威瑞信 (VRSN) 2003 Q4 法說會逐字稿

Good day, everyone and welcome to the VeriSign incorporated conference call. Today's call is being recorded. At this time for opening remarks I will turn the call over to Steven [Gateoff].

Good afternoon, everyone and welcome to VeriSign's fourth quarter and fiscal 2003 earnings call. I'm here too with Stratton Sclavos Chairman and CEO of VeriSign. Dana Evan our CFO and Katie Baird Director of IR.

Before we begin we would remind everyone that other than historical financial data that matters that will be discussing today may include forward-looking statements and as such are subject to the risks and uncertainties in our annual report and other reports filed with the SEC. We would like you to know that our financial results were released to the news wires after the marks closed this afternoon. The press release related financial information discussed on this call and a reconciliation of GAAP and pro forma financial information can be found on our website at www.VeriSign.com. The call is being webcast live both on our website and at street events.com.

So far as today's call, we've got a lot to cover. In a moment, Stratton will provide both a high level view of the quarter, and a detailed discussion of each of our business units. Dana will follow with a review of Q4 and 2003 financial results and turn it back over to Stratton for some color on 2004. Finally, Dana will wrap up with guidance for Q1. And then open the call for your questions. We anticipate the call ending at approximately 3:00 p.m. and with that I would like to turn thinks over to Stratton.

Thanks, Steven. Good afternoon, everyone. Let me add my welcome to all of you attending today's call. As you can see from our earnings release, our operating performance in the fourth quarter was in line with our guidance on the top line, with some overachievement on the bottom line. Increased demand drove sequential growth in many of our operating metrics during the quarter as well as in our bookings and related deferred revenue. In addition we also benefited from an extra 25 days of Network Solutions contribution and naming and directory group that Dana will describe.

With that let me start with the operating metrics for each business for Q4. Like many other technology companies, we saw improved demand and momentum in our Internet services group in Q4. As the case in point we sold over 108,000 web search during the quarter up 16% sequentially from Q3's 93,000. Up so rates improved to 56% an all time high. And much of the volume increase was related to large enterprise sales and renewals at the end of the year driving bookings up 11% sequentially. As this is deferred revenue business, much of this improvement will manifest itself in the P&L during 2004. The total installed base of active website certificates stood a 384,000 at the end of the year, up from 375,000 in Q3. The number of active merchants using our active gateway payment services closed 102,000 up 6% from 96,000 in Q3. We helped process approximately 96 million unique transactions with an aggregate value of over $7.7 billion. Transaction volume was up 41% from Q4 of last year while dollar volume through the gateway was up 71%. On the enterprise security front, we saw renewed interest in our managed authenticity solution, especially within the public sector and financial services market. New and renewing commercial customers in the quarter included Agilent Technologies, Blue Cross Blue Shield, Federal Home Loan Bank, Honeywell, Banc of America, and Bristol-Myers Squibb. Noteworthy public sector wins include the state of Kansas, state of New Jersey, California department of health, and the U.S. department of defense. As with our web certificate business, these bookings materialized as deferred revenue on the balance sheet and will positively impact the P&L during 2004.

We also closed several significant MSS contracts and partnerships in the quarter as the pipeline for these services grew to new highs. These wins, many of which will be announced in the coming weeks, along with our planned acquisition of Guardent, will position us as the leader in managed security services heading into 2004. We have now passed stage clearance on the Guardent acquisition and still anticipate the transaction to close in Q1. Overall, we believe that I.T. security remains a priority in customer spending intentions for 2004. And that our service model and breadth of offerings position us as a leading contender many opportunities.

In fact, recently published a record on the outlook for tech spending in 2004. In a survey of over 200 decision makers, VeriSign and Cisco finished neck and neck as the top vendros being considered for security technology purchases. We were obviously pleased to see these results and feel our recently launched family of intelligence and control services has captured the attention of many organizations. This new family of securities services leverages our unique infrastructure assets including PKI, MSS, payment processing, and DNS resources. The value proposition of intelligence and control services is to provide an enterprise with realtime intelligence about the security of their network, user, and transactions, while providing them the tools to proactively control their environment. The tag line for the integrated marketing campaign is security that sets you free. You will see more service announcements in the first half of 2004, that capitalize on this theme.

Moving to our naming and directory services group, the dot-com and dot-net registries saw over 2.9 new registrations in Q4 up from 2.8 million in Q3. We also renewed or enabled the transfer of over 3.7 million names. Overall renewal rate for the quarter came in at 70%. Substantially above our projection. As a result, the active zone files for common net contained approximately 30.4 million names at the end of the quarter, up 6% from 28.7 million at the end of Q3. For the year as a whole, the active name base grew by 4.6 million names, or 16%, as it now stands at the highest levels ever. Of course, the other item of note in the naming and directory services was the recent announcement that we have been selected to operate the root ONS service for the electronic product code or EPC network. As many of you know, this will be a key enabling service for the rollout of RFID tags in the supply chain over the next few years. While the version one service is live today, we plan to add significant enhancements throughout the year, as we gear up for the early pilot and follow on production deployment of EPC members. Although we remain excited about the prospects for RFID and the EPC, we do not expect the contract toed a materially to our results in 2004. In short, the Internet services group ended the year with good momentum in the core business, and with promising traction for its emerging offerings.

