威瑞信 (VRSN) 2003 Q2 法說會逐字稿

Good day and welcome to the VeriSign Q2 earnings conference call.

At this time for opening remarks and introductions, I would like to turn the conference over Mr. Steven Gatoff.

Good afternoon, I'm here today with Stratton Sclavos, Chairman and CEO of VeriSign, and Dana Evan our CFO and Katie Bare Director of Investor Relations.

Before we begin, I'd like to remind everyone that other than the Matt Barzowskasers we will be discussing today may include forward-looking statements and as is up are subject to the risks and uncertainties described in our 2002 annual report and other reports filed with the SEC. We'd like to you know that our financial results were released to the news wires after the markets closed this afternoon. The press release and related financial information discussed on this call as well as the reconciliation of GAAP and proforma financial information can be found on our web site at www.verisign.com. This call is being webcast live both on our web site and at streetevents.com.

As it relates to format of the call, we'll provide a detailed discussion of each of our business units. Dana will follow with a review of Q2 financial results and guidance going forward. She'll then open the call for of each of our business units. We anticipate the call ending at approximately 3:00 P.M. and with that, I'd like to turn things over to Stratton.

Good afternoon. Let me add my welcome and thanks to everyone attending today's call.

As you can see, our performance in the second quarter was consistent with Q1. We saw operating metrics come in and gravitate towards the high end of our guidance. While general recovery in IT and telecom spending seems to be several quarters out, we are feeling better about our near-term prospects in both our Internet Services Groups and Telecom Services Group. We attribute this to several factors including the services of our services, significant interests in some of our new product lines and overall increase in customer satisfaction across our business unit.

That being said, we would like to see these trends continue for several more quarters before we feel confident we are seeing a sustained recovery. Our key areas were centered around laying the foundation for growth in the Internet Services and Telecom Services Business Unit. Achieving this entails deepening the penetration of our installed base, signing show case accounts for our new services and rebuilding our international distribution network. We believe we made solid progress in all these fronts during the quarter. I'll provide more detail over the next few minutes as we cover each of the reporting group business and highlights for the quarter. I'll then give you high level thoughts about the environment as we see it for Q3 before I turn the call over to Dana for the detailed financial review and forward guidance.

As you know, this division combines our domain name registrar, hosted web site and e-mail offering. We target a wide range of customers to individuals and small to medium sized businesses looking to establish or expand the online presence. The focus in 2003 continues to be around improving customer satisfaction and distribution reach.

During Q2, we added approximately 430,000 new names and renewed and extended approximately 700,000 more. The renewal rate for the quarter came in at just over 56%, up from Q1's 54%. We are projecting a renewal rate of 56% for Q3. We ended the quarter with approximately 8.6 million names under management, slightly higher than our original projections.

Average selling price for both new and renewed names remained stable during the quarter while average term on new names continued its upward trend. Highlights during the quarter included continuing improvement in our customers conversion and satisfaction metrics for what we believe are the industry's most advanced account management tools. We also expanded our additional distribution resources with the addition of Copy Max to our program which already includes four major airlines and AOL small business.

Summing up Q2 for Network Solutions, I think it's fair to say that the quarter came in as expected in most areas with some overachievement in renewal rates in customer service metrics. It was also the second straight quarter we saw cash bookings come in ahead of reported revenue. A trend that we expect to continue through the remainder of the year.

That being said, we are still projecting a $5 million to $8 million decline in revenues for the unit in Q3 and Q4. Moving to our Telecom Services Group, let me first remind you the collection of services that reside within this unit.

VeriSign Telecommunication Services currently provide base called signaling, intelligence network services and wireless clearing mediation and billing. We also provide specialized offerings for newly mandated telecom services such as lawful intercept and do not call. For 2003, the Telecom Services Group has a simple strategy. Deepen the penetration of our existing services within tier one and tier two accounts while we bring to market new services such as do not call and wireless number portability and begin the expansion into the selected international market.

As expected, revenues for the group in Q2 were flat on Q3 sequential basis from Q1. Call volumes increased as pricing and subscriber levels were consistent in Q1. It appears the telecom industry in general is stabilizing and that the areas for growth are beginning to re-emerge, albeit slowly. We end the quarter with 1,063 customers. This compares to 1,053 customers in Q1.

