威瑞信 (VRSN) 2005 Q2 法說會逐字稿

Good day, everyone, and welcome to this VeriSign Inc. second-quarter earnings conference call. Just a reminder that today's call is being recorded. And at this time for opening remarks I would like turn the conference over to Mr. Tom McCallum, Director of Investor Relations at VeriSign. Please go ahead, sir.

Good afternoon, everyone. Welcome to VeriSign's second-quarter 2005 earnings call. I'm year with Stratton Sclavos, Chairman and CEO of VeriSign, and Dana Evan, our CFO.

In a moment the Stratton will review Q2's results and he will provide some insights into the strong performance of our businesses. Data will follow with a detailed review of Q2's financials. She will then provide financial guidance for Q3 and the full year of 2005. We will then open up the call for questions. We anticipate the call will end at approximately 3 PM.

We would like to remind everyone on the call that other than the historical financial data, today's discussion may include forward-looking statements and is subject to the risks and uncertainties described in our Annual Report and other reports filed with the SEC.

Our financial results were released to the news wires after the market closed this afternoon. The press release and related financial information discussed on this call and a reconciliation of GAAP and non-GAAP financial information can be found at our website, www.verisign.com, under the investor relations tab.

This call is being web cast live both on our website and at streetevents.com. And with that, I would like to turn things over to Stratton.

Thanks Tom and good afternoon everyone. Let me add my welcome to all of you attending today's call.

As our second-quarter results indicate, our customers are continuing to utilize our intelligent infrastructure services to enable and protect an increasing number of their interactions over the world's voice and data networks. We saw strong performance across the Internet Services Group as online communications and commerce continue to rise on a global basis, and as the twin threats of identity theft and network vulnerabilities made security a high priority item for our enterprise customers. We also saw good sequential growth in our Communications Services Group with our traditional voice services performing slightly ahead of plan and our content services seeing the flow-through from a very strong Q1, although the strengthening dollar dampened our performance somewhat and is likely to impact the second half of the year similarly.

With that, let me dive into the Q2 highlights for the business units, beginning with 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 intelligent infrastructure offerings enable and protect Internet-based interactions, including Web browsing, e-mail, online commerce, and B2C and B2B communications. Increased overall demand, deeper international penetration, and new product traction combined to make Q2 a record quarter across almost every metric in the Internet Services Group. In our Naming and Directory Services business we processed over 4.7 million new registrations for .com and .net domain names in the quarter. We also saw another 5.6 million names renewed or extended during the period, leading to a renewal rates in the mid-70s. VeriSign's adjusted base of active names at the end of the quarter stood at a record 44.2 million, up 7% sequentially and 30% year-over-year.

As a footnote, given the dramatic increase we've seen in weekly growth registration due to the paid search market, we're now adjusting the active base number we report to include potential deletions that occur within the five-day grace period beyond the quarter end. We believe that this is the most accurate way to report the active base number, and based on our calculation will result in approximately a 2% differ from other publicly available sources that track domain name registration.

Moving on to the SSL business, we sold over 124,000 SSL certificates during the quarter, more than in any other single quarter in our history. This takes our active installed base to a record 471,000, up 2% sequentially and 10% year-over-year.

In our Payment Gateway business we saw a net increase of 8000 new customers, bringing us to a total of 144,000 active merchants, up over 6% from last quarter and 27% year-over-year. As a result, our gateway handled a record 127 million transactions for an aggregate value of $11.4 billion during the quarter.

We believe the domain name, SSL and payment businesses are excellent examples of intelligent infrastructure services that enable network communications and commerce on a global basis. Our strong volume growth in these lines of business in Q2 provides us with improved visibility for the Internet Services Group for the second half of the year.

Other highlights in the quarter included the completion of our contract with ICANN to continue managing the .net registry. In the Security business, we also had several significant customer wins, including Merrill Lynch, Wachovia, Bloomington Trust (ph), ScottishPower, Intuit, SBC and Avery Dennison.

Demand for Managed Security and Consulting services remain strong and we continue to believe we're winning the majority of large account deals in this space. We're also seeing an increasing number of large-scale RFPs and pilot deployments for our unified authentication platform and tokens.

That increase in both the number and severity of threats against Internet users and networks, as well as new compliance mandates, are driving customers' spending priorities in our direction. In fact, our overall sales pipeline in the Security business grew by approximately 20% in the quarter.

Lastly, on acquisition front, we now have completed both the R4 and iDefense transactions. R4 brings RFID consulting expertise to our intelligent supply chain solution while iDefense adds real-time intelligence about threats and vulnerabilities to our Managed Security Services offerings. While neither transaction brings significant revenues in 2005, we believe they will help us further differentiate our offerings and penetrate key verticals such as consumer packaged goods, pharmaceuticals, and the public sector.

So in summing up the Internet Services Group for Q2, we saw good demand throughout the quarter, broader and deeper customer engagement, and strong overall pipeline growth.

