威瑞信 (VRSN) 2004 Q4 法說會逐字稿

Good Day everyone and welcome to the VeriSign Incorporated conference call. Today's call is being recorded. At this time for opening remarks I'd like to turn the program over to Steven Gatoff. Please go ahead sir.

Thank you operator. Good afternoon everyone. Welcome to VeriSign's fourth quarter and 2004 earnings call. I'm here today with Stratton Sclavos, Chairman and CEO, VeriSign; Dana Evan, our CFO; and Tom McCallum, Director of Investor Relations. We have got a lot to cover today. In a moment Stratton will review Q4 and 2004 results. He'll provide some insights into the strong performance of our business units. And then provide some color on Q1and the full year 2005. Dana will follow with detailed review of Q4 and 2004's financial results. She'll provide financial guidance for Q1 and a view into the full year of 2005.

She'll then open the calls for your questions. We anticipate the call ending at about 3:00 p.m. We remind everyone that other then the historical financial data, today's discussion may include forward-looking statements and is subject to the risks and uncertainties described in our annual reports 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, the related financial information discussed on this call and a reconciliation of GAAP to 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. 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 the fourth quarter capped a solid year of execution in growth for VeriSign. In addition to record revenues, operating income and cash flow in Q4 we also saw continued momentum in our core internet and telecom services, positive early results with our new opportunities in strong authentication and mobile content and forward progress on our longer term initiatives in voice and in RFID. As we entered 2004, we established a baseline for the overall business in Q1 and believed we could grow sequentially throughout the year. That strategy was based on the basic principles of growing our core services, introducing compelling new offerings in security and wireless content and expanding our presence in major accounts and international markets.

We're pleased that the year ended with strong evidence that our strategy is working and we're forecasting 2005 to bring more of the same. With that, let me dive into Q4 and the year-end highlights for the business units, beginning 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. Increased demand, deeper international penetration, and new product traction combined to make Q4 a record quarter across almost every metric in the Internet Services Group.

In our naming and directory services business, we processed over 3.9 million new registrations for . com and .net domain names in the quarter. We also saw renewal rates hit 73 percent a high mark for the year. The active base of names at the end of the year stood at a record 38.4 million, up 6 percent sequentially and over 26 percent year-over-year. We also sold over 116,000 SSL certificates during the quarter , another high mark for the year.

This takes our active install base to a record 455,000 up 2 percent sequentially and 18 percent year-over-year. In addition, we saw substantial renewals for our managed SSL offering from some of our largest enterprise customers. In our Payment Gateway business we saw a net increase of close to 9,000 new customers bringing us to a total of 127,000 active merchants, up over 7 percent from last quarter and 25 percent year-over-year. As a result, our gateway handled a record 118 million transactions for an aggregate value of $9.5 billion during the quarter.

We believe the domain name, SSL , and payment businesses are excellent examples of intelligent infrastructure services that enable network communication in commerce on a global basis. Given the recurring nature of the revenue in these lines of business , the strong volume growth in 2004, should lead to continued revenue momentum for ISG this year. Moving to our Managed Security Services business we now actively manage 3,400 devices, up 8 percent from Q3 and 34 percent year-over-year.

We also had several significant customers wins in Q4 which will allow us to continue to drive device counts and revenues up in this line of business in Q1. Of course the most significant investment quarter for ISG was the launch of VeriSign Unified Authentication platform and next generation tokens. We believe this new offering for strong authentication is already proving to be easier to deploy , more cost effective and more flexible then anything else on the market .

Winset (ph) U.S. Bank Corp, and several other accounts as well as a rapidly building pipeline of trials and prospects, leads us to believe that we will see significant traction with this product line in 2005. We expect to be announcing additional customers, channel partners and product line extension this quarter. Key customer wins in the quarter for the overall ISG business included security wins at Morgan Stanley, GlaxoSmithKline, Citigroup, Fidelity Investments, Honey Well, Verizon and British Petroleum.

On the RFID side of the house, we also established pilot relationships with Acer and NDT Communications. All in all we're very pleased with the strong finish and good momentum in the internet services group heading into Q1. Now let's move to our Communications Services Group. CSG provides intelligent communications, commerce , and content services to fixed line, mobile, and broadband carriers and service providers. Demand for our core services, coupled with strong sequential growth in mobile content, once again drove over achievement in the CSG group.

We're very pleased that in addition to continued ramp up of our new mobile content messaging services we saw steady performance in our legacy connectivity and database business, especially in the base of industry consolidation and seasonally slow calling trends in the fourth quarter. As relates to business metrics of the group, we ended the year with just under 1,300 carrier customers. In addition we delivered over 12.8 billion database queries in Q4 up from the 12.7 billion in Q3. We also processed billing and payment services for approximately 6.5 million wireless users up slightly from 6.4 million in the prior quarter.

