威瑞信 (VRSN) 2004 Q3 法說會逐字稿

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

Thank you, good afternoon, welcome to VeriSign's third quarter, 2004, earnings call. I'm here today with Stratton Sclavos, Chairman and CEO of VeriSign, Dana Evan, our CFO, and Tom [McCowam] Director of Investor Relations. In a moment Stratton will review Q3's results and provide some insights into each of our business units. He will then provide some color on Q4 and initial thoughts on 2005. Dana will follow with a detailed review of Q3's financial results provide guidance for Q4 and an initial view into 2005. She'll then open the call for your questions. We anticipate the call ending at about 3p.m.

We remind everyone that other than the historical financial data, today's discussion may include forward-looking statements and is 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 news wires after the markets closed this afternoon. The press release and related financial information discussed on this call and a reconciliation of GAAP and nonGAAP 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.

And, with that, I'd like to turn things over to Stratton.

Thanks, Steven. Good afternoon, everyone. Let me add my welcome to all of you attending today's call. As our results indicate we saw a continued increase in internet, E-commerce and wireless voice and data activity in the third quarter.. These trends enabled us to achieve solid organic growth across all our lines of business during the period. In addition, the first full quarter of revenue contribution from Jamba! was significantly ahead of our expectations. As you recall, our strategy coming into the year was focused on continued growth of our core services, coupled with new product and service introduction, deeper major account penetration, and broader International contribution.

In the third quarter, we fired on all cylinders. The core grew, new services launched, key customers signed up for additional commitments and International took a major leap. We attribute these results to a variety of factors, including the uptick in both the internet and telecommunications market, a very healthy European appetite for wireless content, and strong execution by our teams globally. With that, let me dive into the Q3 highlights and operating metrics for the business units starting with Internet Services Group.

The ISG group contains our naming and directory services, our strong authentication managed security services, and our payment gateway services. For the third consecutive quarter of the year, we've experienced increased demand and deeper International penetration for core services in ISG. This led to solid growth in our domain name, SSL certificate, and payment gateway lines of business.

In our naming and directory services business we processed over 3.7 million new registrations for .com and .net domain names. We also saw renewal rates stay above the 70% mark as another 4.4 million names were renewed or extended. The active base of names at the end of the quarter stood at 36.1 million, up 6% sequentially and 26% year-over-year.

The strong growth in common net appears to be coming from a combination of new business formations, new product and event introduction, and broader International appeal. We also sold over 106,000 SSL certificates during the quarter, taking our active installed base up to 447,000. That's up 4% sequentially and 19% year-over-year. In addition, our upsale rates in the quarter stayed above the 50% mark.

Given the deferred revenue nature of both the domain name and SSL businesses. The strong volume growth in the basis this year should bode well for continued revenue growth in 2005. In our payment gateway business, we saw a net increase of close to 6,000 new customers, bringing us to a total of 118,000 active merchants, up 5% from last quarter and 23% year-over-year. As a result, our gateway handled a record 107 million transactions for an aggregate value of 8.6 billion during the quarter.

We also had a significant number of new product and service announcements Q3. In our naming and directory services business we announced the availability of rapid updates for the dot com and dot net TLDs. The New featuring allows domain name changes or additions to propagate through the VeriSign DNS constellation in minutes rather then hours. The benefits of this innovation include higher availability, flexibility, and resiliency for owners of dot com and dot net domain.

In addition, we also launched the EPC network starter service and application developer's program to help manufacturers, integrators and software developers begin to integrate the EPC network services into their RFID pilot. In our managed security services business, we are pleased to receive placement in the leader segment of Gartner's latest magic quadrant report, helping to solidify our position as a leading provider in the MSS space. We are now actively managing over 3,100 devices up 8% from Q2. In addition, we announced the availability of our new e-mail security service, and have received our first contracts for the antispam, antivirus software.

And last, but not least, with the launch at the end of the quarter or our VeriSign unified authentication form -- platform and next generation token. We believe this much anticipated offering meets the market need for strong authentification that is easier to deploy, more cost effective, and more flexible then anything else on the market. We've now secured our first competitive customer win, and are seeing a significant pipeline of prospects building for Q4 and 2005. You should expect to see both strategic partner and customer announcements soon.

Speaking of customers, we saw several key wins during the quarter in both the authentification and MSS businesses including new or renewal contracts with U.S. Bancorp, SBC, Vanguard, Office Depot, and Boeing. International wins included NTT, Japan highway administration, the Australian custom's office, Nokia, and my personal favorite, the Greek Ministry of the Interior.

All in all, Q3 was a very busy and successful quarter for the Internet Services Group, building on the solid performance from the first half of the year, as we move into Q4, early indications are that we will see a strong finish to the year, with good sequential growth in domain name, SSL, and payment. We'll also be launching a marketing campaign during the holidays for our new VeriSign Secured Site Seal. And, we'll announce an upgrade to our MSS offerings that includes coverage for new device types, new vulnerability scanning services, and a significantly enhanced customer portal.

Now, let's move to our Communications Services Group. CSG provides intelligent communications, commerce and content services to traditional wire line and wireless carriers, cable operators, and next-generation service providers. Clearly, it was a very strong quarter for the Communication Services Group. (Audio difficulty.)