Now let's move to our Communications Services Group. CSG's selection of intelligent infrastructure services enable and protect voice and data interactions over wireline, mobile and broadband communication networks. These offerings support the provisioning, fulfillment and billing of voice calls, text and multimedia messages, and digital content, including ring tones, graphics and games.

As we discussed on last quarter's call, we are reporting the Communications Services Group revenue by service category. The Communications and Commerce line of business includes a legacy network connectivity, database, and pre and postpaid billing services. And the Content line of business includes Jamba!, Jamster, our SMS and MMS interoperability services, and now of course LightSurf.

For Q2, the Communications and Commerce line of business achieved 102 million in revenue, up 5% sequentially. In terms of business metric, we delivered over 14.4 billion database queries in Q2, up 13% from Q1. We also processed billing and payment services for approximately 7.2 million wireless users.

A combination of factors led to better-than-expected results in the Communications and Commerce line of business for the quarter. These included higher volumes of database and network traffic, increasing penetration in Tier 1 accounts, and several competitive take-aways, both here and abroad.

Given our new business close rate during Q2, the sales pipeline heading into Q3, and the serious interest we're seeing from prospects for our next-generation billing and OSS platform, we now expect the Communications and Commerce line of business to perform at or above our original plan for the remainder of the year.

In terms of longer-range milestones, I'm pleased to announce that we also implemented two large-scale pilots utilizing our voice interconnect services during the quarter. The first involves high-priority communication lines between several large financial services firms, while the second is set in the higher education environment across multiple campuses. Early feedback has been positive and we look forward providing more updates on our VoIP initiatives in the coming months.

Now let's move to the Content line of business. There are obviously lots of moving parts this quarter given the LightSurf acquisition and the Jamster US ramp up. In order to set a baseline moving forward, I'll try to provide some additional granularity for the Q2 results and Q3 expectations.

Overall we achieved revenues of 175 million during the quarter, up 21% sequentially. LightSurf and our SMS interoperability services accounted for approximately 10 million during the quarter. Jamba! and Jamster accounted for the remaining 165 million in the Content group, although results would have been higher by about 7 million if not for the impact of the strengthening dollar during the quarter.

On the LightSurf and MMS front, we saw good growth in the picture messaging business, announced several agreements to provide MMS interoperability between certain carriers in the US and Canada. We expect to announce more interoperability agreements in the near future and will introduce additional application services across the LightSurf platform in the second half of the year. We intend to offer these new services through our carrier relationships and possibly through the Jamba! and Jamster portals as well, where we now collectively see millions of unique visitors per month.

All in all the LightSurf integration is going well, and we're seeing strong interest for interoperability and application services, especially in international markets.

Now let's move on to Jamba! and Jamster. As we have said before, we believe the overall digital content market is still in its infancy. Case in point, a new study out this week from Logica CMG reports that only 20% of wireless users worldwide have ever downloaded content to their mobile phone. The report goes on to project that that number could rise to as much as 60% within the next year. We are clearly targeting this global opportunity with our Jamba! and Jamster services and would expect to see the worldwide market for mobile content continue to expand significantly over the next 12 to 24 months. That being said, we also know that given the early stages of the market, the quarter-over-quarter growth rates for this type of business can fluctuate wildly based on a number of factors. We have certainly seen that in the year that we have owned Jamba!.

We believe the growth in any given period is tied to some combination of new consumers entering the market, new carriers being added, new countries being targeted, and of course new content being available. Q1's sequential growth of over 50% for the mobile content business was driven by all four of these factors being in place at the same time. Q2 rose somewhat on the coat tails of Q1 as growth in the quarter came in at 15%, even with the currency fluctuation.

Of the total 165 million in Jamba!/Jamster revenue for the quarter, approximately 122 million came from Europe and rest of world, while approximately 43 million came from the US. The European Jamba! business was actually down sequentially by approximately 8% as a result of higher churn rates coming off of an incredibly strong Q1, and of course the impact of the strengthening dollar. Of the 43 million in US Jamster revenues for Q2, approximately 16 million was a onetime carryover from Q1 as we were waiting for signed agreements from a Tier 1 carrier prior to recognizing revenues for their subs. So the actual Jamster run rate exiting Q2 was about 27 million per quarter, meaning that the US business is well on its way to generating over $100 million in its first year of market entry.

As I said earlier, the key to growth in mobile content is new consumers, new carriers, new countries, and new content. We have very ambitious plans for the second half of the year on all of these fronts, including refreshing both our internal and external content catalogs, adding two additional Tier 1 carriers in the US, and entering half a dozen new markets around the world. Much of the groundwork to make this happen is already underway and our discussions with key partners are progressing well. We would expect to see some announcements in Q3 and some early returns in Q4. That being said, Q3 will be a tough compare to Q1 and Q2 due to seasonality in Europe, a full quarter's impact of a stronger dollar, and the lack of any new carriers or countries added in the second quarter. Although this will lead to a sequential decline in the mobile content revenues, the organic year-over-year growth rate for Q3 will still be over 90%. We do expect revenues to trend up again sequentially in the fourth quarter.