The most significant highlight in the quarter was the hiring of Vernon. Vernon joins VeriSign with over 17 years of experience in the communications industry. We are thrilled to have him on board and believe his leadership will be instrumental in helping us become the global leader in both traditional and next generation telecom services.

Other highlights during the quarter included new strategic customer wins for our do not call and discovery services and key competitive take aways for us signaling an intelligence database services. We were once again pleased with the new level of business activity in the quarter, we would expect the revenue contribution for the new wins to ramp slowly over the next few quarters as network integration and service rollouts proceed.

As we head into Q3, we remain cautious but are optimistic about the long-term opportunities available to us. Our goals for the next few quarters include achieving our new product and international revenue milestones, solidifying our road map for next generation services and successfully transitioning our wireless billing customers off of our service without financial impact. Given that backdrop, we currently expect the revenues will increase modestly through the rest of the year.

Let's now move to the Internet Services Group. The Internet Services Group combines all of our security, payment, naming and directory offering. For these services, we primarily target large and medium sized enterprises and service providers in a wide variety of end market while we operate public services for dot com and dot net and for SSL security. The group's focus for 2003 is to increase the adoption of the services by propagating technology into new network and end user devices while we extend the breadth of services to provide fully integrated and managed solution for the large enterprise customers. The second quarter continued the trends from Q1 with stabilization and modest improvement in several operating metrics.

We sold over 94,000 web (inaudible) during the quarter with rates stable at approximately 50%. The total installed base of active participants stood at 373,000 at the end of Q2, down from 383,000 last quarter. The decrease we have seen in the active base over the last few quarters, however, appears to have now stabilized. We would expect flat to modest growth through the rest of the year.

Revenue in the SSL business increased in the quarter as pricing held up. The number of active merchants using our payment Gateway services climbed over 93,000 up from 89,000 in Q1 as we helped process approximately 84 million unique transactions with (inaudible) value (inaudible) up from 2 Q1.

Other highlights in the quarter including the signing of a contract to manage Merrill Lynch's network security devices. This deal, in addition to representing a noteworthy new customer has also generated significant interest in our managed security services from other large enterprises. Given the uncertainty in the IT spending environment, it is difficult to forecast the close rates and ramp time on this pipeline of opportunity.

That being said, we believe this could be a significant growth driver for the company and we will continue to invest in the business accordingly. Additional noteworthy customer wins and renewals for the security group during the quarter included Hewlett-Packard, Reuters, IBM and several significant public sector wins such as the Commonwealth of Pennsylvania's Integrated Justice Network where we will enable 11,000 users to securely share criminal data.

On the strategic alliance front, we extended our relationship with Microsoft announcing plans to jointly develop and deliver a (inaudible) of next generation security solutions built on Microsoft Windows server 2003 and VeriSign's managed PKI services. We believe this partnership has the potential to accelerate the adoption of PKI within large enterprises and government agencies as we (inaudible) the end user complexity that has long been associated with this technology.

Overall, we believe IT security remains a priority in customer spending intentions. In addition to driving further adoption of our existing services, we are in the process of building several new solutions that target the three key pain points customers tell us they are wrestling with, costs, complexity and compliance. These new solutions will be available over the next three to four quarters and will target perimeter security, application security, universal authentication and fraud and risk management. Initial customer feedback on our proposed road map has been very positive. We will look to roll out a new marketing campaign later this year as the first service to become available.

Moving to the dot com and dot net registry in our naming and directory services business, we saw over 2.6 million new registrations up from 2.5 million in Q1. We enabled the renewal or transfer of names. Reactive fights contained 27.5 million names at the end of the quarter up 3% from 26.6 million at the end of Q1.

Other business highlights for the quarter included the expansion of our distribution channels in Asia. As we move into Q3, we are looking for continued progress across most of the key operating metrics for the Internet services group. Based on current trends, we expect the active base of names for common net to grow again.

We are also looking for continued progress in key vertical markets such as government and financial services where our security offerings are generating significant interest. We are somewhat cautious, however, about the realities of turning this interest into near term revenues. Overall, we believe the market for internet services are still greatly underpenetrated and as the business environment improves, we should benefit from increased demand for our utility-like services.

Let me now sum up Q2 over all and make a few comments looking forward. We came into the quarter with a conservative approach to the business given the economic environment.

As you can see from our financial results, there were very few surprises as the recurring and subscription based nature of our services and type and internal focus combine to enhance our visibility and confidence. Qualitatively, we like our purpose utility and critical nature of the services we deliver. We are also beginning to see the emergence of a few new long-term opportunitys in both our Telecom and Internet Services Groups. We plan to pursue these prudently as the core businesses continue to return to stability and growth.

