威瑞信 (VRSN) 2004 Q2 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. Please go ahead, sir.

Thanks, operator. Good afternoon, everyone. Welcome to VeriSign's second quarter 2004 earnings call. I'm here with Stratton Sclavos, our Chairman and CEO; 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 Q2 financial results. She'll provide some color and guidance for the remainder of 2004, and we'll then open the call for your questions. We anticipate the call ending at about 4 PM.

We remind everyone that other than the historical financial data, today’s discussion may include forward-looking statements and are subject to the risks and uncertainties 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 management team will be participating in various investor conferences over the coming weeks. Event details can be found 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 our results indicate, we continued to see an increase in overall Internet, e-commerce and wireless activity in the second quarter. As both an enabler and beneficiary of these trends, we were able to achieve solid performance and organic growth across all our lines of business during the period.

In addition, the Jamba! acquisition provided some incrementally positive results in just its first month under the VeriSign banner. While there have clearly been some mixed signals in the market regarding technology spending over the last few weeks, we saw no appreciable negative change in customer buying habits or close rates during the quarter. We see this as indicative of a continued mindset shift to procuring buy as you go managed services for key infrastructure needs.

We also seem to be winning a disproportionate share of new opportunities as customers look to buy from the established leader in key segments. We will certainly be watching the external trends closely, especially in the heat of the summer, but we do feel incrementally more positive coming into Q3 and have seen good sales activity through the first three weeks of the quarter.

With that, let me dive into the Q2 highlights and operating metrics for the business units, starting with the Internet Services Group. The ISG group contains our naming and directory services, our authentication and managed security services, and our payment gateway services. As I mentioned earlier, we were definitely the continued beneficiary of some positive trends in Internet and e-commerce activity in Q2. This led to solid performance in our core offerings for domain names, SSL certificate and payment gateway services.

In our naming and directory services business, for example, we processed 3.4m new registrations for .com and .net domain names. We also saw renewal rates pick up slightly over the 70 percent mark, as another 4.4m names were renewed or extended. The active base of names at the end of the quarter stood at 34m, up 5 percent sequentially and almost 12 percent year to date.

We also sold over 105,000 SSL certificates during the quarter, and saw our active installed base rise to 430,000 up 4 percent sequentially from 414,000 at the end of Q1. In addition, our upsell rates in the quarter hit 60 percent for the first time. Obviously, the strong domain name and certificate performance once again helped fuel the higher than expected growth in our deferred revenue balances.

In our payment gateway business, we saw a net increase of 5,000 new customers, bringing us to a total of 112,000 active merchants, up 5 percent from the last quarter. The gateway handled 101m transactions, for an aggregate value of $8.5b, essentially matching Q1’s record levels.

On the enterprise security front, our managed authentication and security solution had a solid quarter with new wins and renewals that included HSBC Bank, Merrill Lynch, U.S. Bank, Avery Dennison, The University of Texas, Bank of Tokyo, Telstra and Reuters. The win at HSBC in particular, was especially gratifying, as we are replacing a competitive system that has been in place for many years and that had issued hundreds of thousands of end user certificates.

On the PKI front, we also received official word last week that we have been certified under the federal government’s shared service provider program. We are currently the only commercial entity to have passed the rigorous test put forth by the federal Identity Credentialing Committee. With this certification in hand, we hope to pursue additional public sector activities in the third and fourth quarter.

In the MSS business, we also signed channel partnerships with MCI and AboveNet to be their main supplier of managed security services for both their hosted and in-premise customers.

As many of you will recall from our analyst’s day in May, we also had quite a number of new services slated for introduction in the second half of the year. We recently announced the availability of our new anti-phishing and email security solution. In addition, the beta testing of our new strong authentication token end services is proceeding as planned and is still on track for general availability in September.

We will also be updating our MSS platform as we head into the fourth quarter with significant enhancements to the correlation engine, network intelligence monitor and customer portal. With these new and improved offerings, we feel we will be in a great position by the end of the year to provide our customers with a full range of managed security services for their users, networks and digital communications.

We also remain on-track with our long-range development efforts for electronic product code and RFID services, and plan to provide a status update towards the end of Q3.

In summary, the second quarter was a success for the Internet Services Group, as we met or exceeded our operating goals and made substantial progress on key strategy initiatives.

Now let’s move to our Communications Services Group. CSG provides intelligent communications, commerce and content, or IC cubed services to wireline, wireless and next generation carriers. CSG revenues grew 4 percent organically quarter over quarter, as we continued to benefit from increases in overall wireless communications activity. This led to solid performance and volume growth in both database and wireless billing services during the period.

In addition, we are beginning to see modest incremental revenues from our newer service offerings such as wireless caller name and net discovery, which have now been active at various tier 1 and tier 2 carriers.

