威瑞信 (VRSN) 2005 Q1 法說會逐字稿

Good day and welcome to this VeriSign, earnings conference call. [OPERATOR INSTRUCTIONS] At this time I will turn the conference over to Mr. Steven Gatoff, Vice President of Finance and Treasurer.

Good afternoon everyone, welcome to VeriSign's first quarter 2005 earnings call. I'm here today with stratton Sclavos, Chairman and CEO of VeriSign. Dana Evan our CFO and Tom McCallum Director of Investor Relations. We have got a lot to cover today and in a moment Stratton will review Q1s results. He'll will provide some insights into the strong performance of our businesses and then provide some color on Q2 and the rest of 2005. Dana will follow with a detailed review of Q1s financial results. She will provide financial guidance for Q2 and the full year 2005 and we'll then open the call for your questions.

We anticipate the call ending at about 3 p.m. We would like everyone than 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, the related financial information discussed on the 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. Finally, before we get started, we'd like to note that the VeriSign management team will be hosting our annual analyst day next month on may 19, here in the bay area. You can find event details and registration procedures on our website under the investor relations tab. With that I would 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 first quarter represented a strong start to the year and a great way to begin our second decade as a company. We are now ten years into our corporate mission to enable and protect all forms interactions on the internet and voice networks. We believe our intelligent infrastructure services are helping our customers and partners accelerate their online efforts and take advantage of the productivity and new revenue opportunities that the world migration to a digital infrastructure will provide.

Through our Internet and communications services groups we were enabling and protecting close to 20 billion network interaction per day across our global infrastructure. These services are helping people find, connect, securely communicate, and transact across the converging world of broadband, wireless, and traditional public switch telephony networks. We also believe that delivery of next generation services for communications commerce and content will increasingly rely on IP based infrastructure that needs an intelligence layer to provide coordination and control. That's where VeriSign comes in.

And our Q1 results demonstrate both the growing nature of this opportunity and our and unique ability to monetize it as we saw record levels of interactions across our domain name, security, payments, voice, and content services. Demand for several of our key services accelerated in Q1 particularly in the domain name and digital content areas. The driving factor in these results were the continuing convergence of mobility and entertainment coupled with ever greater network effects of more Internet users seeking out more services and information on a daily basis. In short, it was a very positive start for the year.

With that, let me dive into the Q1 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. ISG's collection of intelligent infrastructure services enables and protects interactions over the Internet that involve Web browsing, e-mail, online commerce, V to C and V to V communications. Increased demand, deeper international penetration, and new product traction combined to make Q1 a record quarter across almost every metric in the Internet services group.

In our naming and directory services business we processed over 4.8 million new registrations for .com and .net domain names in the quarter up 23% sequentially. We also saw another 5.5 million names renewed or extended during the period leading to a renewal rate in the mid-70% range. The active base of names at the end of the quarter stood at a record 41.4 million up 8% sequentially and 28% year-over-year. We also sold over 122,000 SSL certificates. during the quarter, more than in any other single quarter in our history. This takes our active installed base to a record 462,000, up 2% sequentially and 12% year-over-year.

In our payment gateway business we saw a net increase of 9000 new customers bringing us to a total of 136, excuse me, 136,000 active merchants up over 7% from last quarter and 27% year-over-year. As a result, our gateway handled a record 120 million transactions for an aggregate value of $10.6 billion during the quarter. We believe the domain name, SSL, and payment businesses are excellent examples of intelligent infrastructure services that enable network communication and commerce on a global base. Our strong volume growth in Q1 led to a better than expected increase in deferred revenue which in turn provides us with improved visibility for ISG for the rest of 2005.

Several other highlights in the quarter included ICANN informing us that we are the leading contender to continue managing the .net registry. We are now in negotiations with ICANN to arrive at a mutually acceptable registry contract. In the security business we had several significant customer wins including Morgan Stanley, Merrill Lynch, Ford Motor Company, Boeing, e-funds, Sun Microsystems and Adobe. Of course on the product side we had a significant number of new announcements in support of our unified authentication platform. In addition to winning a highly competitive bid with Bank of America during the quarter, we announced an enhanced family of strong authentication tokens, including a hybrid USB token with flash storage and an OTP only token with industry leading total cost of ownership metrics. We also announced the channel program and recruited our first group of experiences resellers into the fold.

Lastly we broadened our integration and development relationship with Microsoft in the areas of Windows log on, active directory integration and today's announcement of new a WiFi security initiative. All in all we are very pleased with the response from both prospects and the channel for the unified authentication platform and token. The consistent feedback we received is that it's a better product at a better price with better long term investment protection. We expect to see accelerating demand and significant customer wins throughout the year. In summing up the Internet services group for Q1, we saw good demand throughout the quarter, broader and deeper customer engagement, strong overall pipeline growth, and very high close rates.

Now let's move to our communication services group. CSG provides intelligent communications, commerce, and content services to fixed line mobile and broadband carriers and service providers. CSG's collection of intelligent infrastructure services enables and protects voice and data interactions over wireline, mobile, and broadband communication networks. These services support the provisioning, fulfillment, and billing of voice calls, SMS and MMS messages and digital content including ring tones, graphics and games. Given that communications, commerce, and content are the three pillars of our growth strategy for CSG we will begin reporting the CSG revenues in these segments starting with the Q1 results. The communication and commerce line of business includes the legacy network connectivity, database, and pre and post paid billing services. In the future, our Voice over IP and next generation payment services will be included in this line of business as well.