As we move into Q3, we are looking for another quarter of subtle and real improvement in the operating metrics and business forecasts. As I mentioned earlier, we expect the $5 million to $8 million in Q3 and short-term deferred revenue burns off. Conversely, we expect modest revenue growth in both Telecom and Internet Services. In fact, for the first time in several quarters, we expect the growth in Telecom and Internet Services to fully compensate for the networks solutions decline. We believe this is a small, important milestone for the company as we begin to set the course for 2004.

If we see acceleration in contract close rates for existing services and a faster ramp of new services in Q3, we look for (inaudible) all revenue and earnings momentum to return in the fourth quarter.

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

Thanks, Stratton. Good afternoon, everyone.

We are pleased to have delivered second quarter financial results that were in line with our expectations and for the most part at the high end of our guidance. In addition, the continuing balance sheet improvements we have seen and the cash flow generating characteristics of our business further benefited us in Q2 and was driven primarily by corporate-wide focus on our core businesses, sufficient operation and strong cost control.

Now, let's turn to the detailed results starting with the income statement.

On a consolidated basis, VeriSign reported $265 million of revenue for the second quarter down from the $270 million reported in Q1 and at the high end of our guidance of 260 to $265 million. Segmenting the Q2 volume, the Internet Services Group delivered approximately $105 million or 40% of total revenue for the quarter add compared to $103 million or 38% of revenue in Q1. The slight increase was due primarily to growth in Security Services and Naming and Directory Service where's we saw our total name base grow and renewal rates increase.

The Telecom Services Group reported $101 million or 38% of total revenue. The sequentially flat revenue was as we had previously guided and included a revenue reserve for Q2 for bankruptcy filing in April.

Finally, network solutions delivered $59 million or 22% of total revenue as compared to 66 million dollars in Q1, a $7 million decline sequentially. This is within our previous guidance for an anticipated decline in this business at the high end of a $5 million to $8 million range.

Customer concentration always remained extremely low for the company as a whole and is a reflection of our diversified business models. Overall, no single customer accounted for even 5% from the quarter. We would still note, however, there are several large customers in the Telecom Services Group including Cingular, Verizon, (inaudible) that together make up this business unit.

Moving to our international presence, the percentage of affiliates and subsideraries was consistent with previous quarters. Looking at cost of revenues and gross margins, our cost of revenue for the second quarter was $116 million, which was flat as compared to last quarter. This translates into a 56.4% decreased market share for the second quarter, down from the 57.1% recorded in Q1 due primarily to the declining gross margin and the Network Solutions business.

Moving onto operating expenses and related items, total operating expenses for Q2 were $104 million down from $109 million in Q1. The expense decreased quarter over quarter was primarily driven by continued cost controls across the entire organization. As we now maintain a much healthier accounts receivable portfolio and as we continue to rigorously manage our credit and (inaudible), we saw quarterly bad debt expense in Q2 of approximate approximately $2 million.

Performance operating income was $45 million for the second quarter, translating into a $17.1% operating margin. The margin expansion from 16.7% in Q1 was the result of the continued strong expense management. This drove our ability to deliver operating income on an absolute dollar basis over the last two quarters that has been relate (inaudible) consistent even in the face of declining revenue. We ended the quarter with a total employee head count of approximately 3,145 -- 3,145 people down marginally from the end of Q1.

VeriSign reported (inaudible) pretaxed income for the second quarter of $48 million comparable to Q1 and (inaudible) net income of $47 million up from the $43 million reported in Q1. Based upon (inaudible) pretaxed income on a fully taxed basis at a 30% effective tax rate, (inaudible) earnings per share for Q2 was 14 cents, consistent with last quarter and our guidance. This earnings per share is calculated using a fully diluted weighted average shares outstanding of approximately $24 -- 242 million shares for Q2.

Now moving onto the balance sheet and cash flow items, we reported another healthy increase in cash, cash equivalence and short-term investments for Q2 which total the approximately $530 million at June positive June 30th. This includes approximately $18 million of restricted cash in the long-term asset section of the balance sheet. This represents the $55 million increase over Q1, which was atributible to the operating income continued benefits from increased accounts receivable collections and a modest increase in deferred revenue, which was partially offset by increased capital expenditures in the quarter. As you know through our continued focus on credit and collections over the past few quarters, we have seen dramatic improvements in the accounts receivable area.

