威瑞信 (VRSN) 2004 Q1 法說會逐字稿

Good day, and welcome to this VeriSign Inc. conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Steven Gatoff, Vice President of Finance and Treasurer of VeriSign. Please go ahead.

Thank you, operator. Good afternoon, everyone. Welcome to VeriSign's first-quarter 2004 earnings call. I'm here today with Stratton Sclavos, Chairman and CEO of VeriSign, Dana Evan, our CFO, and Katie Bare, Director of Investor Relations. 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 the Q1 financial assaults. She'll provide some color and set out guidance for Q2, and we'll then open the call for your questions. We anticipate the call ending at approximately 3 PM.

We would like to remind everyone that other than the historical financial data, the matters discussed today may include forward-looking statements and are subject to the risk and uncertainty described in our annual report and other reports filed with the SEC. Our financial results were released to the newswires after the markets closed this afternoon. The press release, the related financial information discussed on this call and a reconciliation of GAAP and non-GAAP financial information can all be found on our Website, at www.VeriSign.com under the Investor Relations tab. This call is being Webcast live both on our Website and at Streetevents.com.

Before we get started, we would like to note that the VeriSign's management team will be hosting our annual analyst day this coming May 11 here in the Bay Area. You can find event details and registration procedures on our Website. With that, I would like to turn things over to Stratton.

Thanks, Steven, and good afternoon, everyone. Let me add my welcome to all of you attending today's call. As many of you know, we worked diligently last year to exit 2003 with a much improved cost structure and balance sheet, a strengthened management team and a laser-like focus on providing intelligent infrastructure services for the Internet and telecommunications markets. With that baseline established, our objective for 2004 is very straightforward -- profitable growth. As our earnings release suggests, Q1 proved to be a solid start to the year. We are pleased to see modest over-achievement to plan in each of our business units. We were clearly a beneficiary of both the promising macrotrends in Internet and e-commerce usage as well as customer-specific interest in managed security and telecommunications services. While a quarter does not a year make, we believe these trends, if sustained, will provide VeriSign with a platform for growth throughout 2004.

In developing our operating plan for the year, we assigned the same four goals to each business unit. First, increase market share with existing services. Second, introduce compelling new services that leverage our core platforms. Third, secure key wins with tier one accounts. And fourth, expand our presence internationally. As we move into looking at each business unit's performance in Q1, I will use this framework as a backdrop for measuring our progress and results.

With that, let me start with the operating metrics for the Communications Services Group. VeriSign Communications Services provides intelligent connectivity, database, billing and network monitoring services to wireline, wireless and Next Generation carriers. VCS revenue for Q1 came in slightly ahead of our guidance as the loss of the Dobson revenue was offset by increased usage across our other services. As it relates to gaining share with existing products, Q1 proved to be a strong quarter as we handled 10.1 billion database queries, up 17 percent from the 8.3 billion in Q4. We also processed billing and payment services for approximately 6 million wireless users, up 8 percent from the prior quarter, excluding Dobson, of course. In addition, we are now seeing a significant number of requests from both our existing customers and new prospects for a bundled package of services, where we would be replacing competitive point products with our end-to-end solutions. As the telecom recovery takes hold, we expect carriers to establish deeper relationships with a small number of vendors. We believe our product breadth, proven capability and financial strength position us well to be a partner of choice.

With respect to new services, our wireless caller name, wireless network monitoring and lawful intercept offerings continue to attract customer interest in the quarter. Wireless caller name, or wireless Senam (ph), is a recently introduced extension to our successful wireline service. We had several new customer wins in Q1 and have a growing pipeline of prospects. In addition, our Roamer View network monitoring services was chosen for trial by a leading tier one carrier. We hope to complete this test phase sometime this summer and roll into production across their entire network before year's end. We are seeing interest for Roamer View from other international and domestic carriers as well.

We also signed a contract with Cox Communications for the IT packet version of our NetDiscovery lawful intercept service. We believe the demand for CALEA compliance services will grow as existing carriers, cable MSOs and new generation voice providers enhance their networks. VeriSign Communications Services also used Q1 as the launching point for our new intelligent communications, commerce and content services, or IC-cubed platform, as we call it. The GSM Congress and CTIA tradeshows provided the backdrop to announce this new family of services targeted at the wireless and broadband data markets. The offerings include a wireless data roaming service, integrated payment and billing services in partnership with Bearing Point, and expanded SMS and MMS connectivity and interoperability services enhanced by our recent Unimobile acquisition.

We believe the IC-cubed offerings meet communication providers' needs for a fast, cost-effective way to roll out new revenue-generating services. Customer reaction has been very positive to date and we would expect to see incremental revenues from the IC-cubed services in the second half of the year.