Jamba!’s performance in June was also slightly ahead of our expectations. As it relates to business metrics for the group, we delivered over 12.2b database queries in the quarter, up 20 percent from the 10.1b in Q1. We also processed billing and payment services for approximately 6.3m wireless users, up 4 percent from the prior quarter. The bundling strategy that we talked about last quarter also continued to gain traction as we saw two mid-sized carriers commit to VeriSign’s end-to-end offerings, displacing competitive point products in both cases. Our sales teams are pursuing several other medium to large sized prospects that would look to convert in the second half of the year.

Our new product pipeline remains full in the CSG group as well. During Q2, we announced our MSO Connect service. MSO Connect is a highly scalable directory service, targeted at cable operators who need a cost optimized connectivity solution for routing voice-over-IP calls. We would expect to be in trials with one or more MSOs by the end of the year.

We are also gearing up for major updates to both our post and prepaid billing platforms in the first half of 2005. These enhanced services are being designed to meet the next generation needs of carriers and enterprises, and will bring together everything we know about wireless voice, wireless data and Internet-based payments.

The big news in the quarter was clearly our acquisition of Jamba!. As we discussed when we announced the transaction, Jamba! will help us strategically build out the content piece of our IC cubed platform, and give us a beachhead for expanding our communication services internationally.

As you may recall, Jamba! currently has relationships with 13 European carriers serving nine countries. In addition, the company has forged distribution agreements with over 240 content publishers, and has amassed a product catalog with over 50,000 unique, downloadable products. We believe Jamba!’s current success is derived from its ability to provide a complete, end-to-end offering for wireless content. The company’s services include content acquisition, on-boarding, handset formatting, demand generation and a variety of billing and payment options.

Subscribers benefit from timely and seamless access to the most popular content, while carriers see immediate returns in terms of increased ARPU and customer satisfaction, especially within the highly desirable youth market. The worldwide market for wireless data services is expected to reach $10b by 2006, and to grow at a compounded annual growth rate of over 40 percent for the next five years.

Fueled by new handsets, networks and applications, we believe the market will hit some very interesting inflection points in 2005 and 2006, especially as carriers continue to shift their focus from cost-containment and operating efficiency to new service introduction and revenue growth.

With a month under our belts, we are pleased with both the integration progress and the revenue trajectory at Jamba! There is a lot more work to be done, of course, but we are off to a good start. In fact, given June’s performance, we are raising our guidance slightly for Jamba! in the second half of the year. We would now expect to see Jamba! contribute at lease $75m in revenues for the July through December period, up from $70m previously. We also remain on-track to bring the platform to the U.S. in the first part of 2005, and have received significant indications of interest from our customer base. We look forward to providing another update on Jamba! on next quarter’s call.

So summing up Q2 for CSG, we saw another quarter of solid execution in the core, and are very excited about our prospects in wireless content. With that, let me now say a few words about our thoughts on Q3 and the rest of the year.

At the midpoint of the year, we feel we’ve executed reasonably well on our growth strategy. We’ve seen our core recurring services in both the Internet and communications groups grow organically. We’ve introduced a number of new products that customers are evaluating. We’ve more deeply penetrated some of our largest accounts, and we’ve expanded our international footprint and scale. So far, so good.

As we enter the second half of the year, we’re comfortable with the momentum and dynamics of our business, but mindful of the external factors that could impact us. We’ll be watching those factors closely throughout the summer. At this point, however, we feel we have the visibility we were looking for in order to broaden our guidance window through the end of the year. As promised, Dana will be providing both Q3 and Q4 guidance after she runs through the Q2 numbers in detail. Thanks very much for your attention, and now here’s Dana.

Thanks, Stratton, and good afternoon, everyone. We are pleased with VeriSign’s second quarter financial results and the continued momentum we saw across all of our businesses. This was evidenced by strong sequential growth in bookings, revenue, and operating income, which also drove healthy cash flow generation in the quarter.

Before going into the detailed financials, I would like to remind everyone that our acquisition of Jamba! closed on June 3, and therefore the Q2 financial results include approximately one month of Jamba! activity. So let’s turn to the detailed financial results, starting with the income statement.

On a consolidated basis, VeriSign reported $256m of revenue for the second quarter. Included in this amount is $13m of Jamba! revenue, which was not factored into the guidance we gave on last quarter’s call. Excluding Jamba!, Q2 revenue would have been $243m, up from the $229m reported in Q1, and ahead of our guidance of $235m.

Segmenting the Q2 revenue into VeriSign’s reporting units, the Internet Services Group delivered approximately $139m of revenue for the quarter. This represented a sequential increase of $9m from the $130m reported in Q1, and was also ahead of our guidance of $135m. The increase you see here was driven by continued growth in core revenue streams for both the security and naming and directory businesses that Stratton just discussed.

Our Communication Services Group reported total revenue of $117m for Q2. Excluding the Jamba! $13m revenue contribution, the core VCS business showed sequential growth from the $99m reported in Q1 to $104m for Q2, ahead of our guidance for $100m for the unit.