But content services line of business includes Jamba!, Jamster! and our SMS and MMS inneroperability services. Starting in Q2, the LightSurf revenues will also become part of the content services line of business. Again, we feel this segmentation is consistent with our ICQ strategy, our new organizational structure and most importantly the way in which we position and sell our communication solutions to carriers and service providers.

For Q1, the communications and commerce line of business achieved 97 million in revenues which is consistent with our prior guidance for these services after adjusting for the SMS and MMS revenues being allocated to the content line of business this quarter. In terms of business metrics for communications and commerce, we ended Q1 with just over 1300 carrier customers. In addition we delivered over 12.8 billion database queries in Q1 consistent with Q4s seasonally strong performance. We also processed billing and payment services for approximately 7.1 million wireless users up 9% from 6.5 million in Q4. There were also a large number of products and customer announcements in the communications and commerce group as we participated in the industry's two main trade shows during the quarter. 3GSM and CTIA. Highlights included the announcement of our managed Push-to-Talk services, our updated billing and OSF offering, a sim card based identity solution in partnership with GemPlus and our own security services team and a customer win for our new IP based call intercept services with Vonnage. We are also making good progress with our voice offerings and we expect to meet our goals for customer pilots later in the year.

Moving to the content services line of business, we achieved revenues of 145 million during the quarter. Up 50% sequentially on an apples to apples basis. The vast majority of this revenue comes from growth of our mobile content services. The market opportunities for solutions that allow carriers to address the convergence of communications, mobility, and entertainment are accelerating. We believe our portfolio of content services is well positioned to meet the needs of this market. Our strong performance in Q1 was the result of several factors including an expanded and refreshed content portfolio, initial revenues from our U.S. launch, and growing contributions from Australia and several other satellite countries in Europe. We enabled over 60 million mobile commerce transactions during the quarter versus approximately 40 million in Q4. In addition, we a are now handling over 40 million SMS messages per day for both consumer to consumer and enterprise to consumer applications.

We would expect to see the worldwide market for digital content continue to expand significantly over the next 12 to 24 months as carriers fully embrace the new revenue opportunities that mobile entertainment and messaging provides. As it relates to our U.S. launch testing, I would say we are very pleased with the results so far and look forward to further progress in Q2 as we refine our pricing, packaging, and promotion. We would also expect to broaden our tier 1 relationships over the coming months and begin to deploy services at several tier 2 carriers. Our near term plans in the U.S. include broadening the content catalog, establishing additional carrier connections, and developing new demand generations spots for popular artists and titles.

Of course, while Jamba! and Jamster! make up the center piece of our digital content strategy we are very pleased to have now brought LightSurf into the fold. With the addition of LightSurf's industry leading picture and video messaging platform, our content services business now addresses the complete needs of the market for professional, personal, and enterprise generated content and messaging services. While there has been some speculation in the market to the contrary, we can now also confirm that LightSurf has been awarded a contract from another tier 1 U.S. carrier and we are already delivering picture messaging and interoperability services on behalf of that operator. We hope to make an announcement with this customer soon.

As we've said before we believe the overall digital content market is still in its infancy. The market is expanding and changing at a dramatic rate. As an example of that change, just recently we have seen ring tones, graphics, and games being used as the lead in rather than the follow on promotion for popular music and movie titles. We are working with artists and their labels to produce demand generation spots that promote this content prior to its official release. We are confident that there are many more innovations like this coming to both the mobile and broadband market and that we are positioned well to help our customers get to market quickly and cost effectively with these types of offerings.

Given our continuing focus on expanding the number of geographies, markets, products, and carrier relationships in our content business, we would expect strong growth year-over-year with potential fluctuations in growth from quarter to quarter based on the market entry dynamics associated with these services. Again, a great start to the year for the communications services group and lots of excitement ahead. With that, let me now say a few words about the overall trends we are seeing in the market and our outlook for Q2 and the remainder of 2005. As we've said, we believe the end market demand 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 that 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.

As Dana will discuss in a moment, given the results for Q1 and our near term visibility across our businesses, with are once again raising both our full year 2005 revenue and earnings guidance. As we enter our second decade as a company, we are proud of what we accomplished but even more excited and passionate about our opportunities to deliver the intelligent infrastructure that powers the digital world in the 21st century. Thanks very much for your attention and now let me turn it over to Dana.

Thanks Stratton. And good afternoon, everyone. We are pleased to report a great start to 2005 with first quarter results that exceeded our expectations and established yet another record quarter for VeriSign in revenue, operating income, and earnings. VeriSign's first quarter financial performance was fueled by the continuing momentum we experienced in our core security and naming and directory businesses and the acceleration we saw in our content business. Our top line growth coupled with ongoing operational leverage led to significant growth margin and earnings expansion and drove solid operating cash flow. All while we continued to increase our investments in the business. Other highlights in the quarter included the successful achievement of our Sarbanes-Oxley compliance as evidenced by the unqualified audit opinion issued by KPMG and as reported in our 10K filing on March 16. In addition, we closed the LightSurf acquisition on April 6, and are progressing well with our integration plans. So let's turn to the detailed results starting with the P&L.