With a new sales leadership team in place, led by industry veteran, Sara Vearsley, our focus on tier one providers also showed early signs of success as we expanded our penetration with four of the top wireless carriers in the U.S. The new contracts included wins with wireless Senam, Roam Review and our unregistered roaming services. We are also in the process of proposing the new IC-cubed offerings to major wireline, wireless and cable providers. While tier one selling is characterized by highly competitive and lengthy sales cycles, we feel we are well positioned to continue to make progress throughout 2004.

Our international efforts also continue to take shape in the first quarter, as we had a successful integration of the UNC-Embratel operation in Brazil, and we also saw strong interest throughout Latin America for wireless connectivity, messaging and data services. In addition, we broadened our GSM services base and international partnerships as a precursor to market entry in Europe and Asia later this year.

So summing up Q1 for VCS, we were pleased with the results and feel pretty optimistic about the growing the business through the rest of the year. Looking into Q2, we would expect revenues to be slightly higher than Q1. Excuse me.

Moving to the Internet Services Group, I will use the same growth-oriented framework to discuss our results. The ISG Group contains our security services, payment and naming and directory businesses. As I mentioned earlier, we were definitely the beneficiary in Q1 of some positive trends in Internet usage on a global basis. Our analysis indicates that the Internet ecosystem saw a significant uptick in new business formation and new product introductions as business process migration and international penetration increased during the quarter. As a case in point, our naming and directory services business processed 3.5 million new registrations for .com and .net domain names, up 22 percent from Q4's 2.7 million. Renewal rates also remained strong at 70 percent, enabling the active base of names to climb 6 percent sequentially to 32.3 million from Q4's 30.4 million. We also sold over 107,000 Web certificates and saw our active installed base rise to 414,000, up 8 percent from 384,000 at the end of last year. Obviously, the strong domain name and certificate performance helped fuel the higher than expected growth in our deferred revenue balances. In addition, our payment gateway service now supports 107,000 active merchants, up 5 percent from last quarter. The gateway handled 102 million transactions for an aggregate value of 8.6 billion, a record level.

On the enterprise security front, our managed authentication solution continued to generate interest within the public sector and financial services verticals. New and renewing customers in the quarter included ABN AMRO, Comerica Bank, KeyBank, Fair Isaac, Schering-Plough, McDonald's, Ford Motor Company and the Department of Veterans Affairs. The pipeline activity for Q2 looks equally promising.

It was also a busy quarter in our Managed Security Services or MSS business. We successfully closed the Guardent transaction on February 27, thereby becoming the number one independent provider of MSS services on a global basis. As a combined entity, we now manage or monitor over 2700 devices worldwide, up 10 percent from the fourth quarter. We also closed new agreements with several key customers and partners, including Hyatt International, U.S. Bank and Sun Microsystems. With the integration behind us and momentum in the MSS business building, we would expect to close a significant number of new customer and channel partner agreements in Q2.

In terms of new services, the most significant announcements in Q1 centered around our object naming service for electronic product codes and our strong authentication solutions based on our open authentication or OATH specification. While the market opportunity for Object Naming Service and its associated solutions will be tied to the longer-term adoption of RF ID tags, we believe the market for strong authentication solutions is heating up. We remain on track to conduct our beta testing of the new services in Q2 with general availability targeted for later this summer.

The last area to cover for the Internet Services Group concerns our efforts to expand internationally. As many of you will recall, we embarked on a selective go-direct strategy in 2003. With an initial focus on Japan, Western Europe and Australia, we have now successfully re-claimed marketing and operational responsibility for our SSL certificates and managed authentication services in key markets. Our results in Q1 validate this strategy as we surpassed our bookings plan in each theater and saw 30 percent of security services revenue generated internationally. This strong performance combined with the recent acquisition of the EuroTrust SSL assets lead us to believe we will see continued momentum in Q2 and throughout the year.

So all in all, the first quarter turned out slightly better than we had projected for the Internet Service Group due to strong external trends and internal execution. While it's still very early in the quarter, it does appear that the positive dynamics are holding so far here in Q2.

With that, let me now say a few words about our thoughts on Q2 and the rest of the year. As I said at the beginning of my remarks, Q1 proved to be a solid start to the year. Many of you will remember that on our Q4 call, we gave a normalized exit run rate of approximately $216 million per quarter when network solutions in Dobson were eliminated. We saw organic growth of 227 million in Q1, a 5 percent sequential increase excluding the Guardent revenue contribution. We are pleased with this baseline for Q1 and believe that we will be able to deliver on our goal of growing revenue sequentially in each of our businesses throughout the remainder of the year. We will remain focused on executing our growth strategy of gaining share in the core, launching compelling new services, expanding our penetration in tier one accounts and broadening our reach internationally. An economic recovery and a continued uptick in Internet usage in e-commerce growth should help further re-energize our core businesses in common net, Web certificate and payments. In addition, our competitive position in the telecom space continues to strengthen, given our end-to-end capability, our infrastructure advantages and our financial strength. Given the positive customer and partner feedback to date, we are also cautiously optimistic about our new offerings in strong authentication, MMS, wireless data and RF ID.