Dana will provide updated Q3 and full-year guidance that takes all of these factors into account. But suffice it to say we're still comfortable with our previous full-year forecast.

Let me now say a few words about our outlook for the rest of the business in the second half of the year. As we have said before, we believe the end-market demand for our intelligent infrastructure services if being driven by an accelerating global migration from physical to digital infrastructure, a dramatic increase in broadband and wireless communication and an emerging convergence of mobility and entertainment. With these trends in mind, we believe the Internet Services Group will continue to see good demand for our domain name, SSL and Payment Gateway services through the rest of the year. Additionally, the buildup in the sales pipeline for our MSS and unified authentication offering gives us confidence in the end market demand for these services as well.

The Communication Services Group should also benefit from an improved spending environment for our traditional services, better sales execution in Tier 1 accounts, and emerging opportunities in international markets.

All in all we feel well positioned with our portfolio services and the market opportunities we're pursuing.

With that I want to thank you for your attention, and now I will turn the call over to Dana.

Thanks Stratton and good afternoon everyone. VeriSign is pleased to report another solid quarter for Q2 where we demonstrated growth across our businesses and exceeded all of our financial targets. Continued demand for our services and execution across the Company drove good top and bottom line growth which in turn delivered record operating cash flow. We continue to focus across the Company on executing against our strategy, driving operational efficiency, and expanding business line profitability.

Other highlights in the quarter included the closing of LightSurf, R4 and the Lightbridge transactions, the financial impact of which are reflected in the Q2 results. Additionally, we continued our stock repurchase program during the quarter, buying back approximately 1.6 million shares of VeriSign stock for approximately $43 million. So let's turn to the detailed results, starting with P&L.

On a consolidated basis, VeriSign reported $445 million of revenue for the second quarter, representing a 74% increase year-over-year and an 11% increase sequentially, driven by solid performance form both our Internet and Communication Services Groups.

To segment the Q2 revenue into these reporting units, the Internet Services Group delivered over $168 million of revenue for the quarter, representing 38% of total revenues. ISG grew approximately 6% from the previous quarter, driven by continued demand for security services and increased sales of new and renewed common net names in our naming and directory business.

Our Communication Services Group reported total revenue of $277 million for Q2, growing by over 14% sequentially and now representing 62% of total revenue. Within this reporting group, revenues from the Communications and Commerce line of business grew 5% sequentially to $102 million. The Content line of business grew to $175 million of revenue, up over 21% from Q1. These results include approximately $8 million of revenue from the newly acquired LightSurf business and the onetime carryover of approximately 16 million of US content revenues that Stratton just spoke about.

As it relates to our international operations, the percentage of total revenue that was driven from our international customers, affiliates and subsidiaries was approximately 36% for Q2. This represents a decrease from Q1, driven primarily by strong growth of US-based revenue in Q2. In addition, the strengthening of the US dollar, especially against European currencies, negatively impacted our international revenue in the quarter by approximately $7 million.

Looking at cost of revenues and gross margin, our cost of revenue for the second quarter was $136 million, an increase from 125 million in Q1. This translates into a 69.3% gross margin for Q2, up from 68.9% in the previous quarter. The majority of the increase in gross margin can be attributed to a more favorable revenue mix that we saw in the quarter.

Turning to operating expenses and related items, total operating expenses for Q2 were $216 million, up from 193 million in Q1. The majority of the increase here is attributable to the addition of operating expenses from the newly acquired companies, as well as the continued investments we've been making in the Content business.

VeriSign generated pro forma operating income of $92 million for the second quarter, demonstrating solid growth quarter-over-quarter and a greater than 70% increase over operating income for the same period in 2004. This translated into a 21% operating margin for Q2, consistent with our expectations.

Other income came in at approximately $14 million in the quarter, relatively consistent with Q1.

As it relates to headcount, VeriSign ended the quarter with a total employee base of approximately 3760, up from 3260 at the end of Q1. The majority of the increase came from the launch of our development center in India and the employees who came to us from the recently closed acquisitions.

VeriSign reported pro forma pretax income for the second quarter of $105 million, a 90% plus increased over Q2 of the prior year and an 11% increase sequentially. This pretax income translates into pro forma earnings per share of $0.27 for Q2, $0.01 higher than our guidance of $0.26.

Earnings per share has been calculated using a 30% tax rate and fully diluted weighted average shares outstanding of approximately 273 million shares. This share count does include the 9.9 million shares that we issued for the LightSurf acquisition.

Moving on to the balance sheet and cash flow items, cash balances, which consist of cash and equivalents, restricted cash and short-term investments, totaled $933 million at June 30, representing a $61 million increase from Q1 cash levels. This increase was fueled by healthy inflows of cash generated from operations, offset by cash outlays of $43 million for the stock repurchase, 31 million related to acquisitions, and 29 million for capital expenditures in the quarter.