Moving to our international operations, the percentage of total revenue that was driven from our international customers, affiliates, and subsidiaries was approximately 19 percent for Q2, up sequentially from 16 percent in Q1, driven primarily by the addition of the Jamba! revenue in the quarter.

Looking at cost of revenues and gross margins, our cost of revenue for the second quarter was $102m, up from $91m in Q1. The majority of the dollar increase can be attributed to one month’s worth of Jamba! activity included in the cost of revenues for the quarter, as well as the higher than expected revenues we delivered from our core businesses. This translates into a 60 percent gross margin for Q2, relatively flat as compared to Q1, and consistent with our guidance.

Turning to operating expenses and related items, total operating expenses for Q2 were $100m, up from $92m in Q1. As with cost of revenues, Jamba! operating expenses drove the majority of this increase as well.

VeriSign generated pro forma operating income of $54m for the second quarter, showing significant growth from the $46m recorded in Q1. This translated into a 21 percent operating margin for Q2, which was at the high end of our guided range of 20 to 21 percent. Jamba! contributed less than $1m to the operating income for the quarter.

Other income came in lower than what we had anticipated, at approximately $1.9m. Lower interest income due to the cash used for the Jamba! acquisition and foreign currency adjustments both impacted other income in the quarter.

As it relates to head count, we ended the quarter with a total employee base of approximately 2,970 people, up from 2,600 at the end of Q1. The biggest driver for the head count increase was the acquisition of Jamba! where we added a little over 300 people to the core base of employees.

VeriSign reported pro forma, pre-tax income for the second quarter at $55m, translating into pro forma EPS using a 30 percent tax rate of 15 cents for Q2 in line with our guidance. This EPS has been calculated using a fully diluted, weighted average shares outstanding of approximately 253m shares. We had anticipated share count to come in around 249m shares for the quarter, but the share count increase was slightly higher due primarily to the 2m weighted average shares included for the Jamba! acquisition, and a higher than anticipated quarterly share increase.

Moving onto the balance sheet and cash flow items, cash balances consisting of cash and equivalents, restricted cash and short-term investments were $629m at June 30th, representing a $93m decrease from Q1. This was primarily attributable to the $178m of cash paid for Jamba! and the $8m paid for EuroTrust. This was offset by free cash flow of approximately $80m and Jamba! cash balances that were $24m at June 30th.

Our accounts receivable balance increased $41m to $148m as of June 30th. This was driven primarily by the Jamba! acquisition, which added approximately $35m of AR to the balance sheet. This translates into a net DSO for Q2 of 40 days at the low end of our estimated range of 40 to 50 days, including Jamba!

Total deferred revenue on the balance sheet came in at $392m at the end of Q2, an increase of $24m. The growth you see here was driven primarily from strong bookings across our ISG businesses from the sale of both security services and domain name.

Moving onto the cash flow metric, operating cash flow for the second quarter was approximately $98m. The key drivers of the cash flow were the better than anticipated operating income that was delivered in the quarter; the core bookings and deferred revenue growth that we just mentioned, and quarterly changes in working capital.

Well that completes the Q2 financial review. Let me now turn to some detailed guidance for Q3 and top and bottom line guidance for Q4.

In Q3 we would look for total revenues to be in the $285m range. This guidance reflects the expectation that the Internet Services Group revenue, which showed growth to approximately $145m, fueled by an increase from both our core security and naming and directory businesses. In our communications services group, we would anticipate Q3 core revenues to grow to approximately $106m, and then on top of that we would look for Jamba! to contribute around an additional $35m for a total of approximately $140m.

As it relates to margins for Q3, we would expect gross margins to be relatively flat at 60 percent. In looking at operating margins for next quarter, Q3 will contain a full quarter of Jamba! results, which will come in at a lower margin when compared to the VeriSign consolidated margin. Therefore we would anticipate an operating margin in the range of 19 to 20 percent for Q3.

While Jamba! pre-acquisitions have seen margins in the mid-to-high teens, a comparable range to VeriSign, we would expect increased investments in the business over the next several quarters. These additional resources will be necessary to effectively integrate Jamba! into the company, particularly as it relates to IT and support systems, corporate infrastructure and Sarbanes-Oxley compliance.

In addition, over the next several quarters, as we prepare for the launch of our Jamba! services in the U.S., we will be spending resources in development and sales and marketing to execute the strategy. For Q3 we would expect the fully diluted share count to be approximately $259m shares, which takes into account our normally anticipated quarterly share creep of 1m shares, as well as approximately 4m additional shares related to the Jamba! acquisition and approximately 1m shares we anticipate issuing under our annual employee stock purchase program.

Taking into account the revenue and margin guidance I just gave, we would expect earnings per share for Q3 to be approximately 16 cents, using a 30 percent effective tax rate. As a reminder of what we told you when we announced the Jamba! acquisition, we expect Jamba! to be neutral to EPS for the second half of 2004, due to the reasons I just laid out relating to integration and increased investment requirements.