And lastly, our international channels are signaling a similarly positive outlook. Dana will provide our guidance for Q2 in a few minutes. Should our current business trends continue or perhaps even strengthen further during the quarter, we would likely be in a position to provide not only Q3 but also, rest of year guidance on the Q2 earnings call. While there remain many economic uncertainties in the U.S. and abroad, we do have more confidence now in our ability to predict network usage characteristics and the spending intentions of our global customer base. So with that, let me thank you for your attention and I'll turn the call over to Dana to go over the financial detail and guidance.

Good afternoon, everyone. We are pleased with VeriSign's first-quarter results, particularly with the momentum we saw in certain of our businesses, as evidenced by healthy sequential growth in both bookings and core baseline revenue. This topline performance drove better than anticipated operating income and EPS for the quarter, as well.

Before going into the detailed results, I would like to remind everyone that we sold our Network Solutions business in Q4 and therefore, Q1 was the first full quarter of operations that did not include any Network Solutions results. Additionally, our acquisition of Guardent closed at the end of February and therefore, our financials for the quarter reflect approximately one month of Guardent activity. We saw no revenue in the quarter from the Unimobile transaction, which closed in mid-March.

So let's turn to the detailed results starting with the income statement. On a consolidated basis, VeriSign reported $229 million of revenue for the first quarter, ahead of our guidance of $220 million and up from the core baseline revenue we set in Q4 of $216 million. As we had stated on the January call, we have not factored any Guardent results into our guidance. We closed the Guardent transaction at the end of February, resulting in a revenue contribution in Q1 of approximately $2 million. Therefore, as Stratton indicated, our Q1 revenue grew organically, approximately 5 percent from the Q4 baseline. (technical difficulty) the Q1 revenue into VeriSign's reporting units, the Internet Services Group delivered approximately $130 million of revenue for the quarter, ahead of our guidance of 123 million. Excluding Guardent, ISG revenue for the quarter would have been approximately 128 million, which is also up on an apples-to-apples basis from 120 million in Q4. The net increase here was driven by the strength in both security and naming and directory businesses as Stratton just discussed.

Our Communications Services Group recorded $99 million of revenue for Q1, ahead of our guidance for $97 million. As you know, Q1 was the first full quarter without any revenue from Dobson. While this represented a decline of revenue from Q4 of approximately $1 million, we were pleased to see incremental contribution from our other core services.

Moving to our international operations, the percentage of total revenue that was driven from our international customers, affiliates and subsidiaries was approximately 16 percent for Q1, up sequentially from 13 percent in Q4 off of strong performance from our security business in both Japan and Europe and the exclusion of MSI for a full quarter, which was primarily U.S.-based revenue.

Looking at cost of revenues and gross margins, our cost of revenue for the first quarter was $91 million, down from 100 million in Q4. The majority of the decline can be attributed to the sale of MSI and the cost savings from our restructuring. This translates into a 60 percent gross margin for Q1, relatively flat with last quarter and consistent with our guidance.

Turning to operating expenses and related items, total operating expenses for Q1 were $92 million, down from 95 million in Q4. The sale of MSI drove the majority of the decline here, as well. Pro forma operating income was $46 million for the first quarter, translating into a 20 percent operating margin, which came in at the high end of our guidance of 19 to 20 percent. The margin declined from Q4 as we had anticipated and was primarily a result of the revenue mix in Q4 and some one-off time items we had spoke about on the January call.

On that call, we also discussed our restructuring initiatives related to the NSI enterprise sale and other business realignments across the Company. In the aggregate, those initiatives were anticipated to result in total restructuring charges of approximately 75 to $100 million over a several-quarter period. During Q1, we took a restructuring charge of approximately $15 million, in line with our expectations of 10 to $20 million, primarily related to employee severance and asset impairment. Actual cash out for these charges was a bit higher than anticipated due to lease buyouts and payments for abandoned facilities, and was approximately $8 million. We would expect to see continued restructuring charges in Q2 in the 5 to $10 million range.

