威瑞信 (VRSN) 2005 Q3 法說會逐字稿

Good day everyone and welcome to this VeriSign Incorporated third quarter earnings conference call. Today's call is being recorded. And at this time for opening remarks I would like to turn the conference over to Mr. Tom McCallum, Director of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon everyone. Thank you for joining VeriSign's third quarter 2005 results call. I'm here today with Stratton Sclavos, Chairman and CEO of VeriSign, Dana Evan, our CFO and Steven Gatoff, our VP of Finance and Treasurer. In a moment Stratton will review Q3's results and will provide some insight into the performance of our businesses. Dana will then follow with a detailed review of our Q3 financial. And she will then provide some forward looking guidance. We will then open up the call for your questions. We anticipate the call will end at approximately 3 pm.

We would like to remind everyone that other than historical financial data, today's discussion may include financial 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 on the wires after the markets closed this afternoon. The press release, the related financial information discussed on this call and a reconciliation of GAAP and non-GAAP financial information can be found at our Website at www.verisign.com under the Investor Relations tab. This call is being Webcast live both on our Website and at streetevents.com. And with that I'd like to turn things over to Stratton.

Thanks Tom. And good afternoon everyone. Let me add my welcome to all of you attending today's call. As our press release indicates, our third quarter results came in slightly ahead of the preliminary numbers we announced on September 29. As we discussed previously, it was a very mixed quarter in which we saw very solid performance across our Internet and core communication services. Offset by a substantial shortfall in revenues from our Jamba! and Jamster mobile content business. The Internet service group's performance was driven by the continued rise in online communications in commerce. As well as strong growth in enterprise security spending that was fueled by increased network threats and new corporate compliance requirements.

We also saw good sequential growth in our core communications and commerce business. With our legacy building and voice services performing slightly ahead of plan. All in all, the strong performance at ISG and core communications enabled us to offset the short fall in content and achieve record operating income. Dana will provide more of the financial details in a few minutes.

Before that, let me dive into the Q3 highlights for the business units, beginning with the internet services group. The ISG group contains our naming and directory services for authentication and managed security services and our payment gateway business. Increased overall demand, deeper international penetration and new product traction, combined to make Q3 a record quarter across almost every financial and business metric in the Internet services group.

In our naming and directory services business, we processed approximately 4.6 million new registrations for dot com and dot net domain names during Q3. We also saw another 6.3 million names renewed or extended, adding up to a record 10.9 million domain name transactions in the quarter. VeriSign adjusted base of active name at the end of the period stood at a record 46.7 million, up 6% sequentially and 29% year over year. The strong demand continues to be driven, as it has been all year, by several factors including increasing international penetration, new business and product introductions and the pay-per-click search market.

The VNDS group also began to execute on its real time Web strategy that we laid out at our analyst day in May. Our internal development of a global ping server infrastructure, coupled with the acquisitions of Weblogs and Moreover, positioned VeriSign as the leader in real-time information services for publishers, bloggers, Websites and enterprises. We are excited to be at that time center of this rapidly evolving ecosystem. Doing what VeriSign does best in providing the trusted and scalable infrastructure that's necessary to ensure uninterrupted growth and continued innovation.

We believe the continuing transformation from physical to digital infrastructure is driving the need for real time information services across many industries. Our customers and partners routinely tell us that our globally deployed atlas infrastructure, proven scalability and trusted brand give VeriSign a compelling advantage in providing these type of services. You should expect to see additional product, partnership and customer announcements over the next 90 days.

Moving to the security business. We sold over 122,000 FSL certificates during the quarter. This takes our active installed base to a record 479,000, up 7% year over year. Demand here is being driven by an increasing of transactions at existing sights, coupled with continued international expansion. On the enterprise side of security, we had several significant customer wins in the quarter, including J.P Morgan, IBM, Boeing, Honeywell and Verizon. Demand for our managed security and consulting services remains strong. And we continue to believe we are winning the majority of large account deals in this space. Case in point, we received our largest MSS contract from a federal agency during Q3.

We expect this hotly contested win, to become a potential catalyst for additional public sector business in the near future. In total, we are now managing and monitoring over 4,000 devices for our customers and seeing an aggregate 1.2 billion security events every day. In an environment where network complexity, security threats, and regulatory mandates all continue to increase, we feel well positioned with our MSS services to help our customers successfully move forward with their critical IT initiatives. We're also seeing an increasing number of large scale RP's and pilot deployments for our unified authentication platform and tokens. The increase in both the number and severity of threats against Internet, as well as new compliance mandates are driving customer spending priorities in this area as well.

Of course, the big news here is our alliance with eBay and PayPal to deploy strong authentication technology to their active user bases. With the firm commitment to deploy 1 million tokens and comprehensive game plan to provide incentives for adoption and use, we believe PayPal and Ebay represent the ultimate anchor tenants for our unified authentication platform. And for a push into second factor authentication for consumers. Interestingly, momentum in the consumer space is starting to pick up. As evidenced by yesterday's news report that the Federal Financial Institution Examination Council, a federal regulator, issued a letter to banks last week; stating that financial institutions will be expected to use some form of second factor authentication on their Website by the end of 2006. The letter goes on to blame rising account fraud and identity theft as reasons for the new standards.