On a consolidated basis VeriSign reported $401 million of revenue for the first quarter representing a 75% increase year-over-year and a 13% increase sequentially. Demonstrating the continued growth across those both our Internet and communications business segment. Segmenting the Q1 revenue into VeriSign's reporting units, the Internet services group delivered approximately $159 million of revenue for the quarter or 40% of total revenue. The growth here was driven predominantly by strong bookings for security services and increased sales of new and renewed common net names in our naming and directory business. Our communications services group reported total revenue of $242 million for Q1 growing by 19% sequentially and now representing 60% of total revenue. As Stratton mentioned earlier, and consistent with our strategy for the communications group, we will begin to realign our break down of revenue along the two CSG lines of business. The communication and commerce business and the content business.

In that vein for Q1, the communications and commerce business which includes our core communications revenues as well as prepaid, post pay and next generation billing services delivered 97 million of revenue for the quarter. The content business which includes our Jamba! Jamster! brands, SMS messaging services and other digital content services accelerated once again in Q1 to $145 million of revenue up over 50% sequentially. Here we saw the early results in positive uptake of our launch in the U.S. In addition to continued growth in previously serviced geographies. All of that being said, and for comparative purposes to last quarter's guidance, the previous referred to core CSG business came in consistent with the guidance we gave for $100 million of revenue. As a reminder, this amount included the full effect of our price -- our expiring price contract in Q1.

As it relates to international operations, the percentage of total revenue that was driven from our international customers, affiliates, and subsidiaries was approximately 43% for Q1 up 6% sequentially from 37% in Q4 of last year. This increase was driven primarily by the mobile content revenue generated in international markets as well as growth in demand for our security services in Japan and Europe. Looking at costs of revenues in gross margin, our cost of revenue for the first quarter was $125 million down modestly from 129 million in Q4. This translates into a 69% gross margin for Q1, up 5 percentage points from 64% in Q4. The majority of the decreasing COGS and the corresponding increase in gross margin can be attributed to a more favorable revenue mix in the quarter as well as the mix of content we delivered from our mobile content business.

Turning to operating expenses and related items, total operating expenses for Q1 were $193 million, up from 152 million in Q4. The majority of the increase is attributable to the continued investment in the content business where sales and marketing is the largest component. This increase in marketing expenditures reflects our continued investment in the U.S. content market where we saw strong early adoption as well as continued investment in the international geographies. R&D was also up measurably during the quarter to $22 million as a result of early investments in the year across all lines of the business.

VeriSign generated pro forma operating income of $83 million for the first quarter, demonstrating significant leverage and growth from the 75 million reported in Q4 and an 80% increase over operating income for the same period in 2004. This translated into a 21% operating margin for Q1 which takes into account the ramp of marketing expenses that occurred in the quarter and which also was in line with the guidance we gave previously. The combination of healthy top line growth and operating leverage driven across our business units and the G&A areas drove the majority of expansion and operating income for the quarter. Other income came in at approximately $13 million in Q1.

In addition to the positive benefits we saw from increased cash balances and yields that drove higher interest income, we also recognized a $6 million gain related to the resolution of a dispute with a carrier customer in the quarter which was also disclosed in our recently filed 10K. We had originally expected this gain to be taken into our Q1 cost of revenue's but upon further review the amount has been recorded in other income in the Q1 financial statements. As it relates to head count, VeriSign ended the quarter with a total employee base of approximately 3,260 up modestly from approximately 3,200 at the end of Q4. Hiring in sales and marketing and operations and infrastructure group drove the majority of the increase in the quarter.

VeriSign reported pro forma pre-tax income for the first quarter of $95 million, an 89% increase over Q1 of the prior year and a 21% increase sequentially. This pre-tax income translates into pro forma earnings per share of $0.25 for Q1, $0.04 higher than our guidance of $0.21. The upside you see here was driven by several factors', over achievement and continued leverage in our core businesses. The growth that we saw in the mobile content business and the one-time carrier settlement I spoke about a few minutes ago. In addition, earnings per share has been calculated using a 30% tax rate and fully diluted weighted average shares outstanding of approximately 262 million shares.

Moving on to the balance sheet and cash flow items. Cash balances which consist of cash and equivalents, restricted cash, and short term investments totalled $872 million at the end of the quarter representing an $83 million increase from Q4 cash levels. This increase was fueled by healthy inflows of cash generated from operations offset by cash outlays of 17 million for capital expenditures in the quarter. We also saw approximately 20 million of cash come in from a dividend and a partial note receivable payment from the network's solution business that we sold in 2003. Our accounts receivable balances increased to $258 million as of March 31, driven primarily by higher bookings in our BCS group, specifically in the content business where average DSOs typically run in the 75 to 85-day range. As a reminder, we collect receivables from our carrier customers on a net revenue basis after they've collected revenues from their end user customers.

AR balance translates into a total net DSO for the Company of 49 days within our targeted range of 40-50 days. It's important to note, however, that net of the content business DSOs from our core businesses actually decrease significantly in the quarter. Total deferred revenue on the balance sheet came in at $450 million at the end of Q1, a healthy increase of 37 million. The growth you see here was driven primarily by better than expected bookings from domain name sales as well as growth in certain of our securities services.

Moving on to cash flow metrics, operating cash flow generated for the first quarter was approximately $74 million ahead of our guidance for 50 to 60 million. VeriSign continues to generate healthy cash flows while investing in our businesses for future growth. As a reminder here, Q1 is traditionally a quarter in which annual bonus payments and the majority of our annual maintenance and insurance renewals are generated, all of which had a drag on cash flow in the quarter. As such, the key drivers of the higher than anticipated cash flow were the delivery of better than anticipated operating income and the healthy deferred revenue growth that I just mentioned.