During Q2, we saw a substantial decline again with the accounts receivable balances ending the quarter at 101 million dollars. A decrease of $18 million from Q1. In fact, over the last four quarters, we have reduced our AR balance by over 60% for $146 million. This all translates into a net DSO into the second quarter of 31 days. We were pleased with this DSO number. Our short-term guidance would continue to been a conservative basis.

In connection with the company's annual assessment under financial accounting standards number 142 for evaluating good will and other intangible assets, VeriSign wrote down good will by approximately $123 million. This charge relates to acquisitions made over the past two to three years and is a noncash charge. In accordance with FAS 142, the company will continue to renew its good will on an annual basis. This charge in Q2 was in addition to the ongoing amortization of intangibles which was $54 million for the quarter. The intangible asset writedown will try to reduce ongoing quarterly amortization of approximately $38 million per quarter.

Total deferred revenue on the balance sheet came in at $502 million at the end of the quarter and modest increase in totals deferred of approximately $7 million from last quarter and relatively in line with your expectations. This growth was mostly attributable for the increased terms we saw for the sale of both new and renewed names for network Solutions as well as increased renewal rates. In addition, the increased number of total names being sold at the registry and their own renewal rate increase contributed to the revenue growth in the quarter.

Other focused efforts on managing operations as well as our balance sheet generated healthy cash flows of approximately $81 million in Q2. Again, ahead of our expectation of $60 million to $70 million. The key drivers of operating cash flow in the second quarter were consistent with previous quarters. Solid operating income for the quarter of $45 million. In addition to favorable changes in working capital, particularly in accounts receivable and deferred revenue balances. It is also important to point out that on a run rate basis, cash flow from operations over the past four quarters has totaled approximately $350 million.

And free cash flow has been nearly $250 million. The cash flow generating capabilities of our business continue to be a key benefit of our financial model. Capital expenditures for the second quarter were $28 million. Up as expected from $22 million last quarter. For the first half of 2003, 35% of our capital expenditures occurred in the Telecom Services Group. 12% in the Internet Services group. 24% at Network Solutions and 29% in the corporate area.

As we've discussed previously, our capital budgets would indicate a total expenditure for the year of approximately $120 million. Although there is potential for to us spend less n that amount. With the delivery of strong operating cash flow and taking into account the increase in capital expenditures in Q2, free cash flow for the quarter was approximately $55 million.

With that I'd like to now turn towards our expectations for the third quarter and lay out high level guidance for both top and Bo bottom line results. As Stratton discussed, while we have not seen a general sustained recovery for technology or telecom spending, we are seeing positive trends in the Internet Services and Telecom Services Groups. We look for revenue in Q3 to be consistent with Q2 at $265 million dollars. The expected decline in Network Solutions division revenue of $5 million to $8 million per quarter is likely to be offset by modest growth in our Internet Services and Telecom Services Group.

Turning to margins for Q3, we would expect gross margins to continue to be relatively flat to down slightly. Mostly attributable to declining revenues and operating margins to be flat to slightly up for the quarter. Looking into Q3, we would also expect the fully diluted share count to be in the $245 million to $250 million range.

As you know, we closed our tender offer for the six and one exchange program we initiated in November of last year issuing an additional $7 million option at the end of the quarter for $11 million option that we had been turned in under the program. These options along with our regular (inaudible) program share issuance in August will drive the increase in our share count in Q3. Even taking into account this higher share count, we expect that earnings per share for the quarter to be flat sequentially at 14 cents on a fully taxed basis using the 30% effective tax rate.

We were pleased with the modest growth we saw in total deferred revenue on the balance sheet in Q2 and based on what we're seeing so far in Q3, we expect (inaudible) deferred revenue to again be flat to up modestly on a sequential basis. Consistent with Q2, you would expect to see another increase in long-term deferred as we continue to add longer term names in the network solution. This would likely to be partially offset in the moderate decline of short-term deferred revenue. Insofar as operating cash flow based on the significant and relatively consistent cash flow generation we have seen over the past few quarters (inaudible), we would look for (inaudible)

We'll take our first question with Todd Raker (inaudible).

Stratton, could you give us more information on the average life or length of name and what impact is that having on the deferred revenue balance?