Now moving on to some balance sheet guidance, we are pleased with the deferred revenue growth we saw in our core businesses in Q2. As we look to Q3, we anticipate deferred revenue to grow in the range of approximately $10m to $15m in the quarter, fueled again by securities services and .com and .net names sold.

Turning to operating cash flow, we would expect to generate a baseline cash flow in the range of approximately $65m to $75m in Q3. Now looking out to Q4 at a high level, we would expect total revenue to be in the $300m range, with Jamba! estimated at approximately $40m of that.

We look for EPS of 17 cents in Q4, and for margins to be relatively consistent with Q3. We think it will be helpful to give you some high-level direction in terms of the expected contribution from Jamba! in 2005. We currently anticipate Jamba! contributing a range of $180m to $200m in revenue in ’05, and approximately one penny of EPS per quarter. With that, I would like to open up the call for your questions. Operator, can we have the first question please.

(Operator instructions) We will go to Sarah Friar - Goldman Sachs.

Good afternoon, everyone. Just some questions on Jamba! since it is the newest piece. Can you just walk us through again how Jamba!’s revenue is recognized? Is it also on a recurring basis, the same way you would bill your current customers or do they get revenue up front?

Jamba!’s revenue is subscription-based for the most part, probably 80 percent or so, 20 percent transaction-based, meaning when someone goes and downloads a ringtone. But the majority of the revenue comes out of Germany and the U.K. and it is done on a per subscriber, per month basis, so it is counted monthly but it does not create deferred revenue.

Okay, got it. And then as you look to bring it into the U.S., just on the competitive front, we’ve kind of talked about it before, it sounds like it is a pretty piecemeal competitive landscape. What about some of the bigger guys BREW, part of Qualcomm, or even what some of the iMode is doing -- NTT DoCoMo's iMode? Are those also competitors here? Am I thinking about that in the wrong context?

Well I think each of them talks about their offerings as a platform, Sarah. Like there is the group platform, or the iMode platform, or the J2ME platform. Much of what we have done at Jamba! is build, really, an abstraction above that so that we can really offer any content from any format through any delivery channel. For example, the BREW platform only allows delivery through web-based interfaces to the phone, whereas with Jamba! we can deliver over SMS, MMS, web-based services, we even have IVR based payment and fulfillment, so we are trying to extract up from what are the core communication platforms of those providers, into something a carrier can come to us for so they don’t have to worry about all of that.

To show you how that might benefit us and our customers, we currently have well over 50,000 pieces of content available through download. I think the BREW platform has something like 10,000. And the number of developers that support the platforms we support, numbers somewhere over 4,000, whereas in the BREW platform it is a couple hundred.

So I think if you were a carrier looking to introduce these kinds of services, we would stack up well against competitive offerings, because we are going to get you more content, it is going to be fresher, and we are going to give you many ways to have your customers get it rather than force-feeding one way or another.

Okay, and then maybe just an extension of that. What would you say in your current installed base on the communications side, how many buy -- I don't know if I want to call it an end-to-end bundle, but buy a significant piece of all of those things you offer today? I am trying to get a sense for what is the penetration ability for VeriSign to go more end-to-end with their current carrier base?

I would say that probably 25 percent of our customers are buying north of three or four bundled products from us, so we have a significant opportunity, we believe, to really do account mapping and deeper penetration by putting together very cost-effective bundles that take all of what we can do for them and probably displace, in some cases probably three to five to even 10 vendors of point products that they currently work with.

Got it, okay. And then just finally a quick question on capex expectations through the rest of the year?

Sure. So if you remember our forecasted capital budget for the whole year was $110m. Clearly we’ve only spent about 30 percent of that through the first half of the year, so at this point we would expect for capital to come in a bit lower than that, but it is early in the year, and there are still a lot of projects that are ongoing. But it doesn’t look at this point to be as high as the 110 original forecast.

Okay, great. I’ll leave it at that. Thanks a lot.

Thanks, Sarah.

We will take our next question from Todd Raker - Deutsche Bank.

Hey guys, good quarter.

Thanks, Todd.

Just quick very simple math, Stratton. If I take the $13m from Jamba! and then multiply it against the six months in the second half of the year, I get to $78m. I assume Jamba! is growing nicely, how conservative is that $75m guidance?

Well you know, I hope it is conservative Todd, at the same time we’ve owned it a month and we are coming into the summer period in Europe where the majority of the revenue comes from where we don’t really have a history for what buying patterns are like in August timeframes and September timeframes.

So I think we are trying to be somewhat conservative that having owned it 30 days we don’t get ahead of ourselves. But certainly the trajectory in June was ahead of our original expectations.

Okay, just so I understand the seasonality of the business a little bit, from a revenue perspective, are you guys concerned -- are you basically billing for usage in any way, shape or form, or is that just new additions to the service?

Really new subscribers, right? But you’ve also got churn rate of existing guys, and because it is billed directly to the carrier bill, we see some lag in really understanding that.