That concludes the Q1 financial review. Let me now turn to our business outlook which we are upwardly revising for Q2 and the full year based on the first quarter's results. As it relates to revenue guidance for Q2, we are raising our outlook for total revenues to a range of approximately 300 -- I'm sorry, 435 to $440 million. This guidance reflects the expectation for continued growth across all areas in the Internet services group to approximately 165 million in revenue. In our communications services group, we would look for revenue growth to approximately 270 to $275 million generated from growth in all areas, communications, commerce, and content. Included in that number would be less than $10 million of forecasted revenue from our LightSurf acquisition which closed in April. As it relates in expenses in margins in Q2, we would expect growth margins to be in the 69 to 70% range.

In terms of operating expenses for Q2, our plan is to continue to invest in the worldwide expansion of our content services as well as integrating the full compliment of operating expenses from LightSurf into the financial model. These initiatives will drive increased expenses in sales and marketing as well as R&D for Q2 all translating into guidance for operating margins in the 21% range for the second quarter. We would also expect other income to return to a normalized run rate of approximately $5 million. As it relates to share count, we would expect the fully diluted share count to be approximately 27(INAUDIBLE) million shares which incorporates the acquisition of LightSurf where we issued 9.9 million shares upon closing and our normally anticipated increase for quarterly share take. Taking into account the revenue and margin guidance I just gave, we would expect earnings per share for Q2 to be approximately $0.26 using a 30% effective tax rate.

And moving on to some balance sheet guidance for Q2, we continue to anticipate deferred revenue growth from our core businesses and look for deferred balances to grow by approximately 15 to 20 million in the quarter. Fueled primarily by sales of new and renewed common net names and security services. Looking at operating cash flow, given the increased revenue, margin, and EPS guidance I just spoke about, we would look for operating cash flow to increase significantly to approximately $100 million for Q2.

Now looking out to the rest of 2005, given the continued momentum in our core businesses and the traction we continue to see in the content business, we are raising our guidance for the rest of the year. At a base line level, we would expect total 2005 revenues of approximately 1.75 billion and we would look for EPS of approximately $1.04 for the year up 13% and 16% respectively from our previous '05 guidance. And lastly forecast in capital expenditures for the year conservatively remain in the $110 million range. With that I would like to open the call for your questions. Operator, may we have the first question, please.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Todd Meeker from Deutsche Bank.

A few questions on Jamba!. I'm trying to understand the U.S. ramp to make sure that we don't have a similar situation that we saw in Q4 versus Q3 of last year. Can you give us a feel for what the growth rates of the established markets versus the U.S. And can you talk about whether or not we've seen the majority of the impact of the U.S. Or do you really think there can be a significant upside? And then any feel for customer acquisition. Sales and marketing spend is up, but clearly you are seeing the revenue benefit. Where do you think that settles out? Thanks.

Couple of things, one, I think with this new segmentation of the content business we're going to try to obviously move away from specific country by country, geography by geography, brand by brand types of revenues for a couple of different reasons. One, there is a lot of competitive information there and you are beginning to see copycat type advertising and other things in certain markets in Europe and the rest and we feel like we need to give anybody more competitive information than they can get from the websites and the TV ads. The second piece is, from a marketing perspective, we really can in our opinion spend in any market today and acquire subscribers. So we are going after those markets where the cost of customer acquisition is as low as possible and thinking about spending a certain amount in marketing and allocating that to the markets with the lowest cost of acquisition every quarter. So when it comes to those numbers in Q1, obviously content services were up about 50% quarter over quarter, that's a big jump. I think it's an even bigger jump than we saw in Q3 last year. That is predominantly from existing markets and existing subscriber activities.

The U.S. Contributed a modest amount in the quarter, probably ahead of our very conservative expectations. We would expect to see pretty significant ramp in U.S. revenues contributing to the overall content services in Q2. Again, as we bring on more customers -- I'm sorry, more carriers or as we add other countries throughout the year, you're going to see some fluctuation we think in quarterly growth rate because it's just -- it's hard to pin where those revenue will jump in. But between the geographies we've still got to cover, the carriers we have still got to connect to, and the new product lines that we will be bringing into the space, we are pretty excited about the year-over-year growth prospects as you see with the run rate now for the content business that approaching what is 600 million a year already.

A quick follow-up, in terms of the guidance, are you guys embedding any entry into new markets like Canada, Mexico, or Brazil in those numbers and can you give us a feel for timing there?

Certainly not in the Q2 guidance and I think we haven't really in the overall rest of year guidance we really haven't gotten to that level of detail.

Last question for you, can you talk about the competitive environment within the content services business? You have sot some white label competitors out there who are now pursuing a branded model. Can you contrast your success versus what you are seeing elsewhere?

A couple of things, one, I do genuinely believe we are expanding the market overall. That our attack on the market is coming in at an entry point that really nobody else has and it is hitting customers of the carriers differently than the brand -- I'm sorry, than the white label, slash on the whack deck services would. In fact, we have done some surveys recently here in the U.S. with our current carriers and it would suggest that north of 65% of the people who buy a Jamster! subscription have never tried their carrier's content services before. So I do think this is true market expansion and it would not surprise me to see our -- the other white label competitors in the market continue to have good growth prospects this year as you are seeing from the carrier report this morning that data ARPU is continuing to rise. That being said, I think our growth -- absolute dollars of growth in the quarter in content services was larger than the total revenues, any of those other competitors are going to report this quarter. So I think we are demonstrating a leadership position on the global basis and we would expect to be the number one player in each market.

Great, thanks. Good quarter.

Thank you.