Our accounts receivable balances increased to $280 million as of June 30. This was driven by a couple of factors -- higher bookings and our CSG group, particularly in the content business where average DSOs typically run in the 75 to 85 day range, and over 7 million of accounts receivable balances from acquisition. This AR balance translates into a total net DSO for the Company of 52 days versus 49 days in the previous quarter. Net of the much higher DSOs that we see in the Content business, DSOs from our core businesses were approximately 40 days.

Total deferred revenue on the balance sheet came in at $477 million at the end of Q2, an increase of 27 million. The growth you see here was driven primarily by continued strong bookings for domain names sales and renewals, as well as growth in our security services. We also saw approximately 4 million of deferred added from acquisitions in the quarter.

Operating cash flow generated for the second quarter was approximately $136 million, a new record for VeriSign. We continue to generate very healthy cash flow, fueled by strong operating income and positive balance sheet trends.

That completes Q2 financial review, so let me now turn to our outlook for Q3 and the second half of the year. Before I jump into the actual guidance, let me first make a few brief comments on currency.

As you know, we have seen the US dollar strengthen over the past quarter, particularly against European currencies. VeriSign's practice is to hedge our major currency exposures of the balance sheet, which partially mitigates the effect on currency volatility in a given period. The impact of these hedges is recorded in other income and other expense each quarter.

We're not going to attempt to predict future currency fluctuations, but based on the current spot rates for the euro, GBP and yen in particular, we would expect currency to negatively impact our revenue and to a lesser extent earnings in the second half of the year. The revenue and related margin impact of the strengthening dollar would indicate an effect of approximately $10 million on revenue in each of the third and fourth quarters, as well as approximately $0.01 in EPS in each of those quarters.

So with that being said, for Q3 we're forecasting total revenues in a range of approximately 435 to $440 million. This guidance reflects the expectation for continued growth across all areas of the Internet Services Group to drive approximately 40% of total revenue. And in our Communications Services Group, we would look for revenues to represent approximately 60% of total revenues. This would indicate growth from the core Communications and Commerce area, while in the Content business we have factor in the adverse seasonality that Stratton just spoke about, as well as the foreign currency effects I just discussed.

As it relates to margins for Q3, we would expect gross margins in the 69% range and we would look for operating margins in the 22% range for the quarter.

We would also expect the interest income portion of other income to be approximately 7 million. Because we cannot predict fluctuations in currencies, we're not attempting to forecast other income or expense relating to currency hedges.

As it relates to share count, we would expect the fully diluted share count to increase by approximately 3 million shares due to normal quarterly share creep, our ESTP (ph) program, and our annual performance-based option grants for employees.

Taking into account the revenue and margin guidance I just gave, we would expect EPS for Q3 to be approximately $0.27 using a 30% effective tax rate. This also factors in the negative impact of the foreign currency fluctuation.

Now moving on to some balance sheet guidance for Q3, we continue to anticipate deferred revenue growth from our core business and look for deferred balances to increased by approximately 15 million in the quarter. This amount reflects the impact of the new .net agreement where pricing is adjusted from $6 per name down to $3.50 per name net of the ICANN fee.

Turning to operating cash flow, given the revenue, margin and earnings guidance I just spoke about, we would anticipate operating cash flow of approximately $100 million for Q3.

Now looking out to the rest of 2005, as you will remember, we significantly raised our guidance for the remainder of 2005 on the last earnings call. We expect guidance for total 2005 revenue at approximately 1.75 billion and EPS of approximately $1.04 for the year. Although we're now forecasting approximately a $20 million adverse impact on revenues from currency fluctuation and a corresponding $0.02 effect on EPS, we're maintaining our 2005 revenue guidance of 1.75 billion and are raising our EPS guidance to $1.07 to reflect the Q2 results and our earnings outlook for the remainder of the year.

So in summary, our 2005 guidance for 1.75 billion of revenue represents year-over-year growth of 50% and our EPS guidance of $1.07 would indicate earnings growth at a more accelerated rate of 57% for the year.

And with that, I like to open the call up for your questions.

(OPERATOR INSTRUCTIONS) Ed Maguire, Merrill Lynch.

Stratton, you talked about the churn rate. Has been a change in I guess the acceleration of churn in the customer base? And could you talk about the dynamics of the business in terms of what you're seeing there?

There's a lot of things that go on. In Europe in particular you remember that in Q4 the revenues in Europe were around 94 million. In Q1 revenues from Europe were around 133, 134. So it had grown close to I guess a little over 50% quarter-over-quarter. So what we're seeing is that as you come off of that very high rate where you have added so many new consumers because of Christmas time, and of course we had the Crazy Frog ring tone selling in the UK and Germany, we did see accelerated churn rates in Q2. And I would say some of that is also probably related to carriers in the UK adding more steps in the process of signing up, working with both the regulators and the carriers on that, although that tends to normalize itself out after a few months.