As it relates to headcount, we ended the quarter with a total employee base of approximately 2,600 people, up from 2,470 at the end of Q4. The biggest driver for the headcount increase was the acquisition of Guardent, which really added approximately 150 people to the base. VeriSign recorded pro forma pre-tax income for the first quarter of $50 million, translating into pro forma earnings per share for Q1 of 14 cents, a penny ahead of our guidance. This earnings per share has been calculated using a fully diluted weighted shares outstanding of approximately 248 million shares. I am also pleased to report that in Q1, VeriSign delivered GAAP net income of approximately $9 million, which drove a GAAP EPS of 4 cents for the quarter.

Moving onto the balance sheet and cash flow items, cash balances consisting of cash, cash equivalents and short-term investments were a healthy $722 million at March 31, representing a $20 million decrease from Q4, which was attributable to the $71 million of cash paid for acquisitions, offset by cash flow from operations. Our accounts receivable balance increased $7 million to 107 million, due primarily to the Guardent acquisition, which added 5 million as well as the higher than expected bookings in the quarter. This translates into a net DSO for Q1 of 36 days, below our targeted range of 40 to 50 days. Total deferred revenue on the balance sheet came in at $368 million at the end of Q1, an increase of 29 million or 9 percent over last quarter and ahead of our guidance. The significant growth here was driven off of strong bookings across our ISG businesses. Domain names registered in our naming and directory business drove more than 50 percent of the increase, followed by solid bookings growth in our authentication services business.

Moving onto cash flow metrics, operating cash flow for the first quarter was approximately $48 million. This included 8 million of cash payments related mostly to lease buyouts from restructuring that was about 6 million higher than we had anticipated. Key drivers of operating cash flow in the first quarter were the strong bookings, as well as solid operating income for the quarter. These were partially offset by an over $40 million decline in accounts payable related to the 2003 bonus payouts, the cash paid out for restructuring I just spoke about and lower than anticipated CapEx spend in Q1. Speaking of CapEx -- expenditures, for the first quarter -- they were $15 million, spent primarily on hardware and software for new market development programs and facilities expansion in Arnot. This compares to approximately $40 million spent in Q4. That concludes the Q1 financial review. Let me turn to some guidance for next quarter.

We would look for revenues in Q2 to conservatively be in the $235 million range. This guidance reflects the expectation that the Internet Services Group revenue would show growth to approximately 135 million, demonstrating an increase from both our core security and naming and directory businesses. A full quarter of Guardent would contribute an incremental $4 million of revenue to the 2 million contribution you saw in Q1. In our Communications Services Group, we would anticipate Q2 revenue to be up modestly to $100 million for the reasons Stratton described earlier. As it relates to margins for Q2, we would expect gross margin to be relatively flat at 60 percent and the revenue combined with an expectation for relatively flat operating expenses would anticipate operating margins coming in at approximately 20 to 21 percent, consistent with this quarter.

Looking into Q2, we would expect the fully diluted share count to be approximately 249 million shares. It is reasonable to assume that share count can grow approximately 1 million shares each quarter throughout the remainder of the year. Taking into account the revenue and margin guidance I just gave, we would expect earnings per share for the quarter to be approximately 15 cents, using a 30 percent effective tax rate and a penny ahead of the current First Call estimate.

Now moving onto some balance sheet guidance, we were pleased with the deferred revenue growth we saw in our core businesses in Q1. As we look to Q2, we anticipate deferred revenue to conservatively grow approximately 15 to 20 million in the quarter.

Turning to operating cash flow, we would expect to return to cash flow generation in a base range of 60 to $70 million again in Q2, as we anticipate positive working capital contributions from the balance sheet during the quarter to also contribute to the cash flow generated from strong operating income. As we look out over the remainder of the year, we would fully expect operating cash flow to remain at least the baseline level of 60 to $70 million per quarter.

Our outlook for capital spending for the year indicates an expected total capital expenditure of approximately $110 million. We would expect capital expenditures for the second quarter of approximately 25 to 30 million. And with that, I'd like to open the call for your questions. Operator, may we have the first question, please?

(OPERATOR INSTRUCTIONS). Rob Owens, Pacific Crest.

What was the dilution experienced during the quarter from Guardent; was there any?

No, not really, because we just saw 2 million of revenue and it's relatively neutral to earnings.

Okay. And Stratton, could you walk me through .net a little bit? I know that expires in I think June of '05. How would a competitive bid process work? Is there any decision around pricing or capabilities? And what would another registry need to show? Would it be commensurate technical stability or something else in order to potentially win that business?