Our next question comes from Ed Maguire Merrill Lynch.

Yes, good afternoon. Could you talk about some of your initiatives around the View A authentication token services? Where you think you guys are seeing some traction there and which form factors you think may be most promising.

Yes, I think we generally feel pretty bullish on what we have seen throughout Q4 and Q1 in terms of customer interest. I think we're tracking over 150 live opportunities from what was probably 0 at the end of Q3 when we just announced the product. We have really seen a lot of interest. They are everywhere from pilot tests to strategic rollouts like Banc of America to resellers who are coming over to this platform from others because they think it's new and it's fresh for the market. So I think we're very excited about it.

Very -- we're probably too early yet to talk too much about the trends we're going to see in deployments. There are a lot of interest in the traditional hybrid token that we first introduced. Obviously because it is available and has been in the market from our sales force for a while. Although the storage product the OTP only are also showing up on the forecast now. So I think we are pretty pleased and it's giving customers a choice to not just decide which form factor they want for their company, but in fact to decide on the form factor they want for a given set of users within that company while they may go to a higher version or a lower version for another group of users. So the flexibility to pick and choose and have it all run in one integrated platform that integrates also with their application servers and their Web servers seems to be playing out pretty well.

And a question on the SSL certificates, it looked like you had sold 122,000 certs, but the total number jumped up just 7000. Is there is an issue with churn? Could you comment on what you may be seeing in that part of your business?

Actually, what happened in this particular case is we sell into enterprises as well for us to sell and some enterprises buy them from our direct selling model -- I'm sorry, from our Web based selling models and other enterprises now, they have enough servers, hundreds to even thousands that they buy them in big large enterprise buys. What you are actually seeing in the number is the shift to enterprises buying much more from our direct sales force and we don't count those units in the issued or newly sold column until the enterprise deploys them all. What you've got is a lag effect as the market moves to bigger enterprises buying bigger deals, the renewals of the lower end products is staying relatively the same and at the higher end we're not counting the units as we would have had we sold them one by one to those enterprises off the website. I hope that's clear. But in essence we sold a lot more units than we showed in that number today, but we don't count them until they are actually deployed on servers and the enterprise model since they are buying in such big bulk.

And just to make sure that we can get an apples to apples comparison in the core telco services business, what was the -- can you at least qualify what the contribution from SMS services was in the business so we can get at least an apples to apples from quarter to quarter.

Yes. It's just -- I think what Dana had said and I had said is we had guided to about 100 million for the BCS core business. And had you put the SMS/MMS stuff back in we would have been -- our revenue achievement would have been consistent with that. So it's clearly a few million dollars. Thank you.

We will take a question from Drew Brosseau, S.G. Cowen.

Thanks. On the content business, Stratton, I'm wondering if you can elaborate -- well, two things, one, if you have any comment regarding the number of subscribers and how you think that might grow over the course of the year. Secondly, and relatedly can you talk a little bit more about the prospect for additional tier one and tier two carriers?

On the sub stuff we had talked about having north of 10 million at the end of last year obviously with the strong growth you saw here in the quarter we got more than that now. I think when we get to the analyst day we're going to, in May, we will be trying to figure out exactly how to start talking about subs versus churn versus lifetimes and the rest. So I think we've got some more work to do there. Clearly right now all the statistics in that space are pretty good. The second part of the question?

Comments about new carriers coming up.

Yes, we've talked about there is clearly two other tier one carriers we would like to get up this year. We talked about doing that sometime this summer. I think we are on schedule to do that. As it relates to the tier two or tier three guys here in the U.S., Vernon and his team have been out now putting together bundles with the content services and the LightSurf services and our more traditional billing and prepaid services and we have actually secured both some written and some verbal commitments on that. I think you will start to see us as we get past the second half of the year begin to rollout in some regional markets and some rural markets with these services as well with brand name type carriers there. So we were excited about that.

I think as it relates to other countries, we had talked about Canada and Latin America as obvious entry points this year. We expect we will still be in those markets by the end of the year. We are having good discussions both north and south and would expect to have that be there. We are not finding a lot of resistance to working with us in our content services business because we bring a broad portfolio, a quick market entry for folks, and we're able to put together portfolios of content that are very specific to the demographics. So for example, in Latin America it would likely see us putting together something that really does focus on the demographic there both from a age perspective as well as a style of music and a style of entertainment.

And just as the last one. The business is obviously exploding here and one of the risks associated with this mass market initiative has been exposed a little bit in the press which is some of the consumers getting a little bit confused about how the service works and bumping into extra messaging charges and the like. Could you talk about what you are doing to make sure that you don't -- the brand doesn't get tainted in any way and that you address some of those issues?

I think we have been very aggressive and proactive in Europe around these same types of issues. Very liberal refund policies. An ability for a consumer to stop the subscription any time via multiple channels, phone, web, or SMS. Prices all designated on the TV ads and clearly on the Web and in even the SMS message you get. So I think we because of Jamba!'s start in Europe so early they have been through all this before and have been very proactive working with consumer groups. In fact they have been doing that in the U.K. and have put together -- have worked with the authorities to put together the guidelines for this.

Here in the U.S. we are being proactive as well. The same kind of policies around pricing and refunds. But also working with the mobile marketing association and the CTA -- CTIA and their efforts to put together guidelines for best practices. I think you will find the Jamster! and the Jamba! brands are going to be the bar that everybody else tries to step up to here in terms of this. And I will tell you that I think other vendors are going to struggle with this. We are beginning to see some copycat-type environments here that are probably questionable in terms of practices.