Please continue to stand by. We'll re-establish the speakers line for today is VeriSign third quarter earnings conference call momentarily. Please stand by.

Thank you everyone. Sorry for that delay. Our conference provider must not be using VeriSign Communication Services.

I'll just recap what we've said about Internet Services Group. Busy and successful quarter. And, as we move into Q4, the early indications are that we're going to see a very strong finish to the year with good sequential growth in domain, SSL, and payment. We're also launching a new marketing campaign for our new VeriSign Secured Site Seal, that you'll see during the holidays. And, we'll be upgrading our MSS offering to include coverage for new device types, new vulnerability scanning services, and a significantly enhanced customer portal.

So, I'm going to move now to the Communications Services Group. CSG provides intelligent communication, commerce and content services to traditional wire line and wireless carriers, cable operators, and next-generation service providers. Clearly, it was a very strong quarter for the Communication Services Group.

Revenues for our core services grew over 4% organically for the second consecutive quarter, as we continue to benefit from the improving fortunes of our customers, new product ramp-up, increased overall consumption, and strong execution by the team. And, of course, Jamba!'s extraordinary performance is indicative of the strength of the wireless content market in Europe, in general, and Jamba!'s marketleading presence, in particular.

As it relates to business metrics for the group, we delivered over 12.7 billion database queries in the quarter, up from 12.1 billion in Q2. We also processed billing and payment services for approximately 6.4 million wireless users, up slightly from 6.3 million in the prior quarter. Product announcements in the quarter included the introduction of our intelligent messaging services, and our family of IP connect services.

Our new VeriSign intelligent messaging services are a by-product of our Unimobile acquisition earlier in the year. The two way messaging service and International gateway provide a foundation for enterprise applications to provide real-time alerts, transaction confirmation, and other business communications to a mobile workforce or a customer base. With connectivity to over 350 carriers globally, VeriSign intelligent messaging services meets the needs of today's multi-national corporation.

IP connect services are targeted at traditional telecommunications carriers, cable operators, next generation service providers, and enterprises. IP connect enables these customers to leverage VeriSign's atlas directory technology, and connectivity services to enable efficient and interoperable routing of voice calls over an IT network, or between the [TSTN] and the internet. At this weeks VON conference we also announced a collaboration with Cisco to facilitate interoperability with their IP call manager product. We'll be talking more about the full range of IP connect services and their place in the [Boypeeco] system as we head into 2005.

Key customer wins in the quarter included Tier-1 carrier wins for our Net Discovery Service, and our GSM Clearing Service, as well as enterprise wins for two-way messaging at Wachovia Bank, and Singapore Airlines.

Now, let me spend a few minutes discussing Jamba!'s overall business, and Q3 performance. First, let me start with a refresher on the Jamba! model, which we believe is one of the keys to it's rapid growth and market leadership. Jamba! provides a complete end-to-end offering for wireless content. The Company's services include; content acquision and on-boarding; handset compatibility testing and tuning; mass market demand generation; and seamless billing and payment options. Let's look at each area a bit more closely.

First, content acquisition and on-boarding. The Jamba! team works with a wide variety of content owners to license and convert their music, graphics and games for delivery over wireless and broadband connection. We believe the key to success comes from both breadth and depth of the catalogue, as well as the freshness of the content. Today, we offer over 200,000 unique pieces of content including handset specific version, and we are adding thousands more each month. Our ability to bring new titles to market, and to broadly distribute across multiple carriers and countries have solidified our relationships with the key content publishers.

Now, let's talk about handset testing and tuning. While this might seem archean, it is another key factor in Jamba!'s current success. In essence, we convert and test every piece of content specifically for each handset available in a target market. In addition, we actually tune certain ring tones and graphics on a handset by handset basis, to ensure a high-quality user experience for the customer. This capability allows us to provide significant value to both our content and carrier partners as it drives higher customer satisfaction and usage. To the best of our knowledge, no competitor has such a comprehensive offering.

Of course, all this capability would go for not if we couldn't drive consumers to the platform. This is where Jamba!'s unique demand generation model comes in. Since the majority of mobile content is targeted at the youth market, we and our carrier partner focus our advertising and acquisition efforts in youth oriented media such as DIVO and MTV Europe. Jamba! blankets these outlets with creative ads that drive impulse buying. Because each ad has a specific set of content, and short codes associated with it, we can track the effectiveness of every campaign and adjust our spending accordingly. This approach is proven to be very successful in each market that Jamba! has entered, and has driven significant incremental revenue for our carrier partners in those countries.

Last, but not least, comes billing. As we all know, reducing the friction in any purchasing process will always drive higher conversion rates. Mobile content is no exception. The ultimate goal is to enable impulse buying at any time, anywhere, on any device. The Jamba! platform has a very sophisticated billing engine that supports short code, premium MSS services, [over the air fulfillment], and a variety of carrier billing system interfaces. The Consumer experience is as easy as seeing a Jamba! or partner ad, sending the short code via text messaging, receiving the customized download immediately, and getting on with life. Billing happens behind the scenes with direct integration for the postpaid or prepaid system of the consumer's chosen carrier.