I think, Rob, it's hard to kind of predict exactly what the process will look like other than in our contract, as it relates to .net, it does say that in a competitive bid that there will be certain performance criteria that any bidder must demonstrate, including financial wherewithal, demonstrated technical ability to handle such a system, demonstrated ability to hit service levels and that type of thing. So .net is somewhere a little shy of 5 million names now, 4 and change. And that's a pretty big TLD. It's certainly much bigger than .biz or .info. So I think it would be difficult for those types of parties to meet some of those criteria at this point in time. We will see what happens by '05. I do know that some of the current vendors offering those new TLD services are missing their SLAs more than half of the time. So again, we are going to put in a very serious and we think, well structured bid for .net and let that speak for itself.

Mary Meeker, Morgan Stanley.

A couple of very high-level questions. One, Stratton, over time, you've been pretty acquisitive. If you could give us a sense of what -- how you look at acquisitions over the course of the next couple of years, given your position in the market and given the landscape, that would be great, that would be landscape -- not land scrape! The second question is, you've indicated you'll get some visibility for the second half of the year. Clearly, you're more comfortable with the business outlook and your ability to have a handle on the direction. And the question there would be, give us an inch we'll take a mile, do you think you might kind of midyear be willing to provide some guidance for the next year? And I ask that based on your confidence in the longer-term visibility in the business. And the third question, Stratton, you talked a little bit about voiceover IP, could you maybe spend a minute or two giving us your thoughts on -- at a very high-level, how that may play out over the next one to three years? And more specifically, how it will impact your business. Thanks.

Take a breath there, Mary. Okay. You know, on the acquisition front, I think we've been pretty clear on articulating that through the network solutions registry and the Illuminet assets, those were very strategic platforms that we needed to build out this intelligent infrastructure model that we wanted. I think since then, what you've seen us do is go in and either acquire like businesses, like the MSS business of Guardent, which added customers and scale to our platform, or in the case of Unimobile, expanded our international reach. I think that's really the thrust for the next couple of years for us is, now that we have the core assets in place and the platforms built and operating, we would be looking to throw more volume at them either through customer acquisitions of like entities or international expansion into really rev up, especially in the telecom area, our ability to penetrate international.

On the visibility piece, give an inch, you take a mile, clearly, if you look back into '99 and 2000, some of the very predictable parts of the VeriSign business model were in looking at domain name growth and in looking at the Web certificate growth, not only because they fueled deferred revenue but because we believe they are indicators of a more general up-take in Internet usage and e-commerce growth. And I think that's what we are suggesting here as we get through the end of the second quarter is, not only will we be able to determine better what the ISG revenues are going to look like because of the deferred revenue, we will also be able to really understand what's going on in the Internet ecosystem. And you know, as you and I have talked many times before, quietly under the covers of a .com meltdown, usage on the network has been going up dramatically. And we saw in Q1, a lot of activity re-focused on new business formation, new product introduction and international expansion. So to answer your question about '05, I think we would be willing to give some high-level color, at least in particular areas that are impacted by those kind of dynamics coming into the second half of the year.

On voice, you are going to see, obviously, a lot of activity from a lot of vendors. And we are probably due for another round of hundreds of press releases that all sound the same from lots of vendors, large and small. Whereas VeriSign typically has found our niche is when there is lots of activity that would be best served by some third-party intermediary getting in the middle and helping route calls or helping route addresses, helping secure them and helping translate them. So our goal in voice is very much like our goal in RF ID, is to be in the middle of the mix and as those markets emerge, be the hub by which those messages traverse. So look for us to do things with our registry assets there that will be very much like what we do in GMS and the domain names, of being a registry and helping carriers and enterprises find each other, connect and communicate through those services. I will probably hold off on saying more. But you can look for some product announcements from us later this year.

Todd Raker (ph), Deutsche Bank.

Hey guys, nice quarter. Stratton, can you address the status of the ICANN lawsuit and your ability to introduce new products and kind of just update us on what you're thinking on Site Finder?

As it relates to the lawsuit, Todd, I mean, as you would expect at this point, it's really in the lawyers, in the court's hands, and there's lots of back and forth. We make motions, they make motions, we may counter motions and on and on. So I think over the next couple of months, there was a lot of that going on. We feel very confident in the case that we've put forward and we will see some activity there in the summer. Meanwhile, it doesn't really impact our day-to-day working in common net. So as it relates to new service, we continue to look for ways to bring aggregated services to the registrars. Whether it's things like the Wait List service or it's things like helping them distribute country code TLDs and the rest -- we're going to continue to do those things. I won't make any comments right now on Site Finder and its infrastructure. We continue to have lots of ideas around how to use that infrastructure to provide new services. And you'll see those make their way out the door over the course of the year. I guess as it relates to use of the of the DNS assets and use of the DNS technology in other areas, it is the platform, as we've said many times, for what we will do in RF I'd, what we'll do in voice, what we'll do in wireless data. So in that sense, we're full steam ahead outside any reasonable boundaries of what ICANN would argue with.