But in essence, I think the majority of what we saw in Q2 is related really to coming off of such a big Q1. And I think, as we've said, we've only owned that business that year. I think right now seen what a Christmas season looks like. And then you add to the fact that we added a new country in the US with two carriers coming into Q1 and Q2 and you've got, I think, high-growth that creates a potential for higher churn in a subsequent period.

That being said, we also could grow marketing dollars at that and add more subscribers. We just don't feel that the return on investment right now is there either in the European market, given the summer seasonality or in the US market until we've got one or two more of the main carriers on. So we really aren't trying to spend our way out of this on the marketing from right now either.

Is it your sense that it's going to take three to four quarters to really understand what the stickiness is for new subscribers?

I'm not sure I would predict for you whether it's two quarters out or four quarters out or what. The team in Europe in particular has a significant number of customer retention programs and cross sell type programs that they are just launching this summer, and so I think we will have a much better read on that as we head into Q4 related to what they've been seeing in that market. Here in the US of course we're still so early and we have still got to add Sprint and Verizon before I think we know what kind of the level is to set that at.

Also, talking about the pay per click, should we assume that -- for now you're seeing about I guess a 2% inflation of the zone file at any given time. Has this fluctuated during the quarter? You had mention that you had seen this accelerate. Do you feel like the 2% figure that you're giving is going to give enough tolerance for any acceleration in this practice?

I think at the present time I do, but let me just give you kind of what has happened in the last three quarters.

At the end of Q4, we probably saw about a 40 or 50,000 name difference in the end of quarter number and then what happened five days later. At the end of Q1, it was about 150,000 names different. At the end of Q2 we calculated somewhere around 700,000 names difference. So what has happened in that period of time is that this pay per click market has caught on, more and more gross registrations are being thrown at our servers every week -- between 2 and 3 million a week over the last few weeks -- and so we know that at the end of any given week, five days later a substantial number of the names that just got registered will get deleted out. So we're trying to make that adjustment proactively now rather than wait for this number to get even bigger out longer term.

Just a final follow-up. The recent iDefense acquisition, what's the timing on your incorporation of their services into your overall MSS portfolio?

There's two pieces to that. Of course it is an information service that gets delivered through e-mail alerts to the majority of their customers. So obviously we are already putting that into the sales kit for our sales force and will take it to a much broader audience than they ever could have with their five or six folks. And then second, we will be incorporating some of our data and theirs together into some new reporting that will unique to our MSS offering. That should occur probably in the fourth quarter, early first quarter. But we're selling it as of today, and already seeing sales force pretty excited about it.

Thanks a lot.

Todd Raker, Deutsche Bank.

A few questions for you. First, in the US business, came you dig into the $16 million onetime payment that is going away and explain exactly what that is? Do you expect the US business to be up sequentially here into the third quarter with seasonality?

Let me be very clear what that is. It probably came across a little oddly. We actually in the US in Q1 reported about $9 million or so of Jamster revenue in the total Jamba!/Jamster revenue of 143. But in reality we actually had another 16 million that has flowed through a carrier, but we didn't have contracts signed with that carrier until later in April. And so both our rev rec policy and our auditor's disallowed us being able to show that in Q1.

So it's really just real Jamster revenue from the US that occurred in Q1 that our rev rec policy wouldn't allow us to take in the period. So it is pure subscription to a particular Tier 1 carrier. And it means that the US revenue in Q1 was on kind of a run rate basis around 26 million. It grew by a little bit in Q2 to 27, and we are expecting it to be a little bit up here in Q3 as well.

If you dig into the churn commentary coming out of Europe, can you talk about what the rationale driving kind of increased churn is? DO you believe you're losing these subscribers to fresher content elsewhere? And especially how do you contrast that with the commentary around this industry report where penetration still looks incredibly low in terms of consumers downloading content, yet churn is really picking up here?

I think a couple of things to say. One, again you've got to remember -- I think if you look at the annualized kind of return, the business is going to grow 90% Q3 over Q3. If you look at it quarterly, when you have a really, really big quarter, as we did last Q3, then you saw Q4's growth rate slow. We had a very large Q1 and then you see Q2's growth rate slow. So I think what you're seeing is there must be a dynamic in the space that when you bring so many more new consumers into the market in a given state your churn rate in the preceding -- in the, I'm sorry, succeeding quarter is going to increase. I would probably think philosophically that's a very likely outcome of what you see. I think are Q2 situation is really a byproduct mostly of the Q1 over-performance in the UK in Germany.

That being said, I think there is -- again, we need fresher content. The Crazy Frog, as you know, was wildly successful in the December through kind of February/March phase for us as a ring tone and then subsequent to that as a single for the label. We will launch a Crazy Frog here in the US in the next few weeks. So you've got to refresh these content catalogs to keep those subscribers coming back that when we go out and do our focus group, we go out and touch our customers, what they tell us is the reason they come back for the subscription is in fact because the new content is there and it's fresh. I think we have just expand the content catalog that we're now available to promote here in the US over the last few weeks, and we're looking to do some things in Europe to create some more internally generated content along the lines of the Frog. We'll just have to measure those churn rates. I don't think it's a dynamic assignable to the overall market one way or the other at the moment.