Now, with this background, let's talk about the opportunity as we currently see it. The Worldwide market for wireless data services is expected to reach $10 billion by 2006, and to grow at a compounded annual growth rate of over 40% for the next 5 years. Fueled by new handsets, networks, and application, we believe the market will hit an inflection point in 2005 and 2006. Especially as carriers continue to ship their focus from cost containment and operating efficiency to new service introduction and revenue growth.

As I said earlier, we believe the key to the Jamba!'s current success is the end-to-end capability I just laid out. The model is proven in Germany and the UK, and is being early (indiscernible) in other markets in Europe. Growth will come from continued penetration of existing markets, entry into new countries, and the addition of new products and services as network and handsets become more capable. Jamba! is the center piece of the content leg of our intelligent communications, commerce and content strategy. We are still planning to bring the platform to the U.S. and other markets in the first half of next year, with some early market testing possible later this quarter.

So, in summary, the early returns are strong, the Opportunity is large and growing, and our capabilities seem to be a match for the market's needs. The Jamba! discussion caps off what was a positive Q3 all around for the CSG group.

With that, let me now say a few words about Q4 and our very early views on next year. As we enter the last quarter of 2004, we are pleased that the growth strategy we layed out in January is proving out. We have seen our core services grow at double digit rates. We have introduced compelling new services in each business unit. And we have deepened our penetration of key accounts and Internation markets. The business and financial results associated with this growth have given us increasing comfort in our short and medium term forecast. As Dana will discuss in a minute, we'll be significantly raising Q4 revenue and EPS guidance.

Given the Q3 business trends, and some early momentum here in October, we are confident that Q4 will be the largest revenue quarter in the Company's history, and will drive record operating income as well. Heading into 2005, we believe we are establishing a balanced portfolio for sustained growth. We expect our core, recurring revenue services, such as domain names and SSL certificates to continue growing. We have new products, such as our Strong Authentification Token and Wireless Content Services this is can fuel incremental growth. And we are continuing to invest in long term opportunities in areas such as voice and RFID that could pay off big in the long term. As always, we could still face the potential risk associated with pricing pressures or customer erosions in certain businesses. We will monitor these areas closely but feel we can offset any (indiscernible) impact through growth from other areas.

We also feel that our business model is now very much in tune with customer spending priorities and resource constraints. In fact, we've recently launched a new marketing campaign to highlight our intelligent infrastructure services under the theme, VeriSign, where it all comes together. You'll be seeing both print and on-line ads tied to this campaign in Q4, and throughout 2005, as we attempt to solidify the VeriSign brand as a key component in the continuing transformation to a digital economy.

Thanks very much for your attention. And, now, let me turn us over to the birthday girl, Dana.

Thanks, Stratton, and good afternoon, everyone. We are very pleased to report third quarter results that is exceeded our expectations in all key areas; revenue, operating income, earnings, and operating cash flow. VeriSign's third quarter financial performance was fueled by the continuing momentum we experienced across our core businesses, and the acceleration we saw in our Jamba! business. Our topline growth, coupled with on going operatal leverage, led to significant margin and earnings expansion, and drove strong operating cash flow generation. Before going into the detailed financials, I'd like to just remind everyone that our acquisition of Jamba!, close toward the end of Q2, and, therefore, Q3's results include a full quarter's worth of Jamba!'s operational activity.

So, let's turn to the detailed results, starting with the P&L. On a consolidated basis, VeriSign reported $325 million of revenue for the third quarter. Included in this amount is 73.5 million of revenue from Jamba, which was significantly ahead of the guidance we gave on last quarter's call, as we indicated in 8-K filings a few weeks ago. As Stratton mentioned earlier, this revenue growth was fueled by expansion of our customer base during the quarter, increased ASP's, and the early traction we saw in new markets where we launched the Jamba! service. Excluding Jamba, Q3 revenue from our core businesses came in at 252 million, up from the 243 million reported in Q2, showing 4% sequential growth.

Segmenting the Q3 revenue into VeriSign's reporting unit. The Internet Services Group delivered approximately $143 million of revenue for the quarter, or 44% of total revenue. The growth here was driven by solid bookings for both the security and naming and directory businesses. Our Communication Services Group reported total revenue of $182 million for Q3, including the 73.5 million for Jamba! I just spoke about. To break that down a bit further, the core VCS business showed sequential growth to 108.7 million for Q3, and now represents 56% of total revenue.

Moving to our International operations, the percentage of total revenue that was driven from our International customers, affiliates, and subsidiaries was approximately 33% for Q3, up sequentially from 19% in Q2. This increase was driven primarily by the Jamba! revenue reported in the quarter.

Looking at cost of revenues and gross margin, our cost of revenue for the second quarter was $122 million, up from 102 million in Q2. The majority of this absolute dollar increase can be attributed to the higher than expected revenues delivered from our Communication Services Group, as well as the full quarter's worth of Jamba!'s cost of revenue. This translates into a 62.5% gross margin for Q3, up from 60.1% in Q2. Favorable pricing trends in our wireless services, including Jamba, coupled with increased operational efficiency across the core businesses, drove the margin expansion you see here.