We continue to expand our relationship with several carriers during the quarter as well, including Cingular, Western Wireless, Midwest Wireless, Leap, Metro PPS and XO Communications. In general each of these customers is now buying additional services from us and/or working with us in mobile content and messaging. As it relates to longer term strategic initiatives that made progress during the quarter we announced our IP connect services for voice routing and interoperability receiving the Product of the Year Award from Internet and Telephony magazine. In addition we announced that VeriSign and Thomson will partner to develop an on-demands service to support the secured delivery of electronic entertainment over broadband network. You will be hearing more about both of these efforts later this year.

Of course, our mobile content services were the highlight for a second consecutive quarter. Even without a major new market entry impacting Q4, revenues in this line of business were up 27 percent sequentially as we saw increased penetration in Europe and the initial contribution from Australia. As we've discussed before, each new market entry typically drives incremental revenue one to two quarters out as we establish an initial subscriber base and complete a validated billing cycle.

As many of you know we also began testing the mobile content services in the U.S. in December. Using the Jamster brand we built an initial content portfolio, tested compatibility with a wide variety of CDMA and GSM handsets, established billing connections to Cingular, AT&T Wireless and T-Mobile and began our direct marketing efforts on youth oriented television channels. I think at this point it is fair to say that the early returns have met and in some cases exceeded our expectations.

Based on those results we expanded our marketing efforts late in December and are planning to continue this throughout Q1. Clearly the U.S. market for mobile content is growing rapidly and we look forward to actively participating in and becoming one of the leaders in the market by the end of the year. Our near term plans include broadening the content catalog, establishing additional carrier connections and developing new demand generation spots for popular artists and titles.

We will be providing more details on the status of the U.S. launch on the Q1 call. I did want to point out, however, that we did not recognize any U.S. based Jamster revenue in the fourth quarter as we have not yet completed a full billing and collections cycle with the supported carrier.

Of course, while Jamba and Jamster make up the center piece of our digital content strategy, our recent announcement of our intention to acquire LightSer(sp)demonstrates our commitment to offer carriers a broad portfolio of market leading services, that can accelerate new revenue streams for them and build greater customer loyalty. As a recap, LightSer(sp) offered a suite of carrier grade MMF (ph) services that allow users to capture, view, annotate, and share, multi media messages with any hand set or e-mail address regardless of device, file type or network operator.

Today LightSer(sp) works with a growing number of tier 1 wireless carriers, including Sprint, Bell Mobility and Rogers Wireless to provide hosted picture and video messaging services for millions of wireless customers around the globe. From the financial side, LightSer(sp) adds a rapidly growing profitable business to our VCF portfolio. We anticipate the transaction will close late in the first quarter subject to the standard U.S. regulatory approvals and other conditions. You can expect us to issue a press release upon the closing of the deal.

Over all we worked very diligently this year to revamp our CSG portfolio services. To be positioned to help carriers drive new revenue stream in the converging world of voice and data. We are pleased with the progress to date and proud that Frost and Sullivan recently named VeriSign Telecom Service Provider of the Year.

With that let me now say a few words about the overall trend we're seeing in the market and our outlook for Q1 in 2005 as a whole: We believe the end market for our intelligent infrastructure services is being driven by an accelerating global migration from physical to digital infrastructure, a dramatic increase in broadband and wireless communications and commerce, and an emerging convergence of mobility and entertainment. We also believe these trends will continue and potentially accelerate further in 2005. With that in mind, we believe we have positioned the company to help our customers rapidly introduce new network based services while effectively coping with the issues of cost, complexity and security on these modern networks.

So in 2005, we would look to once again grow our core services at double digit rates, capitalize on the early success of our new offerings in security, and mobile content and further expand our penetration in key accounts and major geoographies. Along the way we will also continue to invest in our long term opportunities in voice and RFID that can fuel additional growth in the coming years. Given the results for Q4 and our near term visibility in the business, we are raising our full year 2005 revenue and earnings guidance, Dana will provide the details in a moment.

As it relates to Q1, let's first talk about the Internet Services Group. We are continuing to see good demand for our domain name, SSL and payment services. In particular we are projecting the active base in the com and net registries will surpass a milestone 40 million names for the first time this quarter. In addition the strong bookings finish in Q4 will add incremental revenue in MFF and strong Authentication in the first half of the year. In the communications services group we are now confident that the ramp up in new services such as mobile content and wireless messaging, will more than make up for the one time effects of the previously announced losses of billing customer in Q1 and the modest impact from continued industry consolidation.