And turning to the telecom business, two questions -- one, can you just touch on the pricing environment? And can you talk more broadly about how the carriers are thinking about this outsourced versus build it themselves or buy it decision -- in which direction you think the industry in general is going to go?

Yes, I think in pricing, it's generally been a discussion around database queries, as you'll remember. And so in that, let me give you a stat for Q1. Volumes were up 70 percent quarter-over-quarter and revenues were up 12 percent or 13 percent. So that shows you that you know as you get to the higher volume, you see some price economics kick in. But again, it does feel more like the more traditional database query business we had where volumes were growing enough to outstrip those price pressures. We don't have any major pricing contracts coming up this year, as we've stated. And so what you're seeing is basically the flow through of the contracts we re-negotiated over the last two years.

Our position or our belief as it relates to what carriers will do as they come back out and spend, is that they will look for a relatively few number of vendors that can get them to market with revenue-producing services very quickly. It's not going to be about cost economics as it may have been over the last two years. It's going to be about getting to market with another service they can put on a customer's bill. And so the strategy Vernon is deploying there is really one of bundling all the collective VeriSign services together to give people a one-stop shop, much like we're doing in security on the enterprise side, and leading with the offerings that we think are really front and center for folks like wireless data or broadband calling and voice calling services.

Great. Thanks guys.

Gene Munster, Piper Jaffray.

Just a follow-up on Site Finder side. So is your anticipation that the odds are that Site Finder will be back in '04? Obviously, there's a lot of big old rumblings are going on there. Do you feel that it will or most likely will not be back in '04? And second is that assuming it does or doesn't, outside of that question, can you just talk a little bit about what that business model looks like in terms of maybe operating margin?

Yes, I guess I will reserve comment on whether or not it will be back in '04 or not, given that we are in the middle of a legal suit on that. So sorry about that. But Gene, I won't comment on it. As it relates to the model for a service like that, it is very much like everything else we try to do, which is, we have a core platform in the DNS service. What we'd like to do is build a new service on top of that that leverages the platform, is capable of very, very high volume. And so any revenue associated with it would be incrementally more profitable than kind of the base revenue. So you can assume that revenues off of Site Finder or any service like it which is leveraging a platform that we paid for through other means, is going to be a very high margin service. Site Finder certainly was for the few weeks that it was on.

Just a follow-up, and I know you can't -- you don't want to say whether or not it's going to be back, but could you at least talk about when some sort of announcements might come, in terms of the legal goings?

I would expect you'll see dueling press releases over the course of May and June, right, based on certain court activities. There are certain court deadlines for responses to claims and vice versa. So that will happen in May and June. My bet would be it's kind of midsummer before anything substantial happens.

Okay. And Dana, in terms of Guardent contribution, you did say it was 2 million for one month in March. And then did you say 4 million for the full quarter for June; is that correct?

No, I said an additional 4 million added onto the 2 million of contribution in Q1. So, it's 6 million in the quarter.

So just basically a flat line?

That's right.

Okay, great. Thank you.

Todd Weller, Legg Mason.

Stratton, I was wondering if you could talk a little bit more about your strategy and the strong authentication kind of with the USB play and your plans there?

Yes, I mean I think it -- let me start at 50,000 feet and drill down. I think it's obvious that strong authentication is becoming more and more real, as a both need and demand item in the security market. Whether it's because of identity theft at places like eBay and others, whether it's because of fishing, whether it's because of just broader use of the network in general, VPNS that sells, strong authentication of users, devices and networks is coming. Microsoft knows that. Bill Gates talks about it all the time now, are stated (indiscernible) in their business. So we are a big believer that strong auth is about to have its day. That being said, our play there is in multiple fronts. We will have user-type authentication with our traditional PKI services and now the token based-service, which provide, we think, a universal authentication idea, where you have got one-time pass, where you've USB, you've got SIM chip manufacturing economics and you've got PKI all in one solution that will sell at probably half the price of competing offerings. We also will link it into a directory infrastructure in the clouds that makes it much easier to deploy so that you don't actually have to build or have to buy or build any servers at your location. You can just tie it into whatever middleware you use for directory. So we think customer demand from -- is going to be much broader, it's a much bigger pie to go attack right now than it ever has been. And we think this particular solution is probably going to be competitively disruptive.

Does that change how you look at kind of a sales channel strategy? I mean if you look at RSA, they have a healthy portion from an indirect channel?

I think the answer to that is yes and no. I think if you go look at the largest deployments there, they are mostly a direct model and we are certainly pursuing a lot of direct activity. Our beta list is got a lot of large and small companies that we're going to directly. But I do think we would also have to avail ourselves of a channel strategy there, much like we've done on the SSL side with ISPs, we would go look at the same kind of bar structure that other vendors like NetScreen or RSA or others have used to get into the small and medium businesses.