Turning to operating expenses and related items. Total operating expenses for Q3 were $140 million, up from 101 million in Q2. The majority of the increase is attributable to the full quarters worth of Jamba!'s operating expenses in the quarter, where sales and marketing is the largest component. Additionally, VeriSign's Corporate Marketing Group launched the, Where it all comes together, marketing campaign at the end of Q3, which also drove increased marketing expense. G&A expenses were up approximately 10 million sequentially, due to the inclusion of Jamba!'s G&A and integration expenses we incurred for them.

On the corporate front, G&A also included increased expenditures for Sarbanes-Oxley compliance during the quarter as we enter the testing phase of that initiative. That all being said, G&A remained at approximately 15% of total revenue. VeriSign generated pro forma operating income of $64 million for the third quarter, demonstrating significant growth from the 54 million reported in Q2 . This translated into a 19.6% operating margin for Q3, in line with the guidance we gave last quarter. The Combination of topline growth in our core businesses, Jamba!'s strong revenues and continued operational efficiency across the Company, adjust growth and operating income for the quarter. Other income was approximately 5.9 million for the quarter, where higher levels of interest income made a positive impact, as well as some modest benefits from foreign currency fluctuation.

As it relates to head count, VeriSign end of the quarter, with a total employee base of approximately 3,100 people, up from approximately 2,970 at the end of Q2. The biggest driver for the head count increase was continued hiring at Jamba!, where we added approximately 100 people during the quarter. VeriSign reported pro forma pretax income for the third quarter of $59 million translating into pro forma earnings-per-share of 19 cents for Q3, which was 3 cents higher then our guidance. This earnings-per-share has been calculated using a 30% tax rate, and fully diluted weighted average shares outstanding of approximately 258 million shares, including the remaining 4 million shares issued in conjunction with the acquisition of Jamba!.

I would also like to point out, that under our previously announced stock repurchase plan, VeriSign purchased approximately 2.1 million shares of common stock in the open market during the quarter for approximately $35 million. The original plan provided for up to $350 million worth of stock to be repurchased, of which 105 million has been purchased to date.

Moving on to balance sheet and cash flow items. Cash balances consisting of cash and equivalents, restricted cash, and short term investments totaled $661 million at September 30th, representing a $32 million increase from Q2 levels. This increase was a result of inflows from the strong cash generated from operations, and $7 million we received from the sales and equity investment. This was offset by cash outlays for 22 million for capital expenditures in the quarter, and the 35 million related to the repurchase of VeriSign shares I spoke about.

Our accounts receivable balance increased to $183 million as of September 30th. Driven, primarily, by the higher bookings in our VCS businesses, including Jamba!. This translates into net DSO for Q3 of 43 days, at the low end of our targeted range of 40 to 50 days. Total deferred revenue on the balance sheet came in at $406 million at the end of Q3, an increase of 14 million. The growth you see here was driven, primarily, from solid bookings in both Security Services and Domain Names in the ISG reporting unit.

Moving on to cash flow metrics, operating cash flow for the third quarter was approximately $84 million. The key drivers of the strong cash flow generation were the delivery of better then anticipated operating income in the quarter, and the deferred revenue growth I just mentioned. Well , that completes the Q3 financial review.

Let me now turn to our business outlook which we are upwardly revising based on the third quarters results. As it relates to Q4 revenue guidance, we are raising our outlook for total revenues to approximately $345 million. This guidance reflects the the expectations that the Internet Services Group revenue would show growth to approximately 149 million, and in our Communication Services Group, we would look for core revenue growth to approximately $111 million. On top of that, we would like for Jamba! to contribute an additional 85 million of revenue, which, together, results in total estimated VCS revenue of approximately 196 million. As it relates to [margins] for Q4, we would expect the growth margins to be flat to modestly up in the 62.5 to 63% range.

In terms of operating expenses for Q4, our plan is to continue to invest in the worldwide expansion of Jamba! services, as well as the upcoming launch of our Wireless Content Services in the U.S. We will also continue to expand our corporate marketing campaign that Stratton spoke about. These initiatives will drive increased investment in R&D, and sales and marketing in Q4, as well as in 2005. In addition, we will continue to have integration spending for Jamba!, particularly as it relates to IT and Support Systems, corporate infrastructure and Sarbanes-Oxley compliance.

This all translates into guidance for operating margins in the high 19% to 20% range for Q4. As it relates to share count, we would expect the fully diluted share count to be approximately 261 million shares, which takes into account our normally anticipated quarterly share [creep], and our annual performance-based stock option grants for employees. Taking into account the revenue and margin guidance I just gave, we would expect earnings-per-share for Q4 to be approximately 20 cents, using a 30% effective tax rate.

Then, moving on to some balance sheet guidance. We continue to see deferred revenue growth in our core businesses, and look for deferred to grow by approximately 10 million in the quarter, fueled, primarily, by forecasted sales of security services and dot com and dot net names. Turning to operating cash flow, given the increased revenue guidance and operating margins I just spoke about, we are increasing our operating cash flow guidance to a base line range of approximately 80 to $85 million for Q4.