I think the simplest answer in it is, we think that we are probably being conservative with that guidance, but the business is in such a hyper growth mode that you really don’t know what seasonality effects are, at the moment.

Okay. And can you just talk about the cost of bringing it to the U.S. market? How much of that is operating expense versus capital expense, and how much are you capturing in some of your Q4 guidance?

I think that from a capital side, it is probably high single-digit millions of capital. Since we are undercapital spent, or under our capital spending in the rest of the business, we probably can support that and stay within the numbers Dana had talked about. On the development, sales and marketing side, it is really going to be based on customer demand. We want to be in a position where we can turn it on quickly, because we have seen, at least a lot of interest from the carriers we currently support, and even a few that we don’t.

So I think that, you're talking about what could be as many as 50 to 100 people that would get brought on in the next six to eight months to support those activities, and we are trying to make sure we have plans for that.

Thanks a lot guys, appreciate it.

And we will move onto Rob Owens, Pacific Crest Securities.

Good afternoon. Dana could you focus us in a little bit on the gross margin line, and why you are not seeing more leverage here? Is this a function of the addition of Jamba!, did it have a different margin structure from a gross perspective?

I think in Q2 what you saw was gross margins in the Internet Services Group relatively consistent, but remember we had a full quarter of Guardent this quarter, and that comes at a lower margin than the majority of the authentication services there. Communications Services Group margin actually picked up a few points, primarily due to revenue mix shift in the quarter. Going forward, Jamba!’s gross margins are in the 50 percent range and so that is why we are being conservative with the gross margin guidance.

Okay, and then any update on the .net agreement? How are things progressing on that front?

Again, there’s an ICAN meeting right now in Kuala Lumpur, of all places, and I am sure they will talk about it there. But we have our bid team together and are continuing to put together that bid, and would expect to turn it in on time. Whether or not they will create extensions is really more up to ICAN than us, but we will be ready whenever they ask for the bid.

And then lastly I missed the reason that the share count creeped up in the quarter. I apologize, can you go over that again?

You had 2m weighted average shares included for Jamba! and then we had higher than what we anticipated shares just being issued on a routine quarterly basis.

Okay, great. Thanks, guys.

We will move next to Walter Pritchard, SoundView Technology.

Hi, just two questions, actually. Dana, if you could go through, you mentioned a $9m sequential increase in the Internet Services Group. If you could just break out for us like you did last quarter, what was the incremental contribution from Guardent that you got as having a full quarter over having a partial quarter last quarter, and then I have one follow-up question.

Jamba! last quarter was about $2m and then the incremental this quarter was about $4m -- Guardent -- (multiple speakers).

I hear you. And then just the other question on the communications side in the billing area, do we have any deals in the next year that are major, that are up for renewal or renegotiation that may be a risk?

Nothing -- small, small contracts here and there, nothing all that significant. We are still running through the roll-off of a company called Price that was purchased by Verizon two years ago, so some of that is still running through, and that goes away in ’05. But that won’t materially impact us heading into ’05.

Thanks a lot.

We will go next to Robert Breza; RBC Capital Markets.

Good afternoon, nice quarter. Wondering just quickly on the Jamba! guidance you gave, the $180m to $200, how much would you say in percentage terms, realizing that it may be conservative, but how much would you say of that guidance is actually dependent on your success of bringing that over here to the U.S.

The guidance we gave does not anticipate a significant U.S. uptick.

Great. Thank you.

Next we will have Steve Ashley with Robert W. Baird.

Hi guys. You talked about your IC3 services, and the success you’ve made going to tier 1 accounts. Can you talk about which of those services -- and I understand that you are bundling them and selling them in a multi-kind of service fashion, but are any one or two of those getting more traction with tier 1 accounts at this time?

Certainly today, if the communications services around the databases, so both the traditional caller name services as well as our new wireless caller name services. In addition, we have a lot of interest in what we call Roamer View, which is our network monitoring service for wireless carriers, both here, domestically with some tier 1’s as well as in Latin America, and some of the cross-traffic that we see down there. So those are truly more of the traditional communication services that make up the first C in the IC cubed platform.

Then we have commerce services or billing services, and both our prepay and our unregistered roaming service are really doing pretty well with tier 1 or at least large tier 2 sized accounts.

And then the content stuff, although Jamba was the big news for the quarter, as you will recall in Q1 we had a small acquisition of a little company called Unimobile, that augmented our SMS services with MMS capability and an international gateway. Believe it or not, that actually is getting some traction as well as we are able to bundle that together with Jamba and other services to really create an enterprise messaging play for certain carriers.

Great. And in terms of the MSO IP Connect, can you talk about how the revenue model might work for VeriSign for that product or service?

A little early to lay all of that out, but at this point it is a directory interconnect service, so it would be where telephone numbers reside, such that during the routing of a voice call we could take it through the Internet to another MSO or we would dump it into the PSTN. Obviously if you take it through the Internet you are having a much lower cost call and you are not paying access charges.