This positive shift will allow us to fully absorb the $8 to $10 million one time dip in our legacy services in the first quarter and still grow revenue sequentially in CSG. Specifically we are forecasting at least 15 percent sequential growth in mobile content services as well as incremental revenue from other new services. In summary, we're pleased with the way 2004 ended and excited about our opportunities in 2005. Thanks very much for your attention. Now let me turn it over to Dana.

Thanks, Stratton. And thank you everyone for joining us this afternoon. As we enter 2005, we are very pleased with our fourth quarter and annual results. 2004 was a year that reflected not only strong execution of our growth strategies, but also the achievement of results that exceeded all of our financial targets.

In addition, we were very focused on continuing investment in strategic areas, driving operational excellence and efficiency across the company and expanding business line profitability. These efforts deal with a sharp increase in performance and strong results for 2004. Over the course of the year, we generated revenues of approximately $1.17 billion and delivered operating income of 238 million, all while significantly expanding margins.

Of particular note these results also drove strong annual operating cash flow of over $365 million. We exited 2004 with record fourth quarter revenues and earnings. As we begin 2005, we are well positioned for continued momentum in our core businesses, exciting new growth areas in securities, directory and mobile content services, and a strong balance sheet to fuel further expansion and growth. So lets turn to the detailed financial results starting with the income statement.

On a consolidated basis, VeriSign reported fourth quarter revenue of $356 million up from 325 million in Q3. The strong sequential revenue increase was driven by solid quarters from both the Internet and communication services group. Looking at revenue by reporting unit, the Internet Services Group delivered approximately $152 million of revenue for the quarter, representing 43 percent of total revenues. Solid growth from our web certification, managed security and naming and directory services, drove the sequential increase you see here.

On a year-over-year basis revenue for the Internet Services Group grew 29 percent, 22 percent organically. Our communications services group reported $204 million of revenue for Q4 up from 182 million in Q3, representing 57 percent of revenue for the quarter. This increase was primarily driven by continued strong demand for our mobile content services which delivered 27percent sequential growth to $94 million in the quarter.

Moving to our international operations, the percentage of revenue driven from international customers, affiliates and subsidiaries was approximately 37percent for Q4 up sequentially from 33percent in Q3. For 2004, international revenue represented 28percent of annual revenues, as compared to 10percent in 2003. Looking at cost of revenues and gross margins our cost of revenue for the fourth quarter increased $7 million due to the revenue growth we experienced coming in at 129 million. This translates into a 63.7percent gross margin for the fourth quarter, up from 62.5percent reported in Q3.

The margin improvement was mainly generated by a shift in revenue mix with web certifications, managed security, naming and communications services all delivering higher margins in the quarter. For the year, gross margins were up approximately 420 basis points, demonstrating the leverage we experienced, more intelligent infrastructure and economy to scale. Turning to operating expenses and related items, total operating expenses for Q4 were $152 million, up from 140 million in Q3.

The majority of the dollar increase occurred in the sales and marketing area and is attributable to the increased marketing spend relating to customer acquisition for our mobile content services, as well as continued spending for our one VeriSign branding campaign. This increase in marketing expenses was partially offset by efficiencies and [indiscernible] spending in D&A. Another milestone for the quarter was that pro forma operating income came in at $75 million, a record high in VeriSign's history.

This translates into a 21percent operating margin, a 142 basis-point improvement over the prior quarter. The revenue mix, gross margin improvements and tight G&A expense management I just spoke about all contributed to the healthy increase here. On a year-over-year basis, operating income grew by 21percent, and operating margins expanded by 182 basis points. A clear demonstration of the operational efficiency and leverage inherent in our business model.

As it relates to employee head count we ended the year with a total employee base of approximately 3,200 people, up from 3,100 at the end of Q3 and 2,470 at the end of 2003. The quarterly head count increase occurred mainly in the mobile content business and over the course of the year, head count additions came primarily from our acquired companies. Our strong financial results were also complimented by solid efficiency and productivity improvements in 2004 with revenue per employee increasing 11percent year-over-year to $393,000 per employee.

VeriSign reported non-GAAP pretax income for the fourth quarter of $78 million, another record for us, and up from $69 million in the previous quarter. Year-over-year, non-GAAP tax income grew a healthy 23percent. Non-GAAP earnings per share for Q4 was 21 cents, a penny ahead of our guidance and up from the 19 cents we reported in Q3. This earnings per share calculation uses a fully diluted rated average shares outstanding of approximately 266 million shares for Q4.

The higher than forecasted share count was the result of employee stock options at strike price thresholds coming into common stock equivalents as the stock price reached multi-year highs at year end. Moving on to the balance sheet and cash flow items, cash balances increased by $128 million in Q4, translating into cash equivalence and short-term investments, totaling approximately $789 million. This sequential increase was primarily the result of extraordinarily strong operating cash flow in the quarter.