Now, let's move to our telecom services group. We ended the quarter with a total of 1177 telecom customers, up from 1138 at the end of Q3. We also handled 8.6 billion queries on our database, up from 8.3 billion in the prior quarter. For the year as a whole, we handled 32.8 billion database query, up 14% from last year's 28.9 billion. We saw improving sales momentum in the telecom group as well during the quarter. Leap, our largest billing customer, emerged from bankruptcy and signed a multi-year extension for our services. Metro PCS, another billing customer, has now gone over 1 million subscribers and has recently added our prepaid services to their offering. In our database services business we now have finalized multi-year contracts with all of our major customers over the last 12 months, leading us to expect increased volume and much greater pricing stability in 2004. We also won new business with over 140 customers in Q4, including Valer, Verizon, AOL, Cingular, Sprint PCS and Embratel.

As we discussed on the last call, Q4 was the first quarter in which we saw the partial impact from the termination of our Dobson contract. As a result, revenues came in at approximately 100 million for the quarter down 3% from the run rate business in Q3. We had expected to make up some of the Dobson decline through new service contracts that we have in house but customer requested delays impacted the ability to ramp these up in the quarter. We expect to see another $2 to $3 million impact to the run rate in Q1 as the Dobson revenue completely goes away. That being said, we also believe that this will represent the baseline revenue from which we will grow sequentially throughout the year.

Now, let me turn the call over to Dana to review the Q4 and 2003 financial details.

Thanks, Stratton and good afternoon, everyone. And you just heard in Stratton's overview our fourth quarter and 2003 annual results reflect our continued efforts over the past year of focusing on our core businesses, driving operational rigger, and efficiencies across the company, and significantly strengthening our balance sheet. Over the course of the year, we generated revenues of approximately $1.1 billion, and delivered operating income of $200 million, all while expanding operating margins by more than 200 basis points. These results drove nearly $360 million in operating cash flow for the year, representing a 50% increase over 2002. As importantly, we feel good as we enter 2004 with a strong conservative balance sheet that posts more than $740 million dollars in cash and equivalent, significantly reduced accounts receivable balances, and healthy deferred revenue from our core businesses of nearly $340 million. As you know, the Network Solutions sales closed on November 25. Therefore our financials for the fourth quarter include a 56-day sub period for NSI results. As I review the financial results I will describe the impact of the sub period in Q4 and more importantly provide an apples to apples comparison as to how the core business would have performed without Network Solutions in the numbers.

So let's turn to the detailed results starting with the income statement. On a consolidated basis, VeriSign reported $252 million of revenue for the fourth quarter, as compared to $268 million in Q3. The sequential revenue decline was attributable to the Network Solutions divestiture midway through the quarter. The actual 56-day NSI sub period contributed $32 million of revenue in Q4. Segmenting the remaining Q4 revenue into VeriSign's rereporting unit the Internet services group delivered approximately $120 million of revenue for the quarter. On a hypothetical basis, if we have no Network Solutions revenue for the entire fourth quarter, our ISG revenue would have been approximately $128 million. This compares on an apples-to-apples basis to 120 million for Q3 assuming no Network Solutions revenue in the numbers. The net increase here was twofold. Organic growth in core naming and directory services and recognition of final deferred revenue balances from the dot org registry of $7 million. As most of you know, the dot org registry was transferred to a new operator during 2003. We have been providing certain support services over the past year, to ensure a smooth transition. These obligations ended on 12/31/03.

Our telecom services group reported $100 million of revenue for Q4, a decline from 105 million in Q3. As we have previously mentioned, Q3 revenues included a one-time $2 million consulting fee. So the decline in run rate revenue in Q4 was actually $3 million, consistent with the two to three million dollar loss we had anticipated from the Dobson contract.

Moving to our international operations, the percentage of total revenue that was driven from our international customers, affiliates and subsideraries was approximately 13% for Q4, up sequentially from 10% in Q3. For the year, international revenue represented 10% of annual revenue.

Looking at cost of revenues and gross margin, our cost of revenue for the fourth quarter was $100 million, down from $114 million last quarter. The majority of the decline is attributed to the sale of NSI. This translates into a 60% gross margin for the fourth quarter, up from the 57% reported in Q3. This margin improvement was generated by the reductions in cost of sales I just spoke about, as well as the slight shift in the revenue mix for the quarter.