Thanks a lot.

This question is from Phil Winslow with CSFB.

Thanks. Great quarter, guys. Just have a question back on the gross margin side. I wonder if you could go into a little bit more detail about that mix shift that you discussed on the content side and why you feel comfortable that that sort mix shift is pretty sustainable here when you look at Q2?

I think from the mix shift it's clearly as we are starting to see more of our own content that we've generated in the European market and a little bit here as well around the graphics and the wallpaper that have very, very high margins. Clearly, there is still not enough handsets in the market that can drive the adoption dramatically we think this year of the real tones and things. And so the mix between polys, real, and our own internally generated content plus the pricing packages we have put into effect in Europe over the course of the last three months has allowed us to drive those gross margins up.

And also when you look I guess going forward on ISG side on the SSL certificates business have you seen any sort of change in the environment there or what do you think as far as the market outlook for this year?

We are still pretty bullish on that business growing 15 to 20% this year. That's the plan we've got of record. That team contributed quite a bit to the deferred revenue growth. We had a banner quarter in domain names. We also had a banner quarter in SSL sales. So clearly from a revenue perspective they beat their -- I'm sorry, from a booking perspective both teams beat their plans and you would look to see that impact the P&L to the positive over the next few quarters.

Great. Thanks guys.

We will take a question from Sarah Friar with Goldman Sachs.

It's Elizabeth Watson for Sarah Friar. I have a follow-up to that earlier question. Can you give us a sense for what percentage of your carrier subscribers have mobile content enabled phones so just on a basic level and then maybe on -- with respect to the polyphonic ring tones?

I think it's a great question and I know we have a ton of data on that but it varies by country and it varies by carrier. The last numbers I saw kind of on average for the various markets, even in Europe where 10 or 15% that could do something akin to real tones or video. So I think you're still in a very, very early stage with the recent Christmas season you saw for the first time camera phones outsell noncamera phones. You are starting to see the picture messaging piece pick up as well. But what we will do at the analyst day is really try to give the latest data that we've been able to see from third parties around what this is in the various markets and the rest. But I think you are still in the single digits maybe to low teens of phones capable of handling this kind of content and obviously that's going to change to the upside pretty much every quarter for the next few years if you talk to the Nokia or the Motorola folks about their handset plans.

Have you seen any impact from Vodafone's rollout of 3G in Europe and the ability to provide richer content services?

No. It's still -- it really did that in Q4 and I would say I'm sure it has contributed somewhat to our continued growth over in Europe, but I don't know whether to attribute it to that. The extra countries that we're now in, some of the pricing changes we've made or the fresher content that we put out in recent weeks. So it's a little bit of all of those things. But clearly faster networks are going to make it easier to introduce more advanced products like video ring tones. Video. Picture messaging. A variety of things that -- where you really do need the speed and the download capacity.

Great. Thanks a lot.

Our next question comes from Gene Munster with Piper Jaffray.

Congratulations and let me just confirm here that -- did you say the majority of the upside in Jamba! came from international versus U.S.?

I would say that's true.

Okay. And kind of sitting from an analyst perspective, this is kind of a little bit of a wild bull here. One quarter you guys absolutely (INAUDIBLE) next quarter it was a strong quarter. And this quarter is another phenomenal quarter. How do we think about this going forward? Do we look at handset deployment? Do we look at new carriers getting brought online. What if you were in our shoes, how do we even try to think about this to try to take away all these whisper numbers on the Jamba! number?

Dave's telling me I have to stop chuckling on this. I think as I was saying earlier, the dynamics of this market are changing dramatically every day or every week. And so we can impact certain things like do we bring another carrier up in the U.S.? Do we enter another market in a given quarter? Do we introduce a new product set? We can impact our dynamics by pricing changes. Looking at the subscription rates and the download rates and the rest. You saw our mobile commerce transactions related to Jamba! and Jamster! went from 40 million or so to a little over 60 million. So I think that that's certainly something we were looking at and we will be trying to give some more color to at the analyst day.

I think other things that are going on here are though are really seasonality. One of the things you noticed is that tons and tons of phones get bought in this November, December period. And then the services kind of start to ramp, December, and then January and February. So your average number of subscribers in our base goes up significantly quarter over quarter, even though we might have introduced it in Q4, you weren't going to see that impact until Q1. Long story short, Gene, I think you are going to see very strong year-over-year growth and I would probably model it that way and just expect that there will be some growth fluctuations quarter over quarter based on when we kick in with one carrier or when we see some of that seasonality impact. But obviously this number for overall content services is significantly higher than we had expected for the quarter as well.

Let me ask you this. In terms of -- if you look at the U.S. market and if you look at the percentage of phones in the U.S. market today that can actually use this service versus what your expectations are as a percentage of phones in the U.S. market, let's say in six months, do you have any idea, is it 10% today going to 40% or 10% going to 15% in next six months or just any sort of color on that would be very helpful.

Yes. So let me make two points about that first which is a lot of the phones in the market can get below end services, monephonic ring tones or graphics or the daily horoscope or whatever it may be. So you have got to be a little careful and say how many phones can get the service. Probably, a lot of phones can get the service. Maybe 20, 30% of the phones can get at least the low-end service. When you go to polyphonic it's probably less than 20% and when you go to real tones or video the latest number I saw was 6% or less in the U.S.