I mean, the average life has been tending up steadily over the last four to six quarters, Todd Raker. You know, I think it's right now at around 2.63 years on a renewal and about two years on a new.

And so, you know, I think that it goes up about, I would say, a tenth of a point or so on a quarterly basis. So, you know it's not dramatically extending it, but certainly, it helps as you get that higher renewal rate with the multiplied effect of a higher term. It is helping cash flow.

Can you talk about what you are seeing in terms of average price per domain name right now and why did the gross margin come down?

Yeah.

On the price, it has been consistent at around the $21 range. I believe that's the fourth or fifth quarter in a row that that has been the number. So, you know, contrary to popular belief that pricing has been very, very stable.

On the gross margin side, which you've got, is basically the fact that cash bookings are going up, or I'm sorry, cash bookings are higher than in-quarter revenue. So you've got an expense base supporting the cash bookings on what is still the declining revenue. As that turns, I think the gross margin will turn as well. But as you see, we were able to increase the operating margins overall by reducing expenses elsewhere.

And just last question. Any update in firms of long-term plans for the registrar for net soft?

Yeah.

Really have no comment on that. I mean, we continue to run the operation and we'll continue to try to improve its performance and customer satisfaction and go on from there.

Great. Thanks, guys.

Moving on, we hear from Rob Owens with Pacific Quest.

Can you guys talk about some of the opportunities you are seeing with the structure and leverage you might find there? Specifically I know there's been a lot of conversation around (inaudible) and maybe a play there.

A couple of things about Atlas, thanks, Rob. A couple of things about Atlas we talked about last quarter was that we had planned to roll Atlas into some of the telecom service, at least to the first services by the end of Q2, and we were successful in doing that. The do not call services currently run on Atlas and will be delivering do not call queries from Atlas in that service. So we're on track there, and as I is said last quarter, we expect to have one or two other of the telecom data services on atlas as well. I would tell that you atlas is performing well above even our expectations on it.

And as you move those over before you answer the other question, why isn't that benefiting your gross margin here?

It will take some time to do that because you've got depreciation on the old infrastructure that will still have to run its course but long term as volumes go up and as those infrastructure go to zero on depreciation, you're going to see benefits. On the new opportunities, I know there's been a lot made of (inaudible) and a few others. We're absolutely pursuing all of those. My caution to everybody is to realize that RFID is a monumental change and how supply chains and packaged goods work. And it's going to take some time.

That being said, we feel well positioned as one of a few number of technology companies who could handle the transaction rate and query rates that those types of systems will look for. So I think we're well positioned. We're certainly involved in lots of the industry work there, but it's going to take some time.

Maybe a little color on your federal government your federal government business as we go into the September quarter. I know (inaudible) has been telling CIS to refrain from technologies in the short term. Any fallout you expect there?

Actually, what the OMB has told those CIO's is to refrain from buying technology to run their own PKI or authentication system and rather to look for shared service providers, which they will be designating by the end of the year. In our view, that's a very positive development for VeriSign as we are a shared service provider and we perform that function on behalf of several agencies today.

So I think, you know it's likely that in Q3 some of the OMB initiatives will stall some purchases but by the end of the year, we would expect and hope to be one of the beneficiaries of that new policy.

Great. Thanks.

Todd Raker Weller with Legg Mason has our next question.

Hi, couple of questions.

One, looks like the short-term deferred is moderating. Just curious when you think that'll stabilize?

Right. So for that to stabilize, we need to get the rest of the deferred named revenue out of the system. And we've talked about that kind of stabilizing and turning around the second half of next year.

How about on the operating expense side, the fourth quarter where you've had nice improvement down absolute? What's driving that? Kind of where are we with respect to Op Ex?

We continue looking for efficiencies across the corporation and we would still be a bit going forward throughout the rest of it here. You might see spending until marketing or longer term perhaps a little bit R & D. But for the most part, you know, across the company we're trying to drive efficiencies still.

I think the main thing that I would point to there, Todd Raker, is the -- all the work we've been doing over the last 18 months putting, you know, Oracle systems in across the company, putting in new billing systems and the rest. We are starting to see real savings because of some of those systems and we would expect to see more as we complete those projects here in '03 and '04.

Great, thanks.

We'll now here from Sarah Friar with Goldman Sachs.

Good afternoon, everyone.

Just on the telcom business, could you talk firstly about pricing trends in the core (inaudible) signaling and how have those been holding up?