And then last question, if you look at kind of the incremental drivers here -- new carrier, new country adoption -- can you update us on where you think you stand with Sprint and Verizon? And where do you see new countries coming on stream over the next 12 to 18 months?

We're very confident that when the other Tier 1 carriers in the US market open up their systems to premium SMS charging that we will be one of the venders that are supported. I can't make those -- I can't make timing announcements for those carriers, nor would I want to try. But we're very confident through our discussions that they view Jamba! or Jamster as a premium brand they would like to see represented when their systems are opened up.

As it relates to new countries, I just reviewed plans that have about a dozen new countries right between now and the middle of next year, some of them with very large populations of mobile users in the youth age groups that we're targeting. So we've talked before about Canada and Latin America. You will also see us open up the Eastern European countries over the course of the next few quarters. And then we're looking at some initial forays into Asia, although I'll keep our paddle dry on that for awhile until we see how it goes.

Thanks guys.

Philip Winslow, Credit Suisse First Boston.

Just wanted to dig in just a little bit on the Q4 sort of outlook on the content side of the business. What are your assumptions when you do look at Q4 versus Q3 as far as carrier uptake here in the US and/or seasonal turnaround in Europe?

I think you've got -- traditionally Q4 and Q1 are quarters in existing markets where new users come into the market because of Christmastime and then obviously activating those phones. You also see more replacement offers from the carriers in those timeframes. So we believe the replacement market is about three times the size of the new handset market over the next five years. You tend to see buying patterns around the fourth quarter and first quarter for replacements. And of course you get new users into the mobile phone base through Christmas buying.

As it relates to the US, we're still hopeful that we will be able to turn on one -- at least one of the other major Tier 1s before the end of the year, and we're going to continue working that hard. I will just say we're ready to do that when those systems become available to us.

And then I think in the other countries, as you know, it takes us -- once we launch in a country it is generally one to two quarters until we see the revenue ramp up because we've gone through a billing cycle and the rest. We're launching several countries this quarter. So that gives us some confidence that Q4 in Q1 will see some uptick.

I guess when you do look at North America, and given your accounting policies, what are sort of the cutoff dates for contract signing to have, let's say, a new carrier actually start to benefit Q4?

It's a fairly detailed policy. It depends on how we connect to their billing system. If we have an existing aggregator that we use to go get the billing done that has already been proven, then we're likely to have a very short period of 30 days or so as we run through the first billing cycle. If it is a direct connect from us or an aggregator we have not used before, then we're more likely to have a 45 to 90 day window that we have to evaluate that through. So we go through a full payment cycle from consumer to carrier, through aggregator, to us.

Thanks guys.

Rob Owens, Pacific Crest Securities.

Could you talk a little bit about just the growth we've seen in the registry? I think this is the second-highest net sequential change. And just what is the sustainability going forward on that?

I think we have seen three factors contributing to the renewed growth in the registry over last year, year and a half. International pick up as com has become more demand and name in those international markets, both because of some of our marketing efforts, I believe, but also because of just general kind of internationalization of the Web phenomenon.

How many .coms are international, if I can step in?

The last number I remember was something on the order of about 23% or 24% of names are now coming from international sources. But that's about a quarter old. So I have to get that for you.

The other is we do see this notion of new products, new movies, new local businesses putting up websites, driving some of the domestic growth.

And then the third one, and the most kind of unique one, is really this pay per click search market where names are bought and then tested against traffic analyzers. And the ones that can generate more than a $6 or $7 fee per year are kept; the other ones are turned back within the five day grace period. That's why we're adjusting this space right now.

But we have been tracking this for about three quarters in that particular space, and we feel like we're seeing some steady-state right now of about 325 to 350,000 names per week across the market that we are registering as new. And then with renewal rates intending to stay in this mid-70% range, it is keeping the base growing at higher rates. Obviously if you're taking less out every quarter and having record quarters of registration, the base is going to grow more than it has before.

In light of that, why aren't you seeing more dynamic growth on the SSL certificates? New certificates issued was good again this quarter, yet the installed base doesn't seem to be growing as fast. I guess you would assumed outside of the pay per click sites there should be some type of natural attach rate. But just in light of the new search issues I would think the install base might be ticking up a little more than it is.

We see a variety of things that happened there. One, we've been trying to model that attach rate ourselves versus domain names for many years. I'm not sure the linkage is exactly there, because a lot of these go to sites well after the domain name has been registered. And of course a lot of domain names get registered that don't ever need a certificate around doing commerce because people will put up lots of front-end servers as the presentation layer, but the transaction servers will be in the background. So there's not clearly a very simple ratio to kind of calculate.