Now, looking out to 2005, in keeping in mind that we are right in the middle of our 2005 budgeting and planning, we think it would be helpful to give you a preliminary high-level view of our outlook for overall revenue and EPS growth. Given the continued momentum in our core businesses, and the early attraction we are currently seeing in the Jamba! business, at a base line level, we would expect total revenue to be in the range of approximately 1.4 billion, to 1 billion 425, and we look for EPS in a range of 84 to 85 cents in '05. This guidance anticipates our continued investment in new products and services, further expansion of sales and marketing, including launching Jamba! services in the U.S. and other new markets, and other corporate initiatives. We'll provide a more detailed update for 2005 guidance on our Q4 earnings call in January.

And with that, I'd like to open the call for your questions. Operator, may we have the first question, please.

Yes, Ma'am. And, again, the conference center would like to formally apologize for any inconvenience that was caused and we would now like to take your questions. (Operator instructions) Our first question is from Todd Raker .

Hey, guys, great quarter. A few questions for you. First, can you talk about the sustainability of Jamba! in terms of revenue momentum? I know there's been some discussion in terms of the half-life of the market for ring tones. And, talk about where you see that going, with the kind of 12-month time horizon?

Sure, Todd. Obviously, we came into the quarter, we'd had a month behind us, and now we've only got four months. I think we're pleasantly surprised at the continued subscriber growth in the markets in which Jamba! has already been in, obviously, the Germany and the U.K., and some early levels of traction in new countries like Italy, and the Netherlands, and the like. So, I think as we look out to the sustainability, we're pretty comfortable in the 12-month horizon, that the availability of new markets in Europe to enter, much the way we have already in the UK and Germany. The Ability to bring it to the U.S. and Latin America, and maybe, one or two countries in Asia, sometime next year, the the availability of new products and services, if you will, what are called master tracks, which are MP 3 versions of ring tones, picture messaging, new multiplayer games and the rest, and the availability of new handsets both, this holiday season, and what we're looking for in '05. When you look at all those things put together. While there may be some degradation in (indiscernible) poly-phonic ring tones later next year, it's likely that there will be more then enough new types of products for new handsets and new networks to make that up.

I think you guys mentioned in your prepared comments that ASP's on the wireless side were going up. Are you seeing the Jamba! ASP's move up?

That was a specific comment that Dana was making. We did see modest increments in the Jamba! per-month, per-subscriber charges in Q3, as they added some new countries and upsold new subscriptions to the existing base.

What are you driving at? Is it volume? People just going for more ring tones per month? Or are you actually seeing price points actually shift upward?

A couple of different things and depending on the country. In some countries like Germany, we create bundled offerings at $2.99 Euro and $4.99 Euro and the like. And, obviously, the higher priced subscriptions give you the availability of more down loads per month. And we've been successful in signing new subscribers up for more of those types of subscriptions, as well as upgrading a few. In the UK, I believe, we actually raised our prices from the initial test phase to the production phase, based on feedback and what was very good uptake, we're just seeing a variety of things that suggest we have not yet reached the feeling on some of the merchandising we can do there.

And, Todd, we also saw favorable pricing trends in the Wireless Roaming and Clearing Services this past quarter.

One quick question on the model. Gross margins were well ahead of my expectation and it looks like they're going to continue to climb here. Clearly, you're investing aggressively on the [OpEx] side. Where do you see the inflection point, in terms of operating margins really starting to expand? And, if you look further down the road, you know, what's your, kind of, two-year time or target for operating margins?

I think, if you had remembered before the Jamba! acquisition, we had been on a trajectory of going from 20% up towards our target of 25, over the next few years, through incremental gains in gross margin and operating margin, just on the kind of leverage in the business. With Jamba, we bringing in a new platform, and obviously, a lot of marketing spend, at a time in the market where it's really a land rush. And, so, we've chosen to make those investments in marketing right now to do that, even though you still saw a pretty decent margins just because of the over performance of that unit. So, I expect our long term targets have not changed. We'll still be targeting 25%, and then, hopefully, targeting longer term than that, even up to 30%. But, we'll take, probably, the next 12 to 18 months with the Jamba! business and invest in the market entry strategies that we need to, to really drive, kind of the acquisitions that we've seen in Europe into these other markets. So, no change in the long term strategy. But we'll definitely take the opportunity right now to invest in the marketing initiatives of Jamba!

And, Dana, can you just quickly break out the impact of foreign exchange on the Jamba! revenue line? How do you guys treat that?

It was less than $500,000.

Thanks, guys.

Our next question comes from Sarah Friar with Goldman Sachs.

Sarah? Operator, do you want to try that again?

Yes, sir. One moment.

Hello?

Hi, Sarah.

Can you hear me now?

We can.

I feel like I'm in the ad for cell phones. Okay. So, just to continue in the Jamba! scene, since it was such a blow out this quarter, could you just talk, maybe a little bit more tangibly, you kind of said here's how we go to the U.S. But, is there new technology buildout required as you move to a different cell phone platform here in the U.S? What's kind of the first step in getting customer wins there? I mean, do you have customers already kind of lining up who are interested in content? And could you just give us a sense for how quickly you think that could move for you?