During Q4 we also took the opportunity to monetize a portion of our holding in VeriSign Japan. Selling a small percentage of our shares for $78 million in proceeds. We then turned around and used all the 78 million to purchase approximately 2.4 million shares of VeriSign stock. Over the course of 2004, we repurchased approximately 4.5 million shares of VeriSign stock for nearly 2 percent of the total shares outstanding. As it relates to accounts receivable, net VSO for the fourth quarter came in at 46 days which is in the middle of our targeted range of 40 to 50 days..

The increase was primarily due to strong international sales in our mobile content business. Total deferred on the balance sheet was $413 million at the end of Q4, as compared to 406 million in the previous quarter. Year-over-year the deferred revenue grew 22 percent. Moving on to the cash flow metrics, operating cash flow for the quarter came in at $135 million, bringing us to a record total cash flow for 2004 of 365 million.

Our execution this quarter drove stronger than anticipated cash flows for the company as operating income rose to record levels and networking capital increased significantly. Capital expenditures for the fourth quarter were $36 million, up from 22 million in Q3. For the year, capital expenditures came in at $93 million, slightly below our forecast for the year due to our focus on driving operational excellence, greater efficiencies and better than expected pricing from our vendors. The annual capital expenditures break down as follows: Communication Services Group, 50 percent, Corporate and Infrastructure Services 33 percent, and Internet Services Group 17 percent.

We continue to see leverage in our capital infrastructure over the past few years as our annual capital spending has continued to decrease from 176 million two years ago to 108 million in 2003 and now 93 million in 2004. And that completes the financial review.

Now, let me turn to some guidance for Q1 and our outlook for 2005. As it relates to Q1 we would look for revenues to come in at approximately $370 million. This revenue guidance reflects the expectations of the Internet Services Group shows quarterly sequential growth to approximately $157 million. And that the Communications Services Group would expect Q1 revenue of approximately $213 million.

This BCS guidance would include approximately 15percent sequential growth in our mobile content services as well as the anticipated and previously communicated decline of revenue from our expiring price Verizon contract and some effects of consolidation in the telecom industry. We also note that this revenue guidance does not include any contributions from our pending LightSer(ph) acquisition. We are still expecting this transaction to close late in Q1 and it will likely have minimal impact on this quarter's results.

Post-closing we anticipate LightSer(ph) to contribute approximately 30 million in revenue for the remainder of 2005. As it relates to margins for Q1 we expect growth margins to be flat to marginally up in 64 percent range. In terms of operating expenses, we will continue to execute on our plan for investing heavily in the world wide expansion of our mobile content services.

This would suggest a significant increase in sales and marketing and research and development expenses in Q1, including the continued U.S. launch of our mobile content services under the Jamster brand. One would expect operating income to increase in absolute dollars, we look for operating margins to be relatively flat in the 21 percent range as a result of this increased spending. As it relates to share count we would forecast a fully diluted share count at approximately 207 million shares--267 million shares, and this assumes normal share [indiscernible] of approximately 1 million shares for the quarter.

Taking into account the anticipated Q1 revenue, our planned increase in spending and the margin guidance I just gave, we are guiding the earnings per share for Q1 of 21 cents on a fully tacked basis, and consistent with first call estimates.

Now moving on to balance sheet items. Looking at operating cash flow we would expect to generate cash flow in Q1 in the 50 to 60 million range. While this forecast is significantly below the Q4 cash flow we just delivered, Q1 historically is a light cash flow quarter for us as a result of annual bonus payments and insurance policy renewals that take place in the first quarter of the year.

In addition, in Q1 we will begin billing U.S. customers for the first time for their Jamster mobile content services and this will naturally drive an increase in accounts receivable and subsequent use of cash flow in the quarter. Our outlook for capital spending for the year indicates conservative expectation for total capital expenditures of approximately $110 million.

We would expect approximately 50 to 60percent of that annual budget to be spent in the first half of the year. On the earnings call Q3 we gave preliminary guidance for 2005. Given the continued momentum in our core businesses and strong traction we're seeing in the mobile content business we're now raising that guidance for 2005.

We now look for total revenue to be in a range of approximately $1.5 to $1.55 billion, up from the previous guidance of 1.425 billion. Taking into account our planned investments and the aggressive spending for the seeding and penetration of the mobile content market particularly in the U.S. we would expect the EPS of 90 cents for 2005. And lastly, given this new revenue in EPS guidance for 2005, we would look to generate a baseline operating cash flow for the year of a least $400 million . And with that, I'd like to turn the call open for your questions. Operator may we have the first question please?