We saw no additional price pricing pressure in the second quarter. It was first quarter after a full quarter's worth of the effects of the contract renegotiations from Q1, so it did have some effect in the all actual numbers. There were no new pricing pressures put on and no new major contracts that had to be renegotiated. So as we had kind of Sur surmised, that pressure stabilized and call volumes continue to go up.

Okay, and just the newer opportunitys there such as SMS messaging, could you talk about how while you're penetrating installed base there in terms of selling those services and how should we think about quantifying the revenue streams from those going forward?

I think we are, let's say, we're very encouraged by the level of activity both within the existing customer base that we have always had, which is as you know traditionally been the independent telephone companies and the smaller carriers. Also in some of these new services, especially the mandated ones, we have significant interest at tier one and signed a few tier one contracts here. As I said last quarter, though, Sarah, what we are finding is it takes a while to integrate the new services into what are much bigger networks of these tier one carriers. Sure. So our expectation is you'll probably see the first revenue traction from some of the new mandated services in Q4 but they are on track and we're pleased with the sales activity.

Okay, great. Thank thanks a lot, guys.

Moving on, we hear from Steve Sigmond.

Thanks, Stratton.

Of all of the three revenue categories, you sounded most bullish on the internet services category in terms of pick up revenue growth. Can you talk about what you are seeing in terms of deployments on the digital certificate side? Do you think the metric there is stabilized? Just curious what's driving that and how long you think the Microsoft partnership will take to ramp as meaningful revenue?

I wouldn't say there was any ah-ha surprise in all of the adoption stuff. We just certainly had very strong quarters on the renewal side on the enterprise. We won some larger deals. Our Japanese guys are seeing their second and third year renewals on enterprise ideals. 50% higher than the first-year contracts. So I think we're just getting into kind of the annuity cycle in some of the PKI efforts that we've been working over the last few years. Meanwhile, public sector and financial services continue to show us new opportunities. That, you know, are really exciting. I think on the other piece of this, it's the business with Merrill Lynch around managed devices that we also expect to be a high growth driver for us coming off of obviously a small base.

The Merrill Lynch announcement did what we hoped it would do, which is drive a lot of interest. The sales seemed busy and active trying to get those deals done in Q3 and Q4. We think that's the other foundation piece and security. You know, the nice thing around dot com and dot net is that within three quarters, we will have replaced all of the names that we used to have because of dot org with new growth in net and com. So the growth there seems stable. It seems strong. The renewal rates are going up with the registry, also adding to some of our improve the optimism here.

Just quickly for Dana on the gross margin.

Is it reasonable to assume if and when the network Solutions business stabilizes its revenue, we ought to see the overall VeriSign gross margin stabilize? Where do you think longer term a good target would be for gross and operating margin? What's the target model like now?

The target model is pretty consistent with what we saw. I don't think we've seen any change there.

I would say, though, if we start to see meaningful growth in the revenue screen from the Internet Services Group and Telecom Services Group, that increased margin there should outweigh the Network Solutions decline because those numbers can tip smaller and smaller over the next few quarters. So for now, looking at a target gross margin would be a good way to look at it. You know, longer term, you know, we haven't given out a long, long-term model, so --

Okay, thanks.

Moving on, we hear from Chip Morris.

My question's been answered. Thank you.

We'll now here from Sterling Auty with J.P. Morgan.

Hi, guys.

Two questions. Just following up on the gross margin question. The managed services business, is that having an impact on gross margins? Do we see that in the quarter or is it still kind of small to have any overall impact?

Yeah. You're exactly right. That margin and the revenues there are fairly small. So it's really not driving the margin at the corporate consolidated level.

And then just from a qualitative standpoint looking at the three operating segments, can you just talk to the operating profit in the three. Did they get better in each of the three? Did any of them have a negative delta in terms of operating profit?

I think as we had shown in the (inaudible), I think we're fairly consistent within those ranges. Certainly telecom and Internet services were consistent there and the decline in network Solutions drove a little bit of the decline both in the gross and operating margin there.

Then just last question. Can you remind us what the opportunity might be in the wireless local number portability?

I think it's hard to scope right now. What you've got is obviously the carrier's all scrambling to be ready by November 23rd. And we've got a few small carriers under contracts and many others we are presenting that service to. So we've often said, I don't think there were any home runs in these new services as much as just nice, clean singles. This one's probably got an opportunity of around $10 million to $20 million or so over the next 12 to 18 months.