So in essence, the benefit to the MSOs for working with us is they can get away from access charges for certain calls, and we would probably charge a yearly subscriber fee for the number of telephone numbers we store for them.

Great. Thanks so much.

We’ll take our next question from Greg Moskowitz; Susquehanna Financial Group.

Thank you and good afternoon. Just to follow up on a couple of the CSG questions. You know, you guys really saw a pretty impressive inflection, I would say, in terms of overall database queries.

Stratton, I guess I am just trying to get a sense if there is any way to kind of look at that number and maybe isolate the amount that is coming from some of the newer services you had mentioned -- wireless caller name, Roamer View, Unimobile, et cetera.

Really the driver in the database queries is local number portability dips which are going up, because what you see in our business is while we didn’t win a lot of the tier 1 porting business, when those numbers are now being called, the databases have to be dipped. So as long as we have access to all of that data, it was going to drive up the volume in our LNP queries.

In parallel with that, because of the wireless CNAM product offering, now we are starting to see delivery of wireless caller ID services. Those are really the drivers of the database queries today.

And maybe just on the wireless CNAM, intuitively it is a little bit difficult for me to kind of expect huge demand for the service, at least kind of compared to wireline, it sounds like you are getting some early, good interest. I am just kind of curious if you guys have seen or done any sort of market studies showing overall interest levels in that compared to wireline caller ID demand.

Actually, I’m glad you asked that Greg because it probably creates an opportunity to explain a little bit more about the offering. We are not saying that this is simply delivering names to wireless handsets. What this product actually does is it takes wireless phone numbers and the names associated with them; we store those in our database and then if that wireless caller is calling either a wireline or a wireless handset, we can deliver the name.

But the bulk of what we’re seeing today is storage of the wireless caller name. It works this way even if you deliver it to a wireline phone. So wireless CNAM, really the nomenclature is we are storing wireless caller names, but delivery can be to any end terminal, wireline, wireless or voice.

Okay, that’s helpful. And maybe just lastly, Dana, I think last quarter you had mentioned that of the increase in deferred revenues, I believe more than 50 percent was due to domain names. This quarter, if you exclude EuroTrust, was that the case again?

Yes. There was about a few million dollars that came over through acquisition, and then after that more than 50 percent of that balance came from the naming and directory services.

Great. Thanks very much.

We will go to Phil Winslow with Credit Suisse First Boston.

Hi, guys. Great quarter. Most of my questions have been asked already, but I just wanted to focus back on the SSL side for a minute, you all continued to have solid growth in the installed base there. I was just hoping maybe you could talk about what your expectations are for that going forward and maybe any sort of trends you're seeing in that market?

I think we're seeing both good new unit sales as well as renewals. As we had talked about on the Q1 call, the number of renewable cert (ph) in Q2 and Q3 tends to be seasonally less than the number in Q1 and Q4.

So, that's why you didn't see quite as much installed base growth in Q2 as you did in Q1, because the Q1 number of available renewals is higher. Pretty much the same will be true in Q3, it will grow again, but the number tends to be lower. And then Q4 is where we see a very, very large renewable base.

So, when you kind of average it out over the year, we're going to see pretty significant growth in the SSL installed base because of new unit sales and increasing renewal rates, but you do have some quarterly sensitivity to the number of available renewable units, more or less the same way you do in domain names about the same period.

Great. And then Dana, just getting back to your point on interest and other income, you said it was affected by FX during the quarter. I was hoping maybe you could quantify that for us.

That was slightly less than $1m.

Great. And what are your expectations just for that line going forward?

I think the $2m or so, that people had $2.5m is what we would expect. This quarter with Jamba!, this quarter there was a few things in there that weren't anticipated which is why it is less than we had thought.

Great. Thanks a lot, guys.

Thank you.

Eugene Munster with Piper Jaffray, has the next question.

Hi, good afternoon., I apologize if this has been asked, but in terms of the token of services business, is that business built into the current estimates that you gave, and if so, any just rough numbers about what that would be?

Yes, Gene, what we've said is general availability will be in September. We're still on track for that. So, that would mean there would only be a modest amount of that in Q4. So, that's kind of built into the Q4 estimates for the security business. But we had not expected that to be a big driver in '04 just because it will be sold on a subscription basis, and our first real selling quarter of it will be Q4.

And one of your competitors tonight was talking about the consumer market opportunity and work with ISPs, e-retailers and so forth. I assume that that's a market that you guys would be interested in as well?

Of course it is, and I think those markets are still going to be a little longer in the development than maybe others are foreseeing, just because I think the user experience is going to be tougher and the integration of millions of user log-ins is going to be tougher than people see. So, we've had those same discussions and we believe that market is a real market. But it's probably going to take a little bit longer to materialize. Meanwhile we're having a high level of interest in large enterprises looking to add this as a second factor of authentication.

And one, just the Site Finder update?