Turning to operating expenses and related items, total operating expenses for Q4 were $95 million, down from $104 million in Q3. The majority of the decline in operating expenses also came from the sale of NSI in addition to expense declines and sales and marketing and G&A. Pro forma operating income was $56 million for the fourth quarter. Translating into a 22% operating margin. The margin expansion from 18.5% in Q3 was primarily a result of the revenue mix and gross margin improvement I just spoke about, as well as continued strong expense management. Again in the sales and marketing and G&A function.

On last quarter's call we discussed our restructuring initiatives related to the NSI sale and other business realignments across the company. Those initiatives were anticipated to result in total restructuring charges of approximately $75 to $100 million over a several quarter period. During Q4, we took a restructuring charge of approximately $43 million related to employee severance, facilities abandonment, contract terminations, and asset disposition. The majority of these charges were the result of the facilities abandonment and asset dispositions resulting from the sale of the Network Solutions business. We would expect to see continued restructuring charges in Q1, in the $10 to $20 million range.

Insofar as head count, we ended the quarter with a total employee base of approximately 2,470 people. Down from the 3100 at the end of Q3. Clearly, the biggest driver in the head count reduction was the sale of Network Solutions, as approximately 575 people were employed by NSI upon the closing of the transaction.

VeriSign reported pro forma pre-tax income for the fourth quarter of $58 million, up from $51 million in the previous quarter. Pro forma earnings per share for Q4 was 17 cents, four pennies ahead of our guidance, and up from the 15 cents we reported in Q3. This earnings per share has been calculated using a fully diluted weighted average shares outstanding of approximately 246 million shares for Q4. The lower-than-expected share count was a result of options forfeitures related to the Network Solutions transaction.

Moving on to balance sheet and cash flow items, cash balances increased $125 million in Q4, which was attributable to several factors. Including $58 million from the sale of Network Solutions, routine quarterly cash flow, as well as the $37 million net proceeds from the VeriSign Japan IPO and related option exercises. This translated into cash, cash equivalents and short term invests totaling approximately $742 million at 12/31. At the end of Q4, our accounts receivable balance remained flat from Q3, at $100 million. This translates into a net DSO for the fourth quarter of 34 days.

Going forward, without Network Solutions, we would expect DSOs to be in the 40-45 day range. Total deferred revenue on the balance sheet came in at $339 million at the end of Q4, as compared to $507 million last quarter. And ahead of our guidance of $320 to $330 million. The significant decline here is of course related to the Network Solutions sale for $262 million of deferred revenue was taken off our balance sheet and transferred to Network Solutions at the close of the transaction. Without Network Solutions, deferred revenue in Q3 would have been $336 million. Moving on to cash flow metrics, our focused efforts on managing our operations and our balance sheet contributed to healthy operating cash flows of approximately $84 million in Q4, again ahead of our ongoing expectations for a base level of quarterly cash flow $60 to $70 million. The key drivers of operating cash flow in the quarter were due to higher operating income for the quarter, up $7 million sequentially, and favorable changes in working capital on the balance sheet.

Capital expenditures for the fourth quarter were $40 million, up from $18 million in Q3. For the year, capital expenditures came in at $107 million, in line with the expectation we had communicated last quarter. The annual capital expenditure breakdown is as follows. Telecom services grew 40%, corporate, 31%. Internet services group, 14% and NSI at 15%. Free cash flow for the quarter, net of the proceeds from the VeriSign Japan and NSI transactions was approximately $34 million. Off a strong operating cash flow, partially offset by capital expenditures, and the acquisition of UNC Embratel in Q4 for $16 million of cash.

To sum up the cash flow picture for the year, cash flow from operations in 2003 totaled $358 million, up 49% over 2002. And free cash flow was approximately $250 million, a significant highlight for the year. The strong cash flow generating capabilities of our business continue to be a key benefit of our financial model. As it relates to other corporate finance activities, I am pleased to report that VeriSign Japan, our majority owned Japanese subsidiary successfully completed its IPO on November 19. Our ownership for it is now 60% versus 73% pre-IPO. Therefore we will continue to consolidate [DSG] results within our financials. Well that completes the Q4 and full year financial review.

Let me turn it back over to Stratton for the 2004 outlook.

Thanks, Dana. As we look back at 2003, and Q4 in particular, we feel the actions we have taken and the corresponding results we have achieved signal the completion of a six quarter transition for VeriSign into a more focused and well positioned company. During that time, we successfully restructured our business, improved operating efficiency and rigger, developed and deployed a new world class services infrastructure, dramatically improved our balance sheet, added significant management debt, and divested or shut down businesses that are not core to our long-term strategy. We believe VeriSign enters 2004 as the leading provider of critical infrastructure services for the Internet and telecommunications network with a focus on managed security, directory, and communications services.

Our growth strategy moving forward will be based on four key objectives. First, we plan to drive additional penetration of our existing services through both volume and share gain, especially in tier one accounts and key verticals. Second, we will generate incremental revenues from new services built in 2003, and the first half of 2004, within all of our business units. Third, we will look to incrementally expand our reach in select international markets. And fourth we will demonstrate the customer facing and operational synergies across our business units by creating some unique solutions that combine our core technologies, and platforms.