We also as we have moved to more and more certificates for enterprises being sold in big bunches, we don't count those until they are deployed versus if that enterprise had come to us a year ago and bought it we would count it right when we shipped it. So in many ways, we may be pushing out the deployment rate, or at least the count of the install base, because we're seeing more enterprise buys for SSL than we used to see. It used to be in a mostly retail business; now the enterprise side kicks in at a pretty significant clip.

A quick one for Dana. The sequential increase in G&A, anything unusual in there?

No, not really. We had some increase legal fees relating to some of the Jamster things that you have seen out there and just normal quarterly expenses. There's also the increase from the acquisitions in there. So we think going forward that the percentage of G&A to revenue is definitely coming back down.

Thanks.

JPMorgan, Sterling Auty.

Can you just give us a little clarification on what some of the new countries that will be coming on board for Jamba! will be in the quarter?

We're targeting -- I think in Q3 we're really focused on turning up countries in Eastern Europe. So you would expect things like Poland and Turkey, and if we could get wrapped up there, Hungary, Russia, potentially. So there's a lot of work that's been going on there and a lot more to do. We are continuing to work on Latin America as well and would hope to see some announce able things there in the third or the fourth quarter.

In terms of the other two Tier 1 carriers you're working on, in one case is it simply just getting the premium SMS opened up? Or is there an opportunity to be kind of a full-fledged infrastructure provider?

I would say that all the carriers are looking at these spaces in a much more open way than they ever had before. So I'm not going to -- again, I'm not going to give out any confidential information, but I think we have opportunities at the Tier 1 carriers in the US beyond just enabling the Jamster brand, but also bringing in others of our services, including things like MMS and SMS alerts and messaging.

And then lastly, can you just comment on the pricing and competition on the unified authentication market right now?

I think we have become the price disrupter in the market. And I think we're seeing competitors in the space try to come down to meet that in large buys. So I think from our perspective we think we've woken the market up a little bit to the economics of the situation. And I think it will take some time for the small and medium-size businesses to see any impact. But in large account selling I think the price there is fairly aggressive right now.

Okay, thanks.

Mike Latimore, Raymond James.

Could you comment on the percent of ring tones that are two tone versus polyphonic tones today, and kind of where you see the equilibrium being in a few years?

I think for our downloads right now it's something on the order of polyphonic tones are still 35 to 40%. We've seen real tones get up into the 30 to 35%. And then the rest of our downloads are either graphics or games or wallpapers.

What will the MMS platform look like at Sprint/Nextel after the merger? Is it going to be a unified system or are they going to use separate vendors, separate systems?

We have no indication from Sprint what their plans are as that integration occurs. I would tell you that the pay per messaging service we provide Sprint continues to grow subscribers and do very well.

Okay, thank you.

Drew Brosseau, SG Cowen.

Thank you. I have a couple. First, on the mobile content business, can you talk about where the number of subscribers was at the end of the quarter?

I think we have said that we hope to have over 15 million subs by the end of this year, Drew. And I think we will still be on target for that. We did see some subscriber losses because of the higher churn rate coming out through Q2 in the European side; have continued to grow the base in the US to several million now. So I think overall we will still be on target for the end of the year. And we're seeing kind of a shift right now in Europe because of the seasonality, so losing some subs, however still adding here in the US on a net basis.

And I guess another way to come at that is can you talk about what you're seeing over time in terms of the average dollars per subscriber?

It has tended over the last four quarters to go up. And so that's, I don't think, a particularly long time to really gauge it given the dynamics of the market. In the US market, as you know, we launched with weekly plan. Our carrier partners had come back to us and asked us to go to monthly plans in the US. So we were charging $1.99 a month in the US in Q1. In Q2 the majority of those went to $5.99 per month. $1.99 per week, I apologize, in the first quarter, $5.99 per month changes. That's really to simplify the billing procedures and the customer care procedures for them. So there is a slight decrease in the US, but that was kind of a onetime effect of the change to a monthly plan.

On a related area, can you talk about the profitability of the business? And in particular, as you're watching activity during the course of a quarter and you're seeing churn developing, how are you able to manage the marketing spend to address profitability risk?

As we've kind of laid out previously, we have tools that measure every ad in every country and the subscriber numbers that come through from that. We know the cost of the ad, and we so we do our calculation of obviously cost per acquisition. We also see what the churn rate is in every country, so what are the number of subscribers spending in (indiscernible). So throughout the quarter we can monitor that. And in countries where we believe there is available inventory on the channels that we like to advertise on and we can get it a good price, we will increase the spend at that point. We measure it. If we see that the cost per acquisition is going up, meaning that fewer new subs are responding to the ads we're running, then we pull down the advertising there and shift it to another country.

So it's a fairly mechanized process that the team uses, and it's all based on cost per acquisition at any given time and a given country. And we can do spot buying of advertising pretty much with a one to two-week notice if we believe there's opportunity to do better in a certain market.

My last one on this is it sounds like in doing the math that you're looking clearly US down from the reported number, maybe up a little bit from the 27. But it sounds like you're also thinking that international will be flat to down in the September quarter. Is that right?