Okay, great. Thank you.

Moving on. We hear from Robert Breza.

Good afternoon, everybody.

Stratton, I wanted to go back to the Microsoft question and see if could you kind of talk a little more about that and what the opportunity is partnering with Microsoft. We're hearing them making additional commentary around security as well and in terms of rolling out with Network Solutions.

I think there's a couple of pieces to it, Robert. So obviously, every customer we sell to in large enterprises for the most part has both desktop and server software from Microsoft. They may have it from other vendors as well, but certainly around Internet security and around electronic mail. Microsoft infrastructure is something we have always had to play effectively with.

The new relationship we announced during the quarter really for the first time got our engineering teams together to figure out how to make this painless or both the administrator at a site and for the end user. So we've gotten take advantage of all of the API work and automation that microsoft had done in 2003 server and used that around provisioning of certificates from our service and administrative processes, relocation processes and the rest. So to make a long story short, the solution solved a lot of the pain points that we believe have inhibited PKI adoption over the last few years. And Microsoft has been very supportive working with us to get that done as we think the joint partnership brings, you know, the best vendors in each space together to really bring something to the market.

You're right, they are also continuing to expand their thoughts around security both how their own products operate and as well as how they can enable more types f network connections securely and we're continuing to have discussions with that with Microsoft about the areas VeriSign can help with 2003 servers. I'm optimist about our relationship there. We're seeing customers who realize they own the infrastructure, plugging the VeriSign structure underneath it is a simple, painless way of getting this technology deployed.

Great. Thank you.

Moving on, we hear from Steve Ashley with Robert Baird.

Hi, guys.

You recently high hired a new VP with strategic development. Maybe you can give us a new color on what his marching orders are.

Sure.

The man's name is Chris Parsons. He came to us from BellSouth and works for Bob who is the Executive Vice President of Corporate Development and Strategy.

Chris has come in to really build and run the team networks on strategic development of our partnership and alliances as well as new business development relationships so he's been working, for example, he and his team have been working with IBM and other large system integrators. They've been working with ecosystem players as we call it.

In our view, you have four companies that are very important to be associated with in this age. It's Microsoft Intel, IBM and Cisco. They are clearly very other -- lots of other great companies but those four have strategies that are very similar to our own in terms of how to build out a network infrastructure. It's our expectation that we will continue to advance our relationship with all four and Chris is really going to be the driver of that.

Dana, did you say during the second quarter you had taken another reserve against a customer?

Yes. We in the quarter as you probably know we actually declared bankruptcey in the quarter. So we had an amount related to in-quarter revenue that we needed to reserve for.

Can you quantify that?

A couple million dollars. Wasn't very much.

Okay.

And Stratton, in your introductory comments, you talked about one of your goals in the near term was to look at the new services and try to achieve milestones around, I think, establishing them. I don't know if you recollect that. Maybe you could tell us what that meant?

Sure.

I think each time you are building out new services, you really don't know if you've spent the money wisely until you go through a series of stages with customer acceptance. The first milestones are contract closures that we've seen a handful of strong contracts close in some of the new telecom services and with Merrill Lynch on the MSN service.

The second thing is turning the service on. Everything we do, we get paid for on a monthly or yearly basis after we've turned it on and provision the service. So bringing the services up here in Q3 and Q4, very important milestone.

And then as we head into 2004, I think the last milestone we will check for is broadening the base and going international so that we've got a ubiquitous service versus just a service turned on for a handful of guys.

Perfect. Thanks a lot.

Moving on. We hear from Gene Munster of Piper Jaffrey.

Hi, everybody.

Most of my questions have been answered. The exception of the domain web site. If you look at the loss of the decline revenue of 7 million to 8 million or 7 million sequentially. (inaudible) the loss seems a little high for 300,000. Can you speak a little to that?

Trying to make sure I understand it. The names under management, right, went down by 300,000, right? You're going -- I'm going to have to form my words here. The way to think about it, though, is that the deferred revenue is cumulative, right? And what you are burning off in a given quarter is not equivalent to just the names that went away from management in that quarter, right? You're burning off -- you know when I'm saying? You are updating (inaudible). That's the real difference. We knew one of the big reasons it was going to go down by 7 million to 8 million this quarter was because there were so many less names up for renewal than there were in the first quart person

So it's got to take into effect the lag effect?