In order tore investors to understand the organic growth characteristics of the business in 2004 and beyond, we feel it is important to establish a common baseline as we enter the year. By taking our Q4 '03 reported revenue of $252 million, stripping out the Network Solutions component of $32 million, adjusting the registry revenues up accordingly, eliminating the accelerated dot org component, and a full quarter's worth of Dobson contribution and you arrive at our true year end revenue run rate of $216 million per quarter, for the base businesses going forward. Given all the puts and takes that go into this calculation, we would be glad to walk through in more detail for any of you who like to do so. That being said we think this gives a clean way to think about our core lines of businesses and the recurring revenue streams as we start the year and to gauge our growth on a sequential basis. Dana will provide our Q1 guidance in a moment using these assumptions as a starting point.

Turning back to our overall outlook for the year, we are definitely seeing some positive external trends as it relates to security, directory, and communications opportunities. We also feel that as the technology and telecom recoveries take hold, customers will be more inclined to look for managed service offerings from trusted vendors, who can provide them with advantages in time to market, domain expertise, and capital efficiency. And our security business, we will focus on three areas of growth. Strong authenticity solutions that go beyond PKI, managed security services that bring the best of VeriSign and Guardent technology and know how together. And Ecommerce security and transaction services that drive continued growth in online sales. In the naming and directory business we will focus on expanding the basic name services we offer as the market continues its recovery. If January is any indication, we would expect to see double digit growth again in the name base this year. We also plan to pursue additional directory opportunities in RFID content management and voice over IP.

In our telecom group we are focused on gaining greater share in tier one accounts in wire line, wireless and cable. Under the direction of the new telecom management team, we have already begun to see a positive shift in our sales pipeline. We will also continue to roll out a collection of new services, with a focus on wireless payments, wireless data, and network monitoring.

In summary, we're looking forward to 2004, as we believe the markets we participate in are recovering, our services portfolio is well positioned, and our people are energized and focused on growth in our core businesses.

With that, let me turn it back over to Dana for the guidance.

Thanks, Stratton. As we previously discussed, Q1 will be the first quarter we report without Network Solutions. With that said, we would look for revenues in Q1 to come in at approximately $220 million, slightly up from the baseline Stratton laid out previously. This guidance reflects the expectation that the Internet services group shows an increase from our core security, and naming and directory businesses. With ISG revenue at approximately $123 million for Q1. In our telecom services group, we would anticipate Q1 revenue of approximately $97 million, for the reason Stratton also just described. Accordingly, we view Q1 revenues as setting the baseline from revenue from which we would expect to show growth on a go forward basis. We also know that this revenue guidance does not include any contribution from our pending Guardent acquisition. We are still expecting this transaction to close sometime late in the quarter, and we will include guidance related to Guardent on the next earnings call.

As it relates to margins for Q1, we would expect gross margins to be approximately flat, at 60%. The revenue guidance combined with an expectation for flat operating expenses, would anticipate operating margins coming in at approximately 19-20%. We believe that this sets a baseline operating margin which should expand throughout the year as well.

Looking forward to Q1, we would expect the fully dilute the share count to be approximately 248 million shares. It is reasonable to assume that share count would grow one million shares each quarter throughout the remainder of the year. Taking into account the full quarter of lost profit dollars related to NSI in Q1 and the revenue and margin guidance I just gave, we would expect earnings per share for the quarter to be approximately 13 cents on a fully taxed basis, using a 30% effective tax rate, and consistent with current First Call estimates.

Now, moving on to some balance sheet guidance, we were pleased with the deferred revenue growth we saw in our core businesses in Q4. As we look into Q1, with Network Solutions fully out of the numbers, we look for deferred revenue in both the naming and directory business as well as the Internet services business, to grow in a range of $5 to $10 million. Looking at operating cash flow, as compared to our previous guidance of a base level of cash flow in the range of $60 to $70 million per quarter, we would expect to generate cash flow in Q1 at a slightly lower range of $50 to $60 million. To give you some perspective on that, Network Solutions contributed approximately $5 million of cash flow in Q4. In addition, in Q1, we would not expect as much cash flow benefit from working capital, as this is the quarter in which we prepaid the majority of our insurance coverages, and pay out annual bonuses and commissions. However, as we look out over the remainder of the year, we would fully expect quarterly baseline cash flow to be back in the $60 to $70 million range. Our outlook for capital spending for the year indicating an expected total capital expenditures of approximately $100 to $110 million. We would expect capital expenditures for the first quarter of approximately 30% to 35% of the annual budget. And with that I would like to turn the call over to questions and answers.

Thank you. The question-and-answer session will be conducted electronically. If you like to ask a question on today's call, star one on your touch-tone phone. If you are using a speaker phone, please make sure the mute function is turned off on your phone to allow the signal to reach our equipment. Once again star one for questions. We will go first to Todd Raker, First Boston please go ahead.