That's right. It will go down a few more million dollars. Again, because of kind of the Q3 seasonality in Europe where when the kids are out, outside in the good weather, we tend to see less subscribers per commercial we run, so we pull back the marketing spend a little bit. And we're starting up in several new countries and don't expect that that will flow through until Q4.

It sounds like you're seeing this churn issue continuing into July.

Well, yes, into these 20 days or so.

You also have the currency fluctuation effect as well.

Okay, thank you.

Steve Mahedy, Banc of America.

Just a follow-up on the churn. I recall back at the analyst day, at that time the refund rate was about 2%, but it didn't seem like churn was that much of a factor. Did it just suddenly become a factor more so towards July, or did it accelerate, or is it stabilizing, I guess?

I don't think we're -- I think we would say it's stabilizing. And again, I would point back to with the number of subs we added in Q1 coming out of Europe, I'm not surprised that we saw a higher churn rate in Q2. I would hope that that stabilizes as we come through the summer, which is really a low point in the market anyway in Europe around these services. So without a new country to add, or without bringing on the other carrier here in the US in Q3, 53, we feel our guidance is appropriate. You might see us make announcements over the coming weeks around those market entries and we will be able to describe more clearly what are plans are then.

Can you tell by product offering perhaps what the equivalent churn would be? Are some products more susceptible to churn than others? If you start to deliver a richer content or one that is other than a ring tone perhaps would churn be lower there? Or do you have enough market information to make any comments?

Off the top of my head I can't kind of give you a qualitative answer there. I think the guys would tell you that the freshness of the content is the most important thing. So when there is fresh content, whether it be a Crazy Frog or it be the newest single from a hot artist, then you have, I think, some ability to kind of drive the market to new subscriber adds that are higher than average. And when you lack that for several weeks, you see the opposite occur.

One of the things, as we have said a little bit early, we are going to be rolling of this quarter as well is both loyalty and kind of win back programs in the space, which is not something the teams have ever done because of the growth characteristic of the business over the last few years. I think that will over time have some impact as well.

From a systems perspective, can you measure and monitor churn right now? Do you have that capability across the infrastructure?

Yes we do.

Thanks.

Sarah Friar, Goldman Sachs.

Can I go back to an earlier question? I think Todd asked you about the impact from other competitors -- private companies, fresher content, that sort of thing. What about the shift from off portal to portal? How does that impact you, particularly in Europe where it has typically not been, it's tended to be done through web sites like Jamba!, are you seeing any shift and you're perhaps (ph) back to the phone company or to the carriers?

Actually, the reports I've seen has it exactly the opposite. Off portal is gaining more market share in Europe. It's now I believe over 50% of the total market, and as much as 70% of the market in the UK. So at least our own reports would suggest off portal is becoming more popular. And in fact in my own discussions with the Tier 1 carriers here in the US, they are acknowledging that they need to have an off portal strategy because it clearly expands the opportunity for them.

So that's not a reason for maybe some of the softness in Europe then?

No, I don't think so.

I think secondly it is a little surprising to me that the US business went from 25 million give or take in Q1 to only 27 in Q2, because I would think it's so under penetrated here. What do you think it needs to really kick start the market here in the US to make similar to the to the sort of trends we have seen in Europe in the early stages?

I think you have to step back and analyze it a little bit carefully. What we're saying is within one quarter of launching in a country we had a $26 million run rate, and we were only covering half the subscribers in the marketplace.

Fair.

That is substantially higher than Jamba! ever saw in the first quarter in Germany or in the first quarter in the UK. So in many respects the UK launch was overly successful in Q1, and maybe that created a flattening of it in Q2 because the market was kind of getting accustomed to it. We do think once we add the other carriers and begin to start to source the Tier 2 carriers who have come to us for this platform, we will begin to get the rest of the market.

Fair enough. And then just finally a quick question. Microsoft just announced the purchase of FrontBridge tonight. I think you know FrontBridge fairly well. How does that impact you guys competitively given your managed security offering and you tend to offer it more on a managed or a host-based platform?

I think, just to be clear, we actually have been OEM-ing the FrontBridge service as our e-mail security service for about the last year. And as you know, we have done a lot of work with Microsoft in our unified authentication platform to integrate with Microsoft Outlook and Outlook Web Access. So we actually are very pleased. We found out about the transaction earlier and believe it will actually strengthen our relationship with Microsoft. We intend to remain a distribution partner for that service and add some of our own value to it.

Okay great. Thanks a lot.

We have time for one final question, and that will come from Robert Breza, RBC Capital Markets.

Real quickly, Stratton, how much of the Q4 guidance would you say is dependent upon uniting the Tier 1 carriers in the US? Or is the Q4 guidance more set up on your entering the Eastern European countries?

I don't think there's any particular thing we are counting on to drive that Q4 guidance.

Thank you.

Gentlemen, I will turn the program back over to you for any additional or concluding remarks.

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

Once again, that does conclude today's conference. I'd like to thank everyone for joining us today.