the other reasons we're being conservative in guiding Telecom revenues to flat for the quarter. As we said last quarter, we'll be through the majority of the negotiations and their impact, by the end of Q2. We are still seeing volumes be very strong in those businesses. So we think, as usual, volumes will outstrip those price pressures.

And then on a different areas, on the MSS business. What's the strategy, to manage it for growth this year? Will it be a drag on profitability and maybe color on strategy?

We will manage for growth this year and market penetration. So it will certainly not hit the typical margins of our security business. However, it’s a small enough business -- it's small enough that you're not going to see a dramatic drive

Dana, on the cash flow item, where else can you -- it seemed like you did a great job on the working capital management. Can that continue next quarter? Is that what we should expect, another increase in payables and continued strong collections to help get the cash flow number?

To the 60 to 70 million, I've guided to?

Yes.

Right. So if you look at an consistent operating income number on absolute dollars, add back the $30 million of depreciation, and then assume that you just have some modest fluctuations in the other balance sheet account, that kind of get you to that 60 to 70 million range.

Okay, and last question, strategically, Stratton it seems like we've seen partnerships with IBM, and really building for what should be hopefully healthy growth in web services, can you talk to where the strategy for VeriSign would be in web services?

Sure. You know, we've been obviously building out technology in that space for about a year now, at the RSA conference last week we announced what we believe is really our initial thrust in that space. Something we call the “trust gateway”. Which is a combination of on-premised software module, linked into VeriSign managed security services, that allows an organization to configure security for web services instead of programming it into each application. You know the notion of the application firewall that folks have talked about. We've worked with IBM on interoperability of that and we’ve worked with BEA on interoperability of that and we'll start to announce embedding partnerships with that Gateway over the course of the next couple of quarters. So we're very pleased with the, if you will, development of that offering and the partnership. I think we're seeing what everybody else is, which is clients are going to spend very judiciously in those new areas, like web services, certainly through the summer, and with, you know, a few projects being started. But the reaction from our customers has been very positive. We expect to have a lot of beta sites here in the second quarter.

Great, thanks.

We'll go ahead and take the next question from Christopher Russ with Wachovia Securities. Go ahead

Nice quarter particularly with the cash flow

Thanks Chris.

The CONVERGYS, and AMDOCS, had better than expected results in the quarter, I’m just wondering if any of that translates into improving results at HO Systems, your wireless billing division?

I think we had the expected results there. You know, that was where we took the revenue reserves from one of the carriers that we've got, you know, we think that was prudent, and a relatively conservative move. With that, we probably would have seen billing be a little higher than expected. But I thought it was a good time to be prudent there.

Okay. There's been a fair amount of speculation about the potential sale or spin-off of the registrar business, and I don't know if you can comment on this specifically, but from a strategic level, does it make sense to maintain that business in-house? I mean, I'm under the impression that still is an attractive business financially in terms of the recurring revenues, the cash flows, the deferred revenue. Or is that business operating at a sub-par margin relative to your other business line such that you would consider potential sale or spin-off?

You know, I think our position on that has been relatively consistent since that question started coming up last summer. Our main objectives there and the team that runs that business, Chet Mitchell, John Donohue and the rest, is to run that business the best we can, and that has meant fairly deep restructuring of the operation, changes in how we look at our marketing, changes in how we look at customer satisfaction, and metrics around that, and we've done, I think, a good job. The team has done a good job in bringing that back around in terms of some of the key metrics. But as you know, that deferred revenue masks a lot of that until you flow through it. We feel good about the changes that the business has made; it continues to be profitable on the contribution margin basis, albeit below the corporate average in terms of margin. And we'll continue to run it the best we can and we'll always consider strategic alternatives, but right now the focus is on execution there.

Okay. And then just finally, would the cash flow improving and the cash balance is that right starting to build up again for the company, would you consider a stock repurchase program or at least I don't know if you have one that's still under way or if you would initiate a new one?

The board authorized a $350 million plan about 18 months ago, that remains open and we remain capable of executing on that, and certainly as we've got the cash balances now, approaching what is looking like half a billion dollars, and strong operating cash flow, we would begin to view that as a pretty realistic option.

Okay, great. Thanks a lot.

and we'll go ahead and take next question from Joe Noel (ph), with Pacific Growth Equities.

Hi, Joe with Pacific Growth. Just a quick clarification. Earlier in the call when you were talking about the Telecom group, you mentioned SBC, Verizon and Leap as not being 4% customers. Were you saying that they are 4% customers, they're less than 4% and 4% of what?

The required SEC disclosure is 10% customers. And then the company has no 10% customers. The company doesn't even have 5% customers, but if you look at the Telecom services group, I wanted to point out there's several large customers there, the largest being SBC, Verizon and Leaf Wireless. If you look at those customers in total, they represent about $20 million of revenue.

Great. Okay, thanks for clarifying that.

You're welcome.

Due to time constraints, we'll go ahead and take our last question from Robert Breza with A.G. Edwards. Please go ahead.

Actually, my question was answered. Thank you.

I'll go ahead and turn the conference back over to you for any closing remarks.

Thank you everyone for taking the time today and giving us your attention. As always, we'll look forward to talking to you and answering any additional questions you may have. Thank you and good evening.

And that concludes today's conference we thank you for your participation.