Really no update. As you see, there's been some reports back and forth about various motions in the lawsuit. We'll continue to pursue that through the summer. But as we expected, there won't be much activity legally at least to report on, probably until Q4.

As you probably saw the Security and Stability Group at ICANN did issue their report, nine months after Site Finder was shut down. That report had no quantitative data in it as to Site Finder's impact. So, we felt that it was a kangaroo court when it started, and it ended up reporting out that way. No big surprises.

Okay. Thanks.

And we have Ed Maguire - Merrill Lynch.

Yes, good afternoon. I would like to go back to Jamba! and dig in a little bit to some of the intellectual property behind that. With roughly 200 and change content providers, do you look to license the content or are you looking to purchase the content there? And would this be a potential capex opportunity for you?

Let's talk a little bit about what we mean by content and the intellectual property in Jamba!. Jamba! itself is a proprietary VeriSign-owned platform around how we do the on boarding of content, the transcoding of that content for various handsets, the compatibility testing and then the delivery and billing. That is a homegrown Jamba! solution.

It is world-class and it is very, very scalable. We supported over 14m downloads in the second quarter alone. So, we think that's a world-class platform, all our own intellectual property runs on standard gear that you would expect, in terms of hardware and software.

The content that we talk about having access to is licensed from the content or the copyrighted publishers. So, that's' folks like music artists or their publishers, it’s folks like Sony and Bertelsmann, it’s folks like PHG and JAMDAT when it comes to games. So, we license that content and we pay them a royalty that's part of our cost of sales when we actually deliver the content.

So, in the whole, if you take 100 percent as the number, we share some revenue with the carriers by putting it on their bill. We pay a royalty to the content providers and then what's left over comes to us.

Okay.

We do have a group, there's about 300 and so people at Jamba!, we do create our own original content, especially in the downloadable graphics area and sometimes in the community service area. And that content we own ourselves and so, obviously our gross margins there are much higher.

Thank you. When you're talking about upselling some of your different communications group services to some of the tier 1 customers in Europe, could you walk me through the process organizationally? How you're looking to do that? Are you going to take some VeriSign folks, move them over from the States, or are you going to rely on people that are already part of Jamba! to give them bigger bags to sell, as it were?

I think we are still, because Jamba! itself is doing incredibly well in its existing markets in Europe, they had established tier 1 carrier relationships either for billing or for distribution, and they're going to continue to be the frontline people to do that.

As you would expect, we will then team them up with VeriSign communication services sales reps, so that they can provide the introduction to the broader portfolio for us. But we'll use product specialists that we train over here and then put them into our European organization.

So, Jamba! will be the point on the sphere and will hopefully make those introductions for us and then we will come in with both other communication services group products, as well as Internet service group products. There's a lot of interest in both the securities services as well as the RFID services.

Okay, and just an update on some of your recent announcements, the new products around the anti-spam, anti-phishing and secure email, what's the expected GA dates and thoughts around pricing and the initial target markets?

Anti-phishing and the email security services, which include the antispam and antivirus are available as of July 12, so they are in GA, and they are being sold by a special tele-sales organization that we’ve put in place as well as by the direct field force.

That you will see some initial probably customer wins this quarter and hopefully incrementally ramping revenue in Q4 and throughout next year.

The anti-phishing work began with a customer project in Q2 at a large US bank that had a significant problem here. So, we have been generating revenue on that since Q2, the service we announced in July is a general abstraction of that so that it's applicable to just about any customer and it uses some of the automated tools we brought in from our fraud team on the payment business.

So, again both new services, modest incremental revenues in the second half of the year, but we think they really complete the portfolio for going into a customer and saying we can handle your users, we can handle your networks and we can handle your digital communications.

Thanks very much.

Thank you.

Next we have Scott Sutherland, with Wedbush Morgan Securities.

Good afternoon.

Good afternoon.

First on the domain name, I missed the beginning of the call, what was the renewal rate on that for the quarter?

Just over 70%.

Okay, and just getting back to Jamba! I just want to understand a little bit more on the cost of the content. Are you licensing on a per piece of content or are you paying more of flat rate to the content providers because it sounds like you will gain more of a subscription per subscriber fee than per download fee?

There are 240 content publishers we work with, and so some of them we have exclusive relationships for, some of them we have time-based windows on the content for, and some of them we do adhoc per download. So, it really is a mix.

What we will try to do after Q3 and we have a full quarter under our belt is provide some more of the statistics like that around number of downloads, number of subscription based downloads vs. number of transaction-based downloads. I will tell you that the Jamba! team has spent a couple of years modeling this. So, what you have seen them do actually over time is raise their per subscriber fee on a monthly basis to be at what they think is the perfect, the optimized point for making money based on the number of average downloads they would see even if they were paying per copy versus what we are getting on a monthly subscriber basis.

So, as you would expect, it's pretty detailed customer modeling and we would love to actually share some of those stats as we come out of a full quarter.