The last question is on the registry side. What kind of revenue growth do you see in that business? I think we've all looked at that as a slower growth business, but active names are up about 11 percent year-over-year. So what kind of growth are you looking for there?

I think we had projected it at kind of a 10 to 15 percent range for this year. And I think we are going to do significantly better than that.

Phil Winslow (ph), Credit Suisse First Boston.

Hi, good quarter, guys. Most of my questions have already been asked. But just turning very quickly to your guidance on Guardent. What do you view sort of -- of the gross margins on that portion of the business?

Well, first and foremost, you have to understand, the Guardent MSS business and the VeriSign MSS business became the same thing on February 28. It's the fastest integration we've ever done. You know, quotas assigned, people redistributed, operations kind of integrated. So you have to look at it at our overall MSS business channel. And I'll let Dana talk about gross margins.

We don't break out the gross margins as components of products within the group. But the Internet Services Group has a 78 percent gross margin this quarter. And that being said, obviously, it's a growing business. So in our new and growing businesses typically have lower gross margins than the Company average because you have got -- you've built the infrastructure and you're ramping up volumes to see the operating leverage there.

I guess when we looked at getting into that space in a bigger way and, hence, the Guardent acquisition, we had done a lot of modeling of what it took to be successful and profitable there. And it became pretty obvious that you need to have at least 1500 to 1800 devices under management to even get to profitability. As you heard us say on the call, we have 2700 devices under management right now, and we are expecting that to grow about 10 percent a quarter.

All right, great. And just last question, turning to the balance sheet very quickly, I'm not sure if Guardent had any impact on deferred revenue this quarter?

No, they did not.

Okay, great. Thanks.

Walter Pritchard, Soundview.

Two questions for you, one, if you could just give us the upsell and renewal rates on the certificate side of the business?

Upsell on the -- was 59 percent, 3 percent higher than last quarter, and again an all-time record. I don't actually know the renewal rate.

I believe it was 67 percent.

Sixty-seven percent.

And where do you think the upsell rate goes? Does it keep just keep marching up a couple percent every quarter or does it level off at some point here?

No one will remember this, but I used to say I'd be thrilled if it got to 35 percent. So it's now close to 60. Yes, I think it would probably level off. My bet would be somewhere around 60 percent. But our team continues to find ways in packaging and bundling this with our other services to really I think do some great and creative marketing things. So in many respects, you know, if it keeps going up, that will be great. We plan for it generally to be around 50 percent. So anything above that tends to be gravy.

Okay. And then just my second question, on the network solutions independent company now, do you have any financial relationship with them in terms of referral fees or anything? I noticed you still have a link on your Website that lets you pass people to them.

No, I think we're all looking around at each other in the room. And if there is some reciprocal stuff, there's -- you know, we pass them -- we just pass them traffic. And I think on certificate, they offer those up. But I think each party is responsible for selling their own, right? It's just a reciprocal agreement to, we will pass them traffic if they pass us traffic.

Greg Moskowitz (ph), Susquehanna Financial Group.

Hi, yes. Actually this is Greg Dunham (ph) on behalf of Greg Moskowitz. And most of my questions have been answered as well. But you commented a little bit about gross margins in the MSS business. And I guess I want to follow up with what kind of pricing environment are you seeing there?

I think pricing in MSS -- you know people have said oh, there's price pressure there or (ph), there isn't. My view has been that there really is not a mature MSS market that we're all selling into to really understand what the pricing dynamics are. We have seen deals come across in the last quarter that have been higher in terms of a per device monitoring fee than we've ever seen and we've seen larger deals that have got some discount associated with them, and so you get lower. So I don't think there's "pricing pressure" in the market. I do think you are seeing smaller vendors who are running out of runway get more desperate. But in this particular marketplace, I think customers, because it's security and because it's a managed service and because they are going to have new compliance requirements, customers are generally not looking for the low-priced bid right now. They are looking for the reliable vendor who's going to be there at a reasonable price. And we think that's where our offering kind of fits.

Daniel Cummins, UBS.

Thank you. Stratton, I wrote down your view that you had 5 percent organic growth in the quarter. And the tone of your comments on the current quarter were also pretty optimistic. So if we looked at the 2.29 I guess and sprinkled in a few more for a full quarter of Guardent, wouldn't we be at guidance of 2.40 to 2.45 for the current quarter, roughly? And if you did do that, how far past 21 percent do you think you could fail?