Thank you At this time if you do have a question, please signal by pressing star, 1 on your touchtone telephone. Again that is star, 1 for any questions at this time. We'll take our first question from Todd Raker with Deutsche Bank.

Hey, guys, two questions for you. On the mobile content business, you know the sales investments going up on the entry into the new markets, can you talk about what you think the baseline run rate is as you start to see see maturity in the U.S. markets?

Based on run rates on marketing expense?

Yeah, exactly do you think we'll see economy of scale as we move in to the back half of '05 or do you see kind of flattish, you know, 26 percent of revenue going forward?

I think the U.S. market is obviously going to be an opportunity we want to invest in significantly in the first half of the year. It is likely going into Latin America or Canada wouldn't necessitate substantial increases like the U.S. launch will. So I think the first half of the year you'll see it pick up here probably on the order, you know, 10 to 15 million a quarter. But at the same time, you know, coming out of that we would expect to be able to, you know, support a pretty broad subscriber base and make that payoff in the revenues on the top line.

In the U.S. market you guys talked about having a first full billing cycle. I assume you expect to see revenue in the first quarter. When do you actually expect to see revenue starting to hit? Is it a 30-day cycle? 60-day cycle? Before you actually recognize revenue from the billing cycle?

Typically if you take the experience from what we've seen in Europe, it is typically 30 to 45 days. We brought the largest carrier on late in December, with Cingular, as you know, we still haven't seen a validated billing cycle through that to see that show up on bills and get paid. I think it is probably somewhere in the middle of the quarter, second half of February, you know, we'll have some pretty strong confidence in what we'll see in the U.S.

The last question for you, there has been a fair amount of controversy on your acquisition of LightSer(ph), and whether tier 1 carriers are really outsource the messaging components. Can you give us your perspective and comfort level with Sprint and other tier 1 carriers and whether they're really going use this capability?

I think we can give you our opinion based on the due diligence we did prior to the acquisition. Obviously we believe Sprint is a very satisfied customer and has seen strong success with the LightSer(ph) platform. We believe other tier 1 folks we talked to, as well as the larger of the tier 2's, really are not yet cemented in their kind of architecture, if you will, or partnership there.

So we believe there are some very strong indications that , that market is available to us, with other carriers. We also believe that the existing offerings in the market, especially around switch-based offerings are failing to scale.

So our own diligence would suggest that opportunity exists, we believe there will be other tier 1 providers both in the U.S. and globally that are looking for a hosted solution. In addition, the interoperability services between carriers, just like we have with SMS [ph] is something that everyone will need, we believe, whether they get it from us or someone else to do the cross carrier exchange of messages.

Okay. Thanks, guys.

Thank you, we'll move next to Ed McGuire from Merrill Lynch.

Yes, good afternoon. When you talk about entering the U.S. market for mobile content, could you talk about any business model differences or differences in the arrangements that you may be reaching with the carriers in the different regions?

Well, as you know, Ed, our model is different than the existing players in the U.S. market from what we can tell. They tend to provide hosted platforms through the carriers. We go through a direct-marketing activity through media advertising and connect into those same carriers for billing.

You know, our expectation is, I think, that the market itself is growing very dramatically right now here in the U.S. I think that has been evidenced by our own results here quarter over quarter as well as other players . And I would expect the market is going to support a lot of growth for a handful of players this year. We would expect to end the year being the number one provider here of this market.

Okay. And moving on to the proposal to renew the .net registry, there has been discussion about potential pricing. Can you give your high level thoughts about how the product is proceeding? And your comfort level on the sustainability of pricing power particularly for the .com registry?

You know - - I don't - - I mean- - As it relates to the .net process, everything you see publicly is what we see publicly We submitted our bid. That bid went in there. We think with a very substantial proposal around how we would continue to invest in the stability and security of the .net registry, as well as new services to drive more demand for .net in undeserved markets today.

We think that is a first in class bid, and we will look forward to [indiscernible] evaluation of our bid and others. As it relates to the .com contract, there is no linkage between the .com contract and what is happening in .net or other TLD's. There will be no price impact to .com as a result of this.

And just moving on to the IP connect services, you talk about the types of customers you're seeing initial interest for the--as you roll these services out?

Sure, it really comes in two buckets. Kind of the new or--new generation type of service providers the [indiscernible] of the world, or others who need these type of connectivity services to take their voice-over IP calls into the traditional PSTN , when the terminating line exists there. That we call our STIP 7 services, we introduced those earlier in the year. We have a dozen or so customers for that and it is a routing service between, you know, IP world and PSTM world. The broader based IP connect suite we're talking about is really targeted right now at large carriers, existing carriers, as well as kind of cable providers as they look to kind of really get into local calling over voice-over IP, the scale of which we believe our atlas based technology is well served to support. You will see us also later in the year begin to target some early adopters and large enterprises and universities who are on the leading edge with voice already, and want to do inter-campus type of directory routing and connectivity.