Just on the telecom business, when you last spoke on your last earnings call, Stratton, let me get the highlight, when you thought new products and services may be able to make some of the loss of Dobson up, two questions for you. Can you quantify as a percentage of revenue what kind of new products and services introduced in the last 12 months represents the revenue stream and can you give us just an update on the momentum there? It seems like it slowed down a little bit.

Yeah, Todd, I think that in the -- I don't have the number for the new product in the last 12 months introduction piece, you know, assume that is, you know, probably still single digit million, per quarter, from the new products, versus the old. I think the as it relates to making up some of the Dobson revenue, we had several contracts in inhouse that we did expect to turn on at least initial stages in Q4, and customers for a variety of reason, some of which were related at their own network upgrades some of which was related to trial periods just decided they wanted to move those into Q1 and Q2 as it relates to rollout so those are all new products and we do expect to see that. In fact we're pretty excited about some things we've seen here in Q1, but they are, you know, slower than we would have anticipated going in, and you know, to be conservative we're going to assume that that's what happens this quarter as well. Although we are starting to see some greater traction. So I think we're, you know, as we come in, we think the revenue in telecom will be about 97 million this quarter. We think it will grow in every quarter of the year from there on out.

And just a follow-up question for Dana, if you look at your gross margin at 60%, I assume that benefited from the dot org recognition, to the tune of 7 million, yet you still think you can do a 60% gross margin in Q1. Can you just kind of highlight that?

Right, so you're correct on the Q4 analysis, Todd and then in Q1, you know we will start to see some benefit of the restructuring that we did in the quarter that will flow through the expense line, as well as the gross margin line.

How many of the services have been transitioned to atlas?

In the telecom side?

Yeah.

I believe it is 3 or 4, with another 3 by summer I think. So the ones we had talked about on the newer services, the do not call, the teleblock, you know, system and then LNP, lidby and the others are on the trajectory for Q1 and Q2.

Thanks.

We will go next to Sarah Friar, Goldman Sachs. Please go ahead.

Good afternoon, everyone. Maybe just turn to the ISG, to the services group, which you've guided up in the first quarter, I would assume that there is a chunk of revenue that you see in the fourth quarter just from better E commerce and so on, that you don't get the same benefit of in Q1. What is it that making you think that you can still see growth there in a seasonally weaker quarter and is that perhaps just being rich by revenue coming off the balance sheet?

Well, you've got seven things contributing. We saw very good bookings, momentum, in SSL certificate, in enterprise authenticity, and in obviously the directory business around common net. Those were booked in Q4 on to the balance sheet and we will see some benefit in revenue there in Q1. In the payments business, with where we charge monthly and by transaction, we have continued to see throughout the last 8-10 quarters sequential ticks up in both transaction volumes, as well as the number of merchants. So we're very confident in the payments business, we will continue to see that growth trajectory and the last there is managed security businesses where we -- services where we start with a small base about we did add some new customer contracts in Q4 which we will turn on in Q1, at least the majority of them. So in that sense, we're pretty confident in the ISG area that we will see an uptick.

And then in that MSS business, are you charging on a -- you know, when you get a contract win, how big is it within a customer, is it on a per device basis? You start small and get bigger? Is there kind of an initial ASP for putting your products in place to monitor?

The way it works, Sarah, there is generally a setup fee depending on the number of devices being managed and there is a per device piece per month. That comes in. Instead, it can be a couple hundred K, normally, and then depending on the number of devices, you know, the fees can be anywhere from, you know, 10 K a month to over 100 K a month.

Okay. Great. I won't be greedy but just on the O & S side I know you said very specifically not expecting a lot of revenue in 2004, what sort of milestones though should we expect? Will you start to give us a sense for customers that are joining that open network? What should we look out for?

I think a little different than in our DNS business. Would he are the subcontractor here and it is the EPC network who will be making those announcements. But we are allowed to say by contract is that the service is live. And when we are rolling out new versions, and enhancements to it. Now, separate from ONS, would he have our own RFID services and EPC services that we are rolling out that we can sell directly to enterprises and you will be hearing more about those proable in March and April and we will make announcements then.

Thanks a lot.

Yup.

We will go next to Gregg Moskowitz. Please go ahead.

Thanks very much. Hi, guys. Dana, first I just wanted to confirm your deferred revenue guidance was that 5-0 million for each of those two segment, 10-20 toll the.

5-10 million in the quarter.

In total. Great. And Stratton, just wonder if you would talk about wireless number port ability. Naturally transfers I think progressed slower than many had thought in the Q4 with a lot of delay in carrier's ability to switch over numbers. Just wondering if you could provide some color on I guess your expectations in Q1 is. There a fair amount of backlog and pentup demand? And then also if you could give an update I guess on whether or not you have been able to sign some more carriers be it tier one or otherwise?