That's right. If the waterfall cascade on the deferred revenue and the name (inaudible) management is just more about quarter by quarter boundaries.

Do you have any expect tations in terms of you talked about the sequential change in revenue, but in terms of the name count change for the September quarter?

Yeah. Our expectation is that it will probably go down another couple hundred thousand or so. And we're starting to see that slow down. Renewal rates go up. We're starting to reach the product bottom there.

Okay. Do you think we could be in a flat by exiting this career or is that just too far out?

Yeah, I think what we've -- John Donahue had said during the (inaudible) was that we would expect that by the middle of next year to have bottom end turned up. Well we may do a little better than that, we're certainly doing better than we thought at this point, but we'll see.

Thanks.

Moving on, Walter Pritchard.

Any recipricals on the quarter?

No.

Did you recognize revenue from that in the quarter?

I think (inaudible) you know, couple hundred dollars or so.

Lastly, on the international revenues, what would you expect international revenue to pick up from the sort of current level of 9% of total?

I think, you know, right now we are rebuilding the distribution network and that was really the goal for 2003. I would expect the international revenue to start picking up in 2004.

Okay, thanks a lot.

Moving on, we hear from Matt Barzowskas from First Albany.

Thanks.

Could you talk about the payment business every quarter and you give all these metrics out. How can I look at that and say this is actually generating x to the top line or the bottom line for VeriSign? Just trying to dig into it a little more.

I think it's, you know, it was about a $30 million business last year, you know, it will probably be close to a $40 million business this year. It generates kind of average operating margins and contribution margins for the company. So it it's a nice business that's growing significantly. We've, you know, continue to have lots of good strong opportunity there in that business. It will probably be around a $40 million business.

Just the second part. You talked about trying to (inaudible) the wireless customer telecom business, how is that going? Where do you see it ending up? How long is it going to take?

Well, there's the -- you talking about the billing customer I mentioned?

Yeah.

Yeah. Right. So we had talked about at the end of 2002 that one of our wireless billing customers, Dobson, was going to be leaving in. And so we've been working with them all year to affect that transition money we'll take them off the service sometime in the fourth quarter. So you'll see, you know, revenue impact will come in the first quarter from that. We hope to make up all of that from the new services ramping up.

Okay. Good enough. Thanks, guys.

Moving on. We'll hear from Gregg Moskowitz.

Hey, guys. I guess first question, Stratton, the names up for renewal are slated to go down. How do you see that shaking out, I guess, for Q3 and Q4?

Actually in Q3 and Q4, they are kind of flat. We knew they would be the highest in Q1, go down to about a (inaudible) a half or so in Q2. From what we can now tell, they look about the same in Q3 and Q 4.

Then Dana, was there any delta on the reserve taken on the telecom services business looking at Q2 versus Q1?

Delta? Well, we actually took less in for Q2 than we had in Q1.

Okay. And I guess the reserve went down and call volumes went up and there was no additional pricing pressure. Was there another factor that maybe I'm missing in terms of why telcom was flat quarter over quarter?

Not particularly. I think there's always the, you know, certain customers do less with us during certain times of the year. We have I think 18 products in that space. You know, one customer may have chose to direct connect to a carrier. So you're talking about very small numbers here.

And as Stratton had said on an earlier question, this quarter you saw the full quarter's effect of the pricing we had talked about in Q1.

All right. Okay.

And then lastly, bad debt expense obviously was small this quarter and collections have been good. I think previously, Dana, you sort of talked about a $4 million to $6 million normalized range money do you feel more comfortable with that going forward?

Yes, we do because the accounts receivable balance has gone down so dramatically, and we have just a better, healthier base receivable within the portfolio that we expect the number to stay on the low end of, you know, single digits.

Okay, thanks a lot.

We'll take our last question from Dan Cummins with UBS.

Thank you.

I just wanted to check my perception on the Internet Services Group, that being that quarter over quarter, you had some growth in the net revenue you get from the registry business. And perhaps a little decline on the security businesses?

No, that would be the wrong perception. Security (inaudible) grew in the quarter.

Then why would the -- why was the registry down?

The registry was up as well.

They were both up at the quarter? Okay. Thank you.

Thank you.

There are no further questions at this time. I'll turn it back over to you for additional or closing remarks.

Thanks, operator.

I'd like to thank everyone for your time and we look forward to talking with you and answering any additional question you might have.

Thank you and good evening.

That does conclude today's conference. We thank you for your participation.