Right. Thanks so much.

Thank you.

Next to Mary Meeker with Morgan Stanley.

Thanks. Just a couple questions. You obviously brought up revenue guidance for '05, you talk about the impact of LightSer[ph] you talked about the better then expected results from Jamba. Can you give us a sense of the - - what the real drivers are from the upside to revenue on a business unit by business unit basis and what's really different now than three months ago. The second question is, I think we have the numbers right here, but domain name growth looks like it was up about 25 percent year-to-year, in '04, versus 18 percent growth in '03. Do you think it's reasonable to assume that you have another accelerating year for the domain name growth in '05? Thanks

Thanks Mary. Drivers for growth [indiscernible] , first of all, the updated guidance that Dana gave for the year on the top line does not include any LightSer(ph). As we said, we think it would add another 30 million at least by the time it closes for the remainder of the year. That would be added on top of the 1.5 to the 1.55 billion she mentioned.

Drivers for growth, by the business unit , as your suggest in the internet services group, it is really more of the same. More demand around those core-enabling services for domain, SSL and payment. we would expect those to grow in the 15 to 20 percent range again. We are seeing a pretty interesting up-tick right now in the weekly type of domain name sales.

That's been occurring since Q3 and continued strong through the end of the year and year-end to January. It is possible there is a little bit of acceleration occurring there. Obviously we're monitoring that closely. It looks like that, plus other transactional businesses and payments and SSL will continue to fuel the 15 to 20 percent growth there.

In addition, with the managed security business and some new large customer wins, plus the token- -Unified Authentication and token platform, those would be gravy on top in terms of incremental revenue this year in ISG. On the Communications Services Group side, we are obviously seeing a lot of interest in the mobile content services, the messaging services, and the like. And that is going to fuel substantial growth this year, year-over-year.

Not just a U.S. launch of Jamster here, but in addition other markets that were being contacted, tier 2 players here that are asking for the services.We are very confident in, you know, growth for the communications services group driven by mobile content and mobile messaging because those are the revenue drivers for the mobile carriers today. I don't think you'll see a dramatic amount of revenue in the, you know, voice-over IP area, but we would expect in 2005 to solidify some of our relationships with the larger players, both domestically and internationally, so going into '06 or '07, voice would probably provide a new leg of growth for us there.

And the last thing we'll do in CSG is continue what we've been doing with legacy services during the last year, which is bundling them together and putting together packages for our existing customers, so that instead of two or three services, they are buying six or eight services from us and that allows us to take market share in the legacy part of the business and that will fuel some 2 to 3 percent growth quarter over quarter in Q3, Q2 and Q4. What you was the second part of the question Mary? I'm sorry.

You basically covered it. Thanks. Stratton, you basically covered it, thanks.

The next is Phil Winslow with Credit Suisse First Boston

Hi. Good afternoon guys. Just one quick question related back to sales and marketing. You mentioned late in the month of December that you started to push a little bit harder on the advertising standpoint in the United States. How much of that increased quarter to quarter here do you think is your core European base, job related marketing versus U.S. Jamster?

Probably about half and half, so we did see very positive early test results. We increased marketing spend almost daily in the U.S. coming out of the quarter.

Those results, you know, if you look to us to us to be at par or better with what we have seen, in the best of efforts over in Europe. On the European side we continue to see strong growth in the UK in December, and we turned on a little bit more marketing in Australia. So I think about half of it came from international and half from the U.S. It was significantly ahead of the spending we had intended to do, but believed we were best served in doing that to build that subscriber base up obviously for 2005 revenue growth.

Now where can I get - - looking I guess to the core German market, did you see any change there either on just the, you know, the pure ring-tone business or any of the other Jamba related services.

I think we saw relatively flat quarter in Germany last quarter around ring tone. The market there, as you know, starting to look at 3G, with vote-a-phone, new product lines we'll introduce this year to serve those new initiatives, and it's going through kind of a hand-set refresh period as well toward the end of the year. So we would expect Germany to show some growth here coming in the first half of the year, based on those two initiatives. UK and some of the other markets in Europe are certainly growing faster than that right now.

Great . Thanks. As far as your Q1 guidance for the mobile content , how much are you all making from U.S. contributions?

You know, relatively nominal contribution at this point. I think we're excited about the opportunity but we'll really want to get our arms around all of the levers as as we kind of come into this real full launch here.

Great, Thanks guys.

Your next is Sarah Friar with Goldman Sachs.

Guys just to build on Phil's question on Jamba in Europe given it is your more mature market. Could you just talk to --have you seen any change in your take of the revenue as contents got more sophisticated? Are you seeing content creators take more of the percentage of the dollar spent by an average consumer?