And wireless number port ability a as we had talked about the prior couple of quarter, would he were generally serving the tier two type carriers there. We certainly saw, you know, a small uptick in service revenue there. And had a few move out, as you USC. We're also starting to see some new opportunities Internet wise as it relates to instant messages services, for example the AOL contract was to take number portability into that model, where you've got IM being delivered to wireless phone, and if those phones had been ported, needing a way to route that traffic so we're seeing a few ancillary things there that just kicked off this quarter but again as we've always said we would expect WNP to be a nice clean single for us in terms of a few million dollars but we're not seeing any major delay or major uptick one way or the other.

Right. And then just wondering on the security intelligence and control services, is it sounds like some of what you're doing is I guess kind of having an early warning system. And just wondering if you can maybe compare and contrast that to some of the other services out there such as maybe Symantec with their deep sight.

Sure, I would love to. I think that is probably a very good offering. I don't know much about it. I know they claim to have quite a few sites, you know, with are they can refer data but those are only sites that have agreed to do that. And what VeriSign kind of has a unique view on is an ability to correlate between 10 billion DNS interactions every day, millions of payment transactions from all over the world, our own managed security services where we have our own probes out there seeing what is going on at our customer sites and our SSL certificate business where we see what kind of sites are up and doing secure transactions. So in essence, we just have a much greater and more diverse set of inputs into the analysis engine, and then we are in the process of building kind of what we would -- we would think of as a next generation data correlation engine to try to capture all those inputs, and make sense of it, for this early warning system. Early returns from our customer are pretty good on that. I think the way to characterize what we do is more at a global network level versus a few thousand site level.

Okay. That's great. Thanks very much.

We will go next to Mary Meeker with Morgan Stanley. Please go ahead. Ms. Meeker, your line is open. And we go to Steve Ashley with Robert Baird. Please go ahead.

Hi. A couple of things. You mentioned in the naming business, first of all, off to a good start. Looking to leverage that. And then you talked about the ability to maybe add content management and voice over IP somewhere down the road. Could you give a little bit more color on those opportunities?

Yeah, just on the naming side, I mean January, obviously, the December quarter was the highest quarter of 2003, in terms of total name registrations that we saw. And the highest reported renewal rate. The first month here in 2004 will surpass the best month of 2003. So -- we're not exactly sure we can target down exactly what's going on in the market. There does seem to be an upswell here, as you're seeing Internet and telecom recovery, there is a return to it looks like a pure demand for the name, and of course, the name base itself is going through a maturation cycle where names are being renewed for the second, third, and fourth times and they have tended to always have higher renewal rates, so we would expect to see renewal rates at least at this level and overall name volumes probably a little higher here in Q1. The new opportunities I mentioned, we talked about RFID, and that's been something we have been working on for about a year. We also started some projects in voice over IP directory services and in looking at content management around clearinghouse functions and directories. About 12 months ago as well. We are in, I would say, prototype on those offerings right now. And talking with the various parties that would be interested in them. On the voice side, it is mostly carriers and system integrators. On the content side, it is obviously publishers across the wide spectrum of the entertainment industries so we don't really have anything to announce yet in those area, Steve. Although they have synergy opportunities for us where we bring atlas, our directory, our security and our telecom assets all together.

Great. And just a follow-up on the recent question here, for this recent week, we did see the outbreak of this virus. It did swell. What would you have seen running the atlas network and what kind of, you know, practical things were you able to do in your MSSP business as a result of that.

Yeah, I don't have the data on this one. Let me give you an example of what happened with so big a few months back. Because these are e-mail virus, they tend to target, -- well we see them because we respond to MX requests in DNS and an MX request is e-mail record. Generally, we see about 60 million to 80 million of those a day on one of our server clusters, in any of the 13 locations. On the day that so big hit we saw 1.8 billion. So that's the kind of early warning system idea that we're coming up with here, which is you're seeing massive changes in what are the, you know, -- the foreseen run rates of these types of transactions and that gives our team an ability to go in and start to attack the sort. In so big we can tell you every site that had been shut down and for the most part every site that had the virus attack it, and had its own machines turned into spam senders. So we take that information, we analyze it, and we take proactive measures for our customers whose networks we manage to shut down their port, and to do remediation so that their products are patched in a priority order. My assumption is we did the same this week, although obviously we're just two days into this virus and I haven't gotten the data from our guys yet.

Great. Thanks a lot.

Yup.

We will go next to Ed McGuire, Merrill Lynch. Please go ahead.

Yes, good afternoon. Saw a nice improvement in your international revenues, and wondering if you could provide a little color, maybe regionally or around products that might have been behind that increase, or may provide a little granularity about the contribution from UNC amber tell.