But if you layer on top of that your existing relationships with carriers, obviously, that would lower the piece and maybe you don't think about the business like we think about it over here, but we just think about addressable phone market and so is it just as a rough number with any form of service? It doesn't necessarily have to be video, but at that most basic level. We look at the existing carriers you guys have relationships with, would you say that your addressable market is really -- I don't want to put a number in your mouth, but is there -- I'm sure you probably have an idea what that would be.

Yes, you do. We do those same kind of studies and I think we think there is about 150 or 160 million total wireless subs in the U.S. Through Cingular and T-mobile today we are probably covering I think the number now is somewhere north of 60 million. Of those 60 million I would bet average 10 or 12% are capable of getting the services so we probably having an addressable market of 6 or 7 million today. We have got a good ramp on attacking that market.

And then final question, where do you see that 6 or 7% addressable in the next six months? Do you think about any expectation because obviously the new phones are going to be doing this and you're going to be bringing new carrier relationships on. Is that number going to be 25% in the next six months?

You know, I just don't know. It's clearly going to go up. And I am not familiar enough with the handset rollout or exactly when we're going to turn a different carrier on.

Great. And congratulations.

Thank you.

Our next question will come from Rob Owens with Pacific Crest Securities.

Just talk a little bit about the acceleration you are seeing in the registry business and it seems like a lot of this is tied to paper clique advertising right now. Are we at a little growth spurt here or is this sustainable throughout 2005?

Well, you and I remember the last bubble in this space, so we have done a lot of analysis of the weekly registration rates and we track them clearly every week and we try to segment the registrations that we believe are coming from normal buying patterns of people putting up websites or introducing new products to the rest and we have begun over the last three to four months to segment what we believe is the paper clique piece of this market. Right now I would tell you it's running at less than 10% of the weekly registration, the paper clique side of it. You have seen a significant uptick in the overall market as well. So let's say in a given week if we are registering 325,000 names, maybe 30,000 of them are what we would attribute to registrars who seem to be serving the paper clique model. Not an exact science yet, a science we we want to get much better at and certainly has contributed to some of the uptick in the market. At 4.8 million names in the quarter, that's a million more than we did last quarter. And last quarter was a big quarter.

And is that chiefly .com or is it flowing through to .net as well right now?

It's flowing through the bulb. It's a little skewed towards .com.

Then secondarily, Dana you were talking about the timing of -- or Stratton was, the timing of SSL certs and the rev rec on that and the difference between total certs and certs issued in the quarter. Did this lead to some of the meaningful increase in deferred as well with some those certs that were sold but not issued, is that sitting in deferred?

Absolutely.

Thanks, guys.

Moving on to Mike Latimore with Raymond James.

Nice quarter. On the new deal that you have with LightSurf, are you sort of supplementing an internal technology there or are you replacing internal technology there?

I guess the right way to think about it would be supplementing it. We had purchased some assets of a company called Unimobile that had some MMS technology. We have the SMS gateway stuff. What LightSurf brings is really the picture messaging and video messaging platforms they also have some interoperability gateway stuff and we'll be merging those two offerings.

What kind of messaging growth are you seeing at that carrier?

I'm sorry --

At the new carrier, tier one carrier.

Very significant because we were replacing an in-house system so they had been moving a substantial number of subscribers over.

Okay. And then I think you mentioned this but just to be clear, the marketing spend, the increase over Q4 that was largely driven by the mobile content. Is that what you said?

That's correct.

And in the U.S. market, do you think -- do you expect to have a position on the handset? Is that a key all and just given the testing you have done over the past quarter, do you think it's more or less important now to be on the handset than it was say three to five months ago?

I think what you're -- let me make sure I understand -- you are saying do we want to be on the whack a deck of the carrier?

Exactly. Yes.

Let me tell you why I was distinguishing. In the LightSurf model, they do have some technology that can be deployed on a handset to make the whole interface to the picture and video messaging system more seamless and more capable for the carrier. So we will expect to have a VeriSign payload on some handsets as we continue to drive adoption of the LightSurf services. And from that payload, we might be able to do a lot of very interesting things both with user generated as well as professionally generated content.

On the other side of the -- for the mobile contact stuff and getting on the decks, we continue to have those discussions. Obviously in Q1's performance, it's probably not hampering us to be there and in fact we do think we are really expanding the market from the other side which is the direct demand generation side. So I think we would see some incremental benefit of being on the decks but I don't think it is imperative for us. That being said, we will look to build BREW application that sits on phones for the BREW operators so that they can enable themselves of the Jamster! stuff. We can see in some cases how many carrier -- how many of a given carriers customers are trying to get the Jamster! and are not currently able to. And we go back around and show those carriers what the revenue opportunity is for them in doing that. So we are kind of working both angles, but clearly the direct demand generation part is working.

And just lastly, just as you get more and more and sell more and more real tones, how do you view your gross margins over time in the mobile content business? Can they hold steady or will they come down a little bit?

You need a crystal ball in some ways on that stuff and there is a lot of opinion. I wouldn't say authoritative in that sense, but there's a lot of opinion about what's going to happen. We think these margins on the gross margin side are sustainable for us for the foreseeable 12 to 18 months and that's kind of how we are building it in the model and I think at over the course at that time we will all have a much better sense for what's really going on in the mix of content here. And remember, in our model we are likely to put packaging and pricing together that helps sustain those margins. We are also likely to introduce new high end products whose mix can help us there.

Great, thank you.

Moving on to Chris Gates, Smith Barney.

Stratton, I was wondering if you could talk about some of the ad rates you are getting in the U.S. and in Europe given that we tend to see a lot of bulk advertising on MTV and other media outlets?