I think you still got a, you know, biggest driver of that particular issue, Sarah, will be the handset, the total volume of handsets in the market that can kind of play the new content. I think you're even looking even in Europe today, at only 10 or 15 percent of the handsets that can do the MP3 quality music, ring tones or some kind of video ring tones So I think you have a lot of growth in the handset conversion coming that will drive those revenue streams. Meanwhile, our discussions with the labels are confidential. We have different relationships based on the type of content that we get from them, and but we feel very comfortable with the mix of offerings we'll have in the European market that we'll still be able to maintain and improve the margins that we've got in that business.

In terms of the volume of ring tones or was there a pricing impact that started to play in there?

Sorry, I missed the first part of the question.

You made the comment that Germany was more flat this quarter. I wondered was total volume up but your price came down? Or was it just in general the volume of ring tone was similar to the quarter before?

It is up the same volume in Germany, I believe. There was no real pricing. We didn't take prices up in Germany. I believe we did increase prices in the UK. And we saw subscriber increases in the UK. The UK had a very good quarter.

Have you seen any appetite yet from the tier 1 vendors you're working with on the mobile content front to buy your other CSG services, like billing or mediation and so on?

We have seen that appetite. I would say that, as you might expect, the mobile content piece is creating a significant amount of interest that is allowing us to go in and put together some larger proposals around both existing services, as well as new content and messaging services.

RFID you mentioned a couple of more customers at the pilot stage. Have you seen any of your current customers move out of pilot into more of a wide deployment and I ask the question more to get a sense for where we are in the RFID market, is '05 going to be the year of RFID or we still looking at more of an '06 time frame?

What I think that you have got in the market place from what we can see is a grudging start to the slap and ship mentality of putting the tags on to meet the mandates of various retailers and you are seeing an uptake in the DOD and some other spaces. I do think that we are seeing a lot more activity right now from those supply chains in consumer package goods, pharma and military to want to connect to the network and begin pilots. We always said '05 for us is mostly about pilot. It seems to us that the market is kind of on track with that, as well. I wouldn't expect there to be any major RFID deployment because you're still not at tag prices or application integration levels that probably drive full production roll-out.

Got it great well Thanks a lot.

We'll now hear from Rob Owens with Pacific Crest

Good afternoon, guys. Can you give us an update on your token business right now, what you're seeing in terms of pricing and what types of channels we should see roll out over the next couple of quarters?

For the tokens, I'm sorry, is that what you asked?

Yes.

Okay. I think today we're still in the $20 to $25 range per user for the tokens, as we have, you know, intimated a little bit earlier in the call, we will be announcing product line extensions here as we talked about the open initiative was kind of creating a ubiquitous model for these types of devices and you'll begin to see the first group of that herein Q1 and Q2. So you'll see other product types in the token space and other price points, you know, in the first half of the year. As we said, our goal would be to drive token prices to sub $10 over the long term over the next two or three years and we think we're on track to do that.

And the go to market strategy for that, strategy for that Stratton, should we see that in Q1, Q2 as well?

I think that we said last year we believe we need to go into the markets direct here the first few quarters and get a sense of what customers are looking for. When those first large anchor tenants and then begin to evangelize the story. You have to build a channel program for. We recently put one of our most senior people on that initiative. She's building the team right now to do that. And we will look to recruit large and small-channel players, both domestically and in Europe this year to fulfill kind of the demand that we think we're going to create.

Great. Thanks.

It looks like we have a follow-up question from Todd Raker. at this time

No, that's not correct. Sorry, guys.

No problem. Again, that is star, 1 for any questions at this time. We'll move next to Chris Tobias of Citigroup.

Could you share with us, now that you have the Jamster bait in the U.S. for a couple of months what you have learned? What are the obstacles or trends , what types of marketing campaigns work or don't work?

You know, I think, Chris, it is too early to give a read out on all those lessons learned. Right now we're pretty enthusiastic that pretty much everything we tried as relates to the various media outlets and as it relates to the various kinds of packages, seem to be resonating with the audience that are seeing the commercials. We would expect to increase the types of content that we're offering and the way in which it is packaged here, towards the beginning of February and March. We'll be curious to see how that works. I think right now we're very pleased with the results so far. And the learnings from Europe have translated well so far to the initial efforts here.

And you had mentioned that only 10 or 15 percent of handsets in Europe are MP3 enabled. What is the similar number in the U.S. and what percentage of U.S. handsets are even polyphonic enabled?

The number I've seen is 10 percent or less for the MP3 quality or what are called the true tones or real tones. I'm sure the polyphonic numbers are close to 30 percent but I'm guessing at that.

Great. Thanks.