Well, I mean, to the first part of the question, I think we have been well served over the last year or so to be pretty conservative about how we look at this stuff and to make sure we kind of tell you what we did instead of what we're going to do in terms of all these new initiatives. So we are pleased with the traction right now. The first three weeks of April, for example, in the domain name side have been at or above the averages we saw in Q1. So that's good news. That means we are likely to overachieve a little bit there. SSL seems to be doing similarly well.

So in essence, we are definitely seeing an uptick in what used to be the kind of day-to-day transactional services at VeriSign that give us greater visibility. In the telecom side, we have a lot of new initiatives. And as we have learned over the last year, even though the customer interest is very, very high and we are in contract negotiations with tens of customers at any given time, the ramp time to revenue for some of those services does take longer. It can take three, six, even nine months in some cases. So we're being a little bit conservative in forecasting out the ramp time on new contracts. For example, the tier one carrier we've got for the network monitoring service, that's a very large carrier. And if we get their whole network, right, it will be a significant multi-million dollar contract for us. But we know it's going to take us through the summer to get through that trial.

So the shorter answer is, yes we believe there is some potential upside to the 2.35, but we think it's a good conservative number to start out the quarter with. As it relates to the margin side, you know, we clearly will look when we have overachievement to use some of that to the bottom line. We'll also take some of it and invest in development of the new services, as we will with voiceover IP and RF ID. So to your margin question, we've targeted long-term margins at 25 to 30 percent. We're still committed to delivering that. But we don't feel that there's a huge rush to get there if we have a few pennies extra every quarter.

Okay. if I could just ask a quick follow-up. Is it unthinkable that you could get a little past let's say 2.40 even if comp services comes in like 1.01 or something?

You know, I'm just going to stick with what I said. Our guidance is 2.35. We feel that's relatively conservable and achievable.

And it looks like we have time for only one more question. We'll take that question from Sara Friar with Goldman Sachs.

Not to keep beating a dead horse on Guardent's guidance, but just to you know, think about what you said over the call, you said that is a good and growing business, and it seems like that's what we're hearing from the market. (Indiscernible) pricing is building a little bit, wild-West-ish, but certainly not too much pricing pressure. And yet if I look at your guidance out of what you've done in this March quarter, you literally are just taking it times three for June. Why are you being so conservative there? I mean obviously you bought Guardent because you think this is a growing area.

You know, Sara, I think the candid answer is because we can be. I think that Guardent is -- was a leader in that space. The VeriSign services with Merrill Lynch and U.S. Bank you know, are obviously two of the bigger deals that have gotten done in that MSS space. But those sales cycles remain unpredictable. So we think Guardent can do -- it really isn't Guardent any longer. It really is the VeriSign MSS business. We think it can do better than that. But remember, you have to not just sign the contracts; you actually have to migrate the devices onto our network. So revenue ramp, right, is always going to be delayed from contract signing there. For example, it took us almost a full year to get all of the Merrill Lynch devices on the network. In the U.S. Bank case, we've just have begun to start to get those devices on. So I think that's always been the case in everybody's MSS business, and Guardent's included. And we are just being conservative about the activation time of the devices on our network, not so much conservative about the -- our ability to book new deals, which I think will be significantly above what those numbers would suggest.

Okay, got it. And then on the token side, I think you kind of said it would be disruptive to the market. What's kind of your competitive edge in going to market, is it -- do you think your technology is better, are you going to go with some sort of pricing, kind of more aggressive pricing? Is it the partnerships you already have with folks like AOL and Microsoft? I mean what is it that you think will give you that edge?

Well, I mean you know, normally, the definition of a disruptive technology is it has advantages in all of those areas. It's going to be lower-priced. It's going to be easier to deploy because you won't have to install proprietary infrastructure in your enterprise and it will tie into your Microsoft, your Java or your IBM WebSphere environments. And then lastly, from a user perspective, it's kind of a one-size fits all in that it has PKI, a onetime password and a SIM chip. So it is very easy to use in an SSL DPN, in a carrier's network with radius architecture or in an enterprise that's got some other kind of remote access probability. So we think it hit -- disruptive means it hits on all those fronts, and we hope to prove that out here in Q2 and Q3.

Terrific. And then just finally, the ONS side RF IDs (indiscernible) we've talked about -- are you seeing any pickup in ONS right now given that you're kind of our one view into what's happening around that database?

We're not by our contract allowed to disclose what's going on with those registrations. What I will tell you is from a pilot perspective, we're being invited into a lot of pilot engagements right now so that people can experience, right, the power of being connected to the ONS network versus having to do point-to-point connections. So there's a lot of interest. And we'll say some more about that at analyst day.

Great, okay. Thanks, a lot.

And at this time, I will turn the conference back over to you for any additional or concluding remarks.

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

And that does conclude today's conference. We thank you for your participation, and have a great day.