Actually, I think the simplest explanation on the increase is really when Network Solutions goes away, the rest of the business has obviously a higher percentage of international than they did, and so that drags it up. The second is that VeriSign Japan did have a record year, and you know, contributed their highest quarter of the year in Q4. Brazil only had, you know, -- I'm not even sure, a couple million here and there in the quarter. But we are seeing nice early traction in that space. So our goal would be to double international penetration in the next two years, to about 25% of revenues. And I think, you know, each of these kind of initiatives in security and in the telecom side will help us do that.

Could you talk about some of the planning around the Guardent acquisition and how you are looking to fold their -- their offerings and their sock into your infrastructure?

Yeah, I will tell you, as you know, we've done quite a few integrations over the course of the last few years. We've developed a best practices cookbook for that, and I think a lessons learned man fess toe on it. So in essence, since we announced the acquisition, we have been planning integration on both sides, and have put some of our best people on it. As we get through clearance here in the closing, you will see a collection of VeriSign and Guardent people in Providence and in Walten where they're located, working, you know, basically to do that integration as quickly as possible. We do have a road map for the platforms merging. We have talked to our largest customers, as well as theirs about the migration plan. We would like to propose, we've gotten very good feedback on that. And we look like we will have about a six-month migration from start to finish there but we're pretty confident on this one, given that we're already in the business, the two technology groups kind of saw eye to eye on where this market was headed anyway in terms of early warning systems and platforms but I think we're feeling pretty good about low risk model there.

Why a follow-up. You're sitting on a fairly sizable cash balance. Any plans for had that, around other acquisitions or share repurchases?

I will talk about acquisitions. On the acquisition front we continue to look at things across the board that would fill our strategy either in one of our existing businesses, or in international penetration, and you've seen UNC Embratel and you've seen Guardent. It would be those kinds of things that we would look toward, nothing imminent. From a stock purchase, I will let Dana handle that.

We have a $350 million share repurchase plan that was approved by the board almost two years ago. That is still in effect and we've purchased about $70, $80 million under that plan in the past. So you know, we certainly will look to be in the market, you know, when we feel it is appropriate.

Thanks very much.

We will go next to Adam Liebhoff SG Cowen. Please go ahead.

It is Drew Brosseau for Adam. Just a couple questions. And I'm hoping you can help us. It is nice to have all the noise behind us by the way. From this baseline, can you talk a little bit about first at the gross margin level, what we should be looking for for each of the two businesses and whether those will change materially from here?

We're really looking for gross margins to be relatively flat throughout the year. And we will see the margin expansion we're looking for more on the operating expense, and the operating margin line, that delivers increased EPS.

And can you give me a sense of what the relative margins between the two businesses are at this point? On the new baseline.

So the VeriSign telecommunications service, is it around 55%, which is, you know, below that. The Internet services group is about 70%. So the blend of that, you know, comes to the corporate gross margin, and I think -- comes to the corporate gross margin and I think in the telecom services group to give a little bit of color there there you've got new services that have been put in place where the cost, are you know in that cost of sales and as the volumes continue to increase over time, we would expect to see, you know, slightly increasing margins in that business, but we don't expect that, you know, towards the end of the year.

Okay. And then I don't want to pin you down on this much but just on a longer-term basis, starting from this new level, what kind of top-line growth do you think is kind of a reasonable place to be thinking? And where do those 20% or so operating margins go over a two or three year time frame?

I think, Drew, the last year at the analyst day, we had talked about getting ourselves to operating margin between 25-30% on the long term model. We believe we are on that trajectory. We believe that operating margin, Dana talked about 19-20% in Q1. We do believe if we can execute our plan, those will increase sequentially in each quarter of the year and we will exit the year, you know, north of 20%, 21 or so. So we will keep marching on that path and as we get economies of scales on these infrastructures, we continue to believe we will be able to demonstrate that. As it relates to revenue growth, I think what you're going to see, the way to think about it is watch what we do in terms of sequential growth in Q2, Q3 and Q4. Q1 will set a baseline now, as you say without any of the noise and I think we're also, you know, pleased that we can start the year here with none of the old or none of the partially divested streams in the revenue. We will get Q1 under our belt. With the 220 number. And then from there, we would look to start to guide on growth rates going forward in both ISG and PSG, and I think we will be more comfortable, probably expanding, you know, the horizon of the guidance we will give, because we will have seen that materialize.

Okay. And then just the last one. Given the cash position, the healthy cash flow, should we be anticipating more Guardent-like acquisitions to just continue to round out the service portfolio?

I don't know that I would say, you know, a lot more, or more. I mean in that particular space, we think we've, you know, far and away captured the number one prize there. And we ourselves, we're seeing our own business start to generate some traction. So I think securities base, probably not. You know, the things we're looking at are really more technology that can enable some of these new services in wireless, and telecom. And that's probably where we will turn our attention next.

Okay. Thank you.

We will go next to Walter Pritchard with Soundview. Please go ahead.

Hi, most of my questions have been answered. Just wondering of the 140 new telecom customer, could you talk to us about what those customers are buying in terms of new versus existing services?