Yes. Let me take the U.S. as an example of any new country we might enter with Jamba!. Obviously, the first thing you want to do, if you go back to my kind of end-to-end model of what Jamba! does, the first thing you have to do is secure the content licenses from the publishers for the new market, or potentially for new products such as ring backs, which are different than ring tones, or for MP3 tracks, as opposed to [poly phonic] tones. We've been working on that since the acquisition and Jamba! guys some up before that. And, we either have, or are confident we will get, all the licensing agreements we need for a U.S. launch. The second piece that's really important, is the handsets that exist in the market, even maybe a little bit more important than the network type GSM receiving MA, is what handsets are in the market and have we tested them? To the best of my knowledge, we looked at this a couple of months ago, and about 98% of the handsets that exist in the U.S. market are handsets we are currently compatible with, and we think that's actually a higher number then any of the U.S. providers of ring tones. The third area is kind of this on-air fulfillment capability, can we create a short code that works across network, and then allows us to deliver the ring tone without forcing the customer to a website on-line or without forcing the customer into some two or three-step process. We are now in testing on that with various carriers here in the U.S. And, believe, again, we will be able to demonstrate a positive result there. Then, of course, the last part is demand generation, both through ourselves and through carrier partners, and those discussions are just beginning. I would say at this point, we're very satisfied with where we are in terms of prepping for the U.S. market. We also have begun work in Australia in the last two weeks, and have seen early launch there where we're getting several thousand subs a day signing up there. We've not even begun demand generation. So, long story short, it's a proven model the guys have used in Germany and the UK, we are not yet running into road blocks either in the U.S. prep, or in some other small countries that we've begun to work in?

Thanks for that answer. It was great. And, then, just finally, on the wireless side. Are there any other significant contracts coming up, either on the billing side, or with your wireless carriers that we should be aware of as we go towards the end of this year?

Yes. Not as we begin at the end of this year, but as we talked about on the last call, several years ago, Verizon bought the price properties, and we've been rolling that contract off. The Impact of that will come up sometime in Q1 or two Q2 with us, and you'll see in the core, a bit of a downtick there. We expect we'll make it up through both Jamba! growth and new services cells to other carriers. The other piece that we have is that, you know, you know in our wireless database businesses, the more volume we get, the higher discounts we give customers, so there will be some of that. But, those are based into our guidance numbers that Dana just gave you. It's all inclusive.

Great, thanks very much.

And our next question comes from Ed McGuire with Merrill Lynch.

Good afternoon. Actually, moving back to the Communication Services Group, could you talk about some of the newer initiatives that you've implemented, the VoIP to SS7? Where you see some incremental growth coming from new services in that segment?

Sure. Well, let's start with Tier-1carriers, which has been, obviously, a very big target of ours through 2004. Very pleased to say that in the second -- I'm sorry, in the third quarter, we landed a Tier-1 carrier for our Net Discovery Services, which is our lawful intercept technology. We also landed a Tier-1 carrier for GSM clearing. So, that's where you're starting to see some new volume upticks. In the VoIP world, we really have been, as you know, building for sometime, kind of this VoIP capability on the Atlas platform. And so, we've been showing that at various conferences and industry events to large wire line carriers, to cable operators, and to the next gen carriers who are coming up from, you know, a ground zero start in VoIP. The product we announced last week, I believe, at the USTA, was called SIP-7. It's a way for VoIP providers to get easy access into the SS7 network to determine a call. We probably have more than a half dozen customers on that service already of the new VoIP carriers. The IP connect services that we launched at Vaughn this week, are really about tying enterprise PBX's into a VeriSign directory service in the sky, through integrated capabilities with folks like Cisco and Avaya and others. That will be a product that comes to market in terms of general availability, really next year as Cisco updates their product line and others do as well. We're also working with a lot of the wire line providers in either prototypes or test phases, with an Atlas offshoot we call the Network Routing Directory that we also launched last week. So, you know, in general, I would say in the VoIP world we've taken Atlas and repurposed it to about 6 or 7 different product lines that will be launching to both wire line carriers and to to the next generation carriers that are starting to come in. And, we'll also be introducing Net Discovery Services for, voice-over IP as well. We're really kind of filling up the portfolio, at a time we think is still early in the uptake of VoIP, but where someone like us, who's an eco-system kind of player, needs to be there demonstrating what we can help people do.

Did you just provide an update on the dot net RFP's, sight finder, and the ongoing issues with ICANN.

Not a lot of new news. There was a hearing run in the U.S. Congress a few weeks ago through Senator Burns' office and his committee. ICANN, at that point, announce publically there that they were going to be delaying the RFP for a few more weeks. So, we're not exactly sure what that means, we still expect to see it, either by the end of this month or some time in November. Don't expect there to be any major surprises there. We have our bid team fully engaged on putting together what we think will be a world-class proposal. On the lawsuit front, you know, the both parties have continued through their law firms to go back and forth with various filings and proceedings, there's really, I wouldn't expect, there's nothing imminent there, in the next few months.

Okay, thanks very much.

Next, we'll hear from Rom Fernavottin with Morgan Stanley.

Hi Stratton and Dana, this is (indiscernible) I just wanted to ask a few questions regarding Jamba! metrics. Particularly, wondering if you guys are going to give any clarity regarding the number of subscribers on the platform and quantify if you download, or actually how they've been going? And the other question I had was regarding VoIP. I don't know if you guys addressed this already, what percentage do you think of revenue could VoIP be in '05 and '06 of the telecom or Internet Services Group?