That would definitely be great. How about with the carriers? Do you recognize revenue gross or net after carriers take their cut?

We recognize that net.

Okay. Your guidance for 2004, of $180m-$200m for 2005, if you have Jamba! for all of '04 what kind of growth is that year-over-year?

You know what? I don't think we are going to kind of try to forecast all of that. It's still significant growth and I think as we will see as we come out of Q3 and get into Q4, you will be able to see what kind of the sequential growth is looking like.

Jamba! has been in a mode for several years of very, very dramatic growth. So, I think our assumptions for 2005, assume that we continue to grow in Europe and that we do modest selling elsewhere in the world. All that could change based on a couple of customer wins here and there. So, I think we will kind of wait to tell you how it went versus try to forecast that.

Fair enough, I was just trying to get at the growth on that, because it’s just been so hyper in that type of market. Lastly, on the MVNOs, I’ve seen a lot more activity on that front. What kind of opportunity are you seeing then for your prepaid and postpaid billing services?

I think exactly as you say, we are seeing heightened activity as well. It does feel like there is going to be a wave of MVNOs that come to the market. I think people are watching Virgin Mobile and saying that's something we could do with our brand.

I think you are seeing the large network providers like Sprint, create packages for MVNOs that make it easy to get in that business. And I think one of the most exciting things with an MVNO would be to be able to jump into the market with brand new handsets on a robust network that they didn't have to sink a lot of capital into and with the freshest content so they can target this exploding youth market.

So, we are absolutely targeting that space. A lot of that tends to be prepaid business or spending limit business, which works well with our prepaid platform. So, you will see us integrate the Jamba! system into our prepaid platform, probably first thing we will do as we bring it over here.

Great, thank you.

And next we have Seth Potter with Punk, Ziegel Investments.

Good afternoon. Just a question on your ability to achieve a win in the tier 1 client in your bundling services, you mentioned that you had two mid-sized carrier wins during the quarter. Is there a different sales cycle or what are some of the issues, if there are any, to potentially winning a tier 1 customer? Thanks.

As we talked about last quarter there are definitely very, very long sales cycles and then after the sales cycle is over there are very long trial or ramp up periods. So, for example, we mentioned last quarter that we had won some business with our Roamer View services at a tier 1 carrier. We also said that we would not expect to have them fully deployed until the end this year. So, that tells you kind of what the sales and ramp cycles look like.

But, we have won business at a tier 1 of that kind. We have learned that it probably takes between two to four quarters to see someone of that magnitude ramp the services because as you would expect they are very concerned about disrupting their networks.

Okay, thank you.

Next we have Daniel Cummins with UBS.

I wondered if you could you give us some sense of what you think either the content providers or the ISPs are expecting or want to arrange for their customer base in terms of putting an authentication token in their hands versus maybe what the vendors and yourselves are expecting?

My thought is that obviously, it seems like there is a place in the market for consumers to have one device that they can use for many purposes. What do you think the first contract announcements that we are going to see, kind of specify?

Before I answer, let me kind of go back to what I said earlier, which is the here and now market opportunity is enterprises using this for remote access for Windows login, for SSL, VPN.

I'm sure every vendor in the space has a very large prospect or suspect list in their pipeline and so do we. I think the universal tokens for access to multiple services with federated identity that is the holy grail in the space and I think you will have some of the larger ISPs saying, if we could go to our customers, offer them this enhanced security and link it to other services they use on the Net, where maybe their health records are stored or maybe their financial records are stored, wouldn't that be a great thing?

So, I think that there is a lot of froth in that market, and I think it's the large consumer-facing ISPs who have talked about it, as well as some of the larger consumer-facing e-commerce sites. My expectation would be, there is going to be a trial and error in that space before someone gets it right, and that as usually happens, the universal holy grail idea will give way to probably more step-wise early adopter type implementations where it is offered as an optional service instead of something that is mandated.

Is it your sense is that one of these large ISPs is thinking in terms of a co-branded token with the vendor?

I think that that is probably where a lot of the decision making is right now. What you will probably see is an OEMs token with the ISPs name on it, a co-branded token and then a vendor branded token and my belief is that the ISP will offer all three with varying price points and varying feature sets and let the customers choose.

You would expect we have talked to those same suspects who were looking at these programs and I think they are all still very much on the drawing board as to what's actually going to work.

Okay, thank you.

Next we will go to [Max Jonnas] with Sigma Capital.

Hi, how are you? A quick question on the Guardent. Was that $4m in total revenues for the second quarter, or $4m incremental relative to the first quarter?

Incremental relative to the first quarter.

So, it's roughly $6m for the second quarter?

That's right.

Okay, thanks a lot.

That does conclude our question and answer session. Now I will turn it back over to you, Mr. Gatoff for any closing remarks.

Thanks, everyone for your time today. As always, we look forward to talking with you and answering any additional questions you may have. Thank you and good evening.

That does conclude our conference call. We do thank you for your participation.