Moving now to Daniel Cummins of UBS.

Thanks. First question for Dana. Could you give us the going forward or kind of the run rate amortization, the non-cash amortization on the income statement, the 23 million. Was there anything one-time in that number for this quarter. What should it be going forward ?

That number will stay relatively consistent until we close the LightSer(ph) acquisition and at that time we'll be doing evaluation on those assets. So the good will intangibles will increase and that will also increase the amortization.

I wanted to just get back to the question on tokens, also I don't know if you would be willing to say how many deployments, of - - kind of big deployments of 50,000 or 100,000 you might have by year end '05. And Aladin(ph) said recently you were out in the market looking for an OTP supplier. Is that what people are asking you for right now? In other words is the market really still not ready for the smart token in big numbers.

I can't forecast the number of 50,000 of deployment. I don't think there is a whole lot of those in anybody's camp today. As we said last quarter, you know, our initial orders and couple of accounts have been larger than we thought in terms of unit volumes and those customers are beginning to take units this quarter, so we do think the market is expanding, both in terms of the number of companies looking for these types of solutions and in the potential volume that they may want to procure long-term rather than 500 or a 1,000 remote users looking to go to business partners and customers in a broader or a higher volume base. So we're pretty excited in what we're seeing in terms of market expansion, and we are seeing a lot of interest in our hybrid tokens. So, you know, I'm not going to comment on product announcements but we will have a full range of offerings from the low end to the high end, and, you know, our ability to put those into the market at different price points with different packaging, we think is very good at the moment.

Okay. And just one other follow-up. I thought you said you thought maybe the SSL demand out there is in the range of 15 to 20 percent for '05. Is that right?

That's correct.

Next to Steven Ashley with Robert Baird.

General administrative expenses declined from just less than 50 to 41 million. Dana can you give us some color on what was involved with that and what we can look for going forward?

Couple things going on in the quarter. Q3 was an unusually high quarter for us in legal expenses, as well as expenses related to Sarbanes Oxley. It was really when we were in a big crunch trying to get ready for our 404 testing and had unusually high level of legal activity. Those were the two drivers that pretty much brought the number down in Q4. Going forward, you know, we would expect that the G&A expense should stay somewhere in the 11 to 12 percent range for the year is what we forecasted.

Great. Stratton, just back to the token business, we have not seen financial institutions in the United States adopt authentication for their retail customers. Is that a discussion starting to happen? What is the reluctance there? What is maybe the chance we could see something on that front in 2005?

You know, Steve, I remain skeptical that we as a security industry have cracked the code yet on how to make the utility of to factor off good enough and cheap enough to overcome the user experience obstacle of adding that device in. So we believe the market is going to grow here based on remote access, windows log-on, business partner integration; all of those types of traditional drivers. We're now looking for the consumer market and retail banking market to take off yet for several more years. Until there is more utility in the device and lower cost point per user, so that either subsidizing it or creating a bundled package of services for the consumer are something that are worthwhile.

Great. Thank you.

We do have time for one final question and that will come from Dean Munser with Piper Jaffrey.

As the subscription becomes a bigger component of the Jamba side, do you plan on breaking out some general subscriber numbers or can you give us some sort of flavor in terms of what subscription might be at the current level or what the quarter -to -quarter add on that has been.

I think we're going to work hard on that this quarter based upon what we see in the U.S. launch and a couple of the other markets in terms of trying to come up with the metrics that, you know, that we will talk about routinely in that business. When we announced the Jamba acquisition in May or June, we talked about Jamba having north of 4 million billable subscribers at that time and clearly ended the year with more than double that. That would not include any U.S. subscribers. So we think it is a very healthy growth rate here.

We need to understand churn rates here and we need to understand lifetime of the customer better but we will come out with some metrics in the end of Q1 . And I think many cases the numbers will speak for themselves.

Can you say just directionally is churn increasing or decreasing? Any flavor on that front?

You know I dont have necessarily off the top of my head any particular flavor. Depends on the market, obviously when a market gets saturated like Germany you have certain characteristics in a market like in the UK that's growing pretty fast, you tend to have others. And clearly in the U.S. we just don't know at the moment. I think the thing to note is that revenue did grow 27 percent sequentially from Q3 to Q4 and there was no new market entry that drove a whole new subscriber base to be added. So, you know, the run rate business is pretty healthy bringing the U.S., Canada, Brazil and other markets on line later this year, we think will fuel even further growth.

Just one last basic question. Is it safe to say the majority of revenue within that is some form of a subscription base or is there just a general percentage you can see subscription versus maybe a one time purchase?

The majority is subscription.

Okay. Great. Thank you very much.

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

That concludes today's conference call. You may now disconnect and have a pleasant day.