In terms of Jamba! metrics, I think we'll take another quarter to really get fully our arms around what the subscribers look like. Billable subscribers versus gross subscribers, number of downloads averages per subscriber, you know, price points of various things, we'll come out with a set of metrics as we head into '05 to give, you know, some level of visibility into the wireless content site of our business. Again, just it's so early and the growth is so phenomenal at the moment, we really want to take some time to make sure we're focused on the right metric that, that in fact, do identify the drivers in the business. As it relates to VoIP revenue, you know, I think you have to classify it in two ways. There's VoIP to SS7 or VoIP to traditional [PSCN], where we are the enter operability hub or bridge. That's probably single digit millions next year, growing to double digit millions in '06. So, in a total telecom business, with Jamba, that's going to be 700 million plus, it's pretty small numbers. As it relates to the VoIP interconnect for large carriers or next gen providers, we really believe that's an '06, '07 market at best. But, that we have proven through the Atlas technology, that we're one of a very few number of vendors who could really provide the interoperability between the major carriers. And, so, my expectation is in '05, we'll be in some major tests with large carriers and next gen providers with VoIP to VoIP. But we're not doing it for '05 or '06 revenue. Nor do I think based on our guidance, do we really feel we need

Thank you. And we'll take our next question from Scott Sutherland of Wedbush Morgan.

Couple questions, first on the Jamba!. What kind of operating and gross margins do you see from the business now? Where do you expect that to trend as we kind of roll that into your core business?

I think on the gross margin side, it's in the 70's. And that's helping, obviously, with the overall corporate gross margin, as well as the Communication Services gross margin in the last quarter. On the operating margin side, it was in the teens when we bought Jamba!. We believe we could get it into the 19, 20% next year. Although, as I said earlier, given the over performance in the business and the absolute dollars of operating income we're (indiscernible) to generate, we'll probably look to use the additional uplink leverage to invest in new-market entries. So, I think, we still believe Jamba! will hit the corporate operating margin. Whether we do that second half of next year or '06, really will depend on the opportunity we see to invest more early on to establish a foot hold in the U.S. market, and others.

Of course (indiscernible) Jamba! they want (indiscernible) billing. In Jamba!, in your high-level guidance for next year, do you include any carrier win? Also, in Jamba!, what kind of effect does it have on deferred revenue, if any at all? And do you see any play with your SS7 network and IP network in the ring back tones market? Billing side, any new updates there on new product announcements or service announcements?

Let me get all those together. On carrier wins. The Guidance we gave does not assume any major carrier wins in new markets for Jamba!. However, it does assume penetration into some of those markets on a relatively modest way. So, I don't think we're targeting or tagging any particular account win. And, again, in the Jamba! model, what we really need is connectivity to the carrier's networks, and we're very confident we're going to get all we need there. As it relates to ring-back capabilities, and the rest. Both, the Jamba! team and the VeriSign communications team studying that product intently over the last few months, we will have an offering in the market in 2005, if not sooner. No problem at all instrumenting that in our current network, current Jamba! platform and current billing systems that handle some of the wireless carriers who are interested in that. In terms of billing plat form, as we talked about last time. We are in the middle kind of phase of re-engineering both the postpaid platform and the prepaid platform to new technology, and in integrating that with some of our E-commerce activities from the internet side. Those things still remain on track for kind of a mid-next year relaunch of both platforms.

Great, good job on the quarter.

Thank you.

We'll take our next question from Phil Winslow with Credit Suisse First Boston.

Great quarter, guys. Most of my questions have been asked, but I would like to spend time focused on the garden side of the business. Hopefully, you can provide some clarity about how business tracked during the quarter, and perhaps, how much the revenue contribution was?

We don't break out the revenue contribution specifically for the MSS business, which is now both the garden and the original VeriSign side. We continue to see good traction there both in closed accounts, as well as, I think, in fact, the third quarter we had the highest rate of the year in new closures. We also landed a very large International customer for the first time. We will be running the Security Operating Center in partnership, with the system integrator for a large government in Asia. And, we're also in the pipeline, seeing, probably, the largest deal sizes we've ever had in the MSS sales pipeline. All be it with what appear to be longer closed cycles. But, I think that business is, you know, about to accelerate, given what we're seeing right now on the pipeline. Obviously, the Gartner placement of us in the leadership quadrant, as well as kind of our continued execution state, we think bodes pretty well. But, again, it was a small business as we came into the year. It's growing. It grew, in terms of devices under management, 8% quarter over quarter. So, those are good rates. And, I think we're pretty excited about what's about to come.

Turning briefly to the website certificate side of the business, have you seen any change in the competitive landscape there or the pricing environment?

I think for about the third or Fourth Quarter in a row our prices picked up a few dollars on a per-unit basis. Our installed base, obviously, went up quite a bit, 17,000 units. We are continuing to look at ways to drive higher retention rates through some life cycle marketing. So, all the marketing campaigns that we spoke about in the call, are really targeted at this holiday season in Q4. So, generally, Q3 is the quarter in which we have the least amount of renewable opportunities. Q4 tends to be the one where we have the most. So, I expect a pretty big quarter in [SSL] this time.

Great, thanks a lot, guys.

And we'll take our next question from Rob Owens with Pacific Crest.