Pretty much I would say 80%, the existing services, around database services, signaling services, wireless roaming and the rest, the 20% of them buying the new services, which will start to ramp here in Q1 and Q2. Let's see. Largest things really were in -- actually the largest one was in our do not call service in terms of value sign. C-nam in billing came after that. And then a variety of signaling stuff. So again, across the board, it is probably with the do not call being one. The highest to new values of contracts we signed.

And then just lastly, could you clarify for us, on the Brazil, you said that was about 2 million in the quarter?

Actually it was about 3.

OK. Thank you.

We will go next to Steve Sigmond with RBC. Please go ahead.

Thank you. Dan now just back on the operating expenses for a second. Can you clarify for us what the organic growth in opex is going to be. You've got. You guided a flat opex quarter on quarter, but some of that should go away with the Network Solutions divesture. So are you hiring? You know what's the net impact of opex?

In terms of percentage Steve or...

Right.

We're really looking for sales and marketing to stay relatively flat around 17% or so. G&A should start to tick down a little bit in the out quarters as we start to get through all the restructuring and R&D will stay around the 7%. At the end of the day, NSI, didn't have a lot of expenditures that were extraordinary in Q4 and we took the opportunity to spend some extra money, as we always do, in the budget in Q1 to get things ramped up. So, it kind of nets out.

What was the total opex contribution from NSI then on that 32 million in Revenue? What was there opex in the quarter?

I don't have that right in front of me.

So if you're guiding to flat, the net organic growth would be higher, if I'm understanding it correctly.

That's right. And I think it is really just a lot of startup expenses as we go into the year, right, as we always do, as it relates to new marketing programs, the RSA conference, the GSM conference, a variety of things that will hit early here in the year.

Great. And Stratton, you mentioned bookings growth of 11% sequentially. I believe that was in the certificate business. Can you just give us some more color on what you're seeing in terms of enterprise buying trends? Are they buying components of your solution? Are they buying the full command and control? And what kind of, you know, pricing trends are you seeing in the enterprise buyer right now?

The 11% bookings uptick came in the SSL sert business that we sell to enterprises and that was just, you know, people coming back and renewing for a lot of servers that were coming due. As well as buying for new. The bookings actually in the enterprise side grew by more than that quarter over quarter. But probably off a smaller base. So I think we are seeing very much a renewed interest in that space. And we are penetrating the public sector and financial service markets with less competition than we had in prior years. So I think those things are giving us, you know, pretty good feeling about the trajectory there.

Okay. Thank you.

We will go next to Howard Smith with First Analysis. Please go ahead.

Yes, good afternoon. Just maybe some clarification on the cost of Internet services line, the cost of goods sold there. You've been taking that down fairly substantially, you know, as you migrate over to atlas and I'm just curious, at what point have you driven all the costs out and with the growth in the business, you know, on an absolute dollar basis, that line starts to go up again?

Yeah, I think we still believe we've got another couple of years, of driving costs out, because remember, first we started with the DNS infrastructure going there, good numbers for you to know, I think in 2000, we spent about $37 million on Capex in the DNS business. Just for the constellation. And last year, we spent about 6. So atlas is showing us the, you know, the savings that we had hoped there. We're putting security services on it now. As you're seeing we're about halfway through the transition on telecom but then we will start to build the new things, the voice services and the content services there. So you know, on existing services, I think we've got another couple of years just to run through everything we've got and get that benefit. But don't be surprised to see us spend new capital to put -- to build new services on top of atlas that we don't have today.

Great. Thank you.

We will go next to Gene Muenster, Piper Jaffray. Please go ahead.

Good afternoon, everybody. Just in terms of site finder just revisiting that, any sort of updates or answer bringing it back this year?

I'm surprised we had hadn't been asked that before, Gene. Thanks. We had done, I think on the technical side inhouse, we've done a lot of work in thinking about how to improve the service going forward. And I think we would be ready to do that sometime here in the second quarter. We're still evaluating some of our options as it relates to how to work that through with the community. With ITM and the department of commerce, so I don't think we have any imminent announcements there. But we have continued to work to make sure we know how to make site finder incredibly value to the community at large.

So from a technology perspective, it is basically down, it is just getting the community on board?

More or less. I would say we would be in a position to launch within a 60-90 day period.

Okay. So any -- does that mean it's possible in '04 or probable?

Good question. I think I will reserve comment on that now.

And a quill follow-up on the FX, I know it is not a big impact given international but any thoughts in terms of what the impact was?

A million dollars.

Okay. Great. Thank you.

Thanks, Gene.

Ladies and gentlemen, this does conclude today's question-and-answer session. At this time, I would like to return the conference back to Mr. Gateoff for any additional or closing remarks.

Thanks, operator. Thank you everyone for taking the time today, as always we look forward to talking with you and answer any additional questions you might have. Thank you, and good night.

Ladies and gentlemen, this does conclude today's teleconference. We thank everybody for their participation. You may disconnect at this time.