The question was what are our ad rates?

Ad rates you are getting discounts because of bulk purchases or I was wondering if you could just talk about that a little bit?

Yes. I think we have found ourselves now in the position of being a large media buyer. Therefore, we are afforded the same kinds of volume discounts for the same kinds of dollar commitments that other more traditional media buyers would in Europe and now here. So I would say that we are seeing good volume discounts for media out over in Europe as well as what we've been doing here on the Viacom properties and the longer we are willing from a timing perspective, two months, three months, six months to commit the ad buy, the higher the discounts are going to be. So I'd say right now we are somewhere in the middle of all that. Meaning that we are getting get good rates and willing to commit two to four months out. In a couple of cases in Europe where the guys have just had a lot more experience they can get 9 to 12 months out. But I think we are finding the dollars speak here and so it's a competitive advantage for us to have the kind of volumes we can throw at this.

Have you seen any trends especially in Europe where you dial back advertising a little bit have you seen any trends on the revenue side there?

Nothing that we I think view yet as something you can go to the bank on. I mean, we clearly buy a lot of ads in the U.K. and Germany and we see various acquisition units as well as acquisition costs. I think we were still refining all those models even over there. I don't think we can get a lot more inventory in the U.K. and Germany. So that's where you start to say, okay, now if we dialed it back, are we missing anything. Here in the U.S. or in other countries like Australia, some satellite countries in Europe, we are still in the early parts of the game to figure that out.

Great, thanks.

Next question comes from Gregg Moskowitz, Susquehanna Financial Group.

Thanks a lot and nice quarter, guys. Stratton, given the billing cycle lag in the U.S., when did you actually begin to recognize revenues here in the states? Was that late January, early Feb or when did that start?

Some point in late January.

Okay. And then just looking -- I guess a question for Dana, just looking at the high level guidance, fair to say that in terms of marketing spend around content that we are looking at a somewhat significant deceleration in terms of the rate of change as opposed to the -- what you had in the Q1.

That would be a fair statement, yes.

And then lastly, just a housekeeping, how much revenue exactly went away in the Q1 as a result of the price contract in the AT&T Cingular consolidation?

Probably on the order of 9 million or so.

Great. Thanks.

We have time remaining for one final question. That question comes from Scott Sutherland with Wedbush Securities.

Good afternoon Stratton and Dana. Great quarter.

Thanks Scott.

Question on John, did you spend between your 10 to 15 million marketing here in the U.S.? And where do you expect that to go?

I think we spent more than that. Especially late in the quarter as we saw success here which will flow through into some the Q2 numbers. I think we would expect the U.S. marketing dollars to continue to go up as long as we are seeing current acquisition rates that we are. So it's more than the 10 to 15 million this quarter but we would expect the requisite return on that from a revenue perspective. So I think, right now we are feeling like the U.S. market still has ways to go in terms of customer acquisition saturation.

And on that last question, on when you recognized revenue, when a carrier typically recognizes revenue, what's the average delay in days where you get to recognize that revenue?

Those are two separate questions. There's a -- when we get connected to a new carrier for the first time, we wait until we have a full billing cycle to go through. Could be as long as 45 to 60 days which is what we said.

Let me rephrase that, when a download occurs, how long is the average time frame before you get to recognize that?

We would recognize it in about 30 days and, of course, it would go into accounts receivable which Dana was saying from this carrier is 75 to 85 days average.

And remember, we recognize the net revenue from the carrier.

Understood. What was your same markets growth in Jamba!? I'm not sure if you are still giving that out.

We're not giving it out but obviously as we said the majority of the growth came from non U.S. markets.

And a couple of questions in other areas you saw a jump in the billing subscribers what was that and can you give an update on RFID?

The billing subscribers, it was pretty strong growth in a couple of the wireless carriers we do post pay billing for in particular Metro BPS. I'm sorry, the last question?

Just kind of update where you guys are in RFID? What the outlook is in the coming quarters and years.

We are on our plan for RFID in the sense we expected '05 to be the year of pilots and testing and developer conferences and the rest. In fact, last weekend I believe we ran the first ever EPC developers conference in conjunction with one of their technical seminars. Had about 100 different folks represented from various system integrators, software developers and even end customers. And that was all very very well received. Put out some APIs and frameworks and tool sets to be able to let people hook into the network services and the rest. So I think you're going to find a lot of build activity, if you will, in '05 and most of '06. We have a lot of interest from folks to work with us in the space, a lot coming from chip vendors to system integrators to large end customers who want to see how the network service could improve their return on investments from what they are doing already.

And I want to go back to one last question on Jamba!. Looks like your organic growth from your general comments accelerated from your growth in the fourth quarter. Would you say that was a general market dynamic or just something specific that VeriSign did to grow those markets organically?

I think it's a little bit of both. As we were talking about earlier, there is some seasonality as you come out of Q4 because of all the phones that get bought for Christmas and so as those get turned on you'd probably see a little bit more of a jump in Q1 in the existing markets. You had our initial contribution from the U.S., you had some new titles that came out from certain artists that were very popular that we were running in Europe and here. And this is a title driven market. New content sells better than old content and the quicker you get it up, the fresher it is and the more you're going to sell. So there is a lot of those different dynamics that play in here and I think the we are still learning about every day.

Great. Thank you.

That does conclude the question and answer session. Mr. Gatoff I will turn the call back over to you.

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

That does conclude today's conference. Thank you for your participation. You may now all disconnect from the line.