Good afternoon. Could you give us a little update on the token initiative, which is on Q3 and was only out a couple weeks? But, really, what you're looking for in Q4 and impact of 2005 ?

Let me talk first about, on a kind of customer interest and activity level, and we'll talk a little bit about financial impact. We did sign our first major customer at the end of Q3. Pretty excited about that. A financial institution. Next week, digital I.D. world and we'll be making several more types of partnership announcements there, as it relates to both the [oath] initiative, new hardware vendors, as well as service partners and providers who are going to be working with the token. We've installed our first couple of accounts already. And, in some cases those installations took just a few days. And the customer's already issued hundreds of tokens. One customer actually had a competitive system in-house, and over about the six-month period that they'd owned it they'd only been able to get it up and issue five tokens. So, we are seeing in some early indications that this notion of easier to deploy, more flexible, better cost of ownership is working. We've deployed them internally to several dozen VeriSign employees in our first test, and we'll be going through the whole company through the course of the next few quarters. We're already using it for Windows logon, for [YPly] access, and for VP and remote access. So, it's a killer product. We're very excited. The Pipeline for that is growing faster than anything in our history. And the sales force is pretty keen upon getting some big wins here in the fourth quarter and starting up Q1. We said, we'd expect that product to start modestly, kind of in the single digit millions again next year, we may have some upside there if this activity translates into bigger orders sooner. But, long term, it's going to be a big product line for the [VSS] business.

Great. And, can you remind us how the revenue model works on that, Stratton?

It's generally a per user, per-year subscription. There're several versions of it, there's OTP only, there's TKI only, and there's OTP and TKI. It depends on whether the customer has, you know, already have certificates from it, or is a brand new customer from start-up. But, in essence, we talk about a 25 to $30 per year user fee, and that's all inclusive. There's no other software to buy. There's no administrators to hire and to run all that.

Great. Thanks.

Thank you. At this time, we do have a follow-up question from Todd Raker of Deutsche Bank.

Actually, it was asked, guys. Thanks.

Thanks, Todd.

We also have a follow-up question with Scott Sutherland of Wedbush Morgan.

One more question on Jamba!. If you can have the numbers, can you give the linearity by month of the growth of Jamba! during the quarter?

I could. But I won't. I guess, Scott, very simple to say, it's very linear. We, as you know, as we came into July, we gave relatively conservative guidance because we only owned it a month. And, because, summertime we could have expected to potentially see, especially with such European concentration, maybe a slowing down. But, August was better then July. And, September was better then August. And, it's, obviously, hit quite a growth trajectory at the moment.

I guess I'll take that.

Thank you.

Thank you. And our next question comes from Christy [Beioss] with Citigroup.

Thanks. Stratton, you'd mentioned that MTV Europe was a big help in driving revenue for Jamba! in the youth market. Do you have have any partnerships like that or do you work with MTV and the youth to bring that to the U.S?

Again, remember what I said earlier. We are in market prep right now for the U.S. So, we're having all the discussions with the content providers, all the discussions with the carriers, and the discussions, we believe, are necessary with the media outlets that we would choose to use. So, you can expect to see similar arrangements with VeriSign and the folks that we have used successfully in Europe and other new avenues that might be, you know, appropriate here. But, again, this model is one that, at least seems to be very transferable to other markets. And, at least, in the Australia test we're certainly seeing the same kind of uptake we had experienced, for example, one into Italy two months ago. So, it's the kind of subscriber growth, and getting the impulse buying in front of the consumer, really seemed to be the secret sauce in getting this done.

And then, as a follow-up, you had originally guided to 180 to 200 million for Jamba! in 2005, giving the renewed revenue guidance, how should we (indiscernible) the contribution for that?

I think we're giving -- gave guidance at the 85 million range for Q4. So, the exit rate there is clearly well north of the 180 to 200. I expect that, you know, that run rate is kind of the base line and we'll grow it from there every quarter in 2005. So, that's going to be a big number.

Great. Thanks.

At this time, we do have one final question and that comes from Seth Potter Punk Ziegel.

Hi, just one quick question. In your ISG business, last quarter, your guidance, I believe, to 1145 or so million dollars and came in a little below that. Anything in looking to there, was there a contract you thought would happen that didn't occur? Thanks.

Thanks. Couple of things. We had some larger professional service engagements which we only recognize on completion. And, a couple of those added up to, you know, several hundred thousands of dollars. We had some activation of some larger MSF deals that we didn't get in September. We looked to get started in October or November. So, I would say, you know, you saw a really one month flips in some of the activations and closures on a couple of PSO deals, but nothing other then that. Meanwhile , the bookings trajectory for deferred revenue in both SSL and domain name, has accelerated in October. So, we're actually would expect to see a pretty strong ISG quarter.

Thank you, and that does conclude the question & answer session today. At this time, Mr. Gatoff, I will turn the conference back over to you for any additional or closing remarks.

Thanks, operator. We realize that the call was dropped in the middle at some point because of the technical problems on the side of the operator. We would like to let people know of the call back number, if that's helpful right now. It's 888-203-1112. Pass code 842883. Thanks very much for your time today. As always, we look forward to talking with you and answering any questions that you might have. Thank you and good evening.