Again, we feel our unified authentication platform, with its device flexibility, standards based interfaces and low cost to total ownership is well suited to meeting the needs of this market. Stay tuned for several significant announcements in this area over the next 90 days. Of course, as part of the alliance with of PayPal and Ebay, we have also announced that PayPal will purchase the assets of our payment gateway business. The payment gateway business recorded a record 134 million in Q3, for an aggregate dollar value of 12.3 billion. We expect the transaction to close later this quarter and to see the business continue to thrive under the PayPal banner.

As we look into Q4, we are very bullish on the Internet services group as a whole. Demand is strong in our core domain name and at the sell units. And our managed security and unified authentication businesses are accelerating. In fact our sales pipelines, heading into the quarter, have grown 100% from Q1 of this year. All this bodes well for a very strong finish for ISG.

Now, let's move to our communication services group. The communications and commerce line of business includes the legacy network connectivity, database and and pre and post billing services. The content line of businesses includes Jamba!, Jamster, LightSurf and our SMS and MMS interoperability services. For Q2, the communications and commerce line of business achieved 107 million in revenue, up a surprising 5% sequentially from the second quarter. In terms of business metrics, we delivered over 14.4 billion database queries in the Q3, consistent with Q2. And we also processed billing and payment services for approximately 7.2 million wireless users. While we continue to see some pressure on the core signaling and database businesses due to consolation and customer renewals; we are finding significant interest in our new billing, messaging and IP connect offerings. While we would expect Q4 to be relatively flat, given the sequential growth over the last two quarters, we are feeling bullish about our opportunities heading into 2006.

Now, let's move to the content line of business. Overall, we achieved revenues of 131 million during the quarter, down 25% sequentially but up nearly 80% year over year. LightSurf and our SMS/MMS interoperability services accounted for approximately 12 million during the quarter. Jamba! and Jamster accounted for the remaining 119 million in the content group. Slightly better than our preannouncement estimate of 115 million.

On the LightSurf and MMS front, we saw good growth in the fixture messaging business, announced several agreements to provide MMS interoperability between certain carriers in the U.S., Canada and Latin America. We are also well into the development of our next generation messaging platform. Which would combine all of our messaging capabilities in a common unified offering for carriers and Internet portals. We expect to launch the new services in the second half of 2006 and have already begun prebriefings with our key customers and prospects.

Now let's move on to Jamba! and Jamster. We're obviously very disappointed in our inability to overcome the weakness we saw in the Jamba! and Jamster European business. In particular, it appears the lack of new hit content in the seasonally slow period adversely affected our efforts to reverse the churn we began to see at the end of Q2. In addition, the imposition of new marketing restrictions and guidelines in the UK in September reaccelerated the churn in that market. This led to significant friction in the customer acquisition process that outweighed any positive impact from our customer retention and market expansion initiatives during the quarter.

As Q3 emphasizes, the market for mobile content has seen dramatic and unpredictable swings over the last 12 months, driven by a wide variety of factors. While short term trends will continue to be hard to forecast, we still fully believe in the long term opportunity in mobile content enabled by the convergence of mobility and entertainment. And in our ability to capitalize on our position as the leading global platform for these services. It's also important to remember that the content business will still exit the year on a revenue run rate that is approximately ten times bigger than just two short years ago. Meanwhile, we expect the market to reach some level of stability in the next six months. As the base in the UK and Germany stabilizes such that expansion into other geographies and new product areas begins to show through.

We'll also continue to manage our marketing expenses carefully as we in parallel strive to build better retention and loyalty programs. We should also point out that there were some highlights in the content business in Q3. Including the addition of over 400,000 subscribers from new geographies, as well as the initial availability of our services for Sprint customers in the U.S. We'll continue to push forward with new carriers and geographies in Q4. And in fact are expecting to ramp our demand generation with Sprint significantly over the next few weeks. In addition, we are currently working on a significant number of new students for B to B and white label services that include our traditional mobile content but also full track music and picture messaging. We're optimistic that these current engagements will lead to meaningful incremental opportunities in 2006.

Let me now say a few words about Q4. Overall, we believe the end market demand for our intelligent infrastructures is being driven by an accelerating global migration from physical to digital infrastructure. The dramatic increase in broadband and wireless communications. And an emerging convergence of mobility and entertainment. With these trends in mind, we are expecting a strong showing in the Internet services group for Q4. Meanwhile our strategy in the core communications business has continued to offset the pricing and consolidation pressures with incremental revenues from new products and deeper penetration into tier one accounts.

Jamba! and Jamster will obviously be the wild card. We hope to have a better feeling for the content business' prospects going forward by the Q4 earnings call. With that I want to thank you for your attention. And now I'll turn the call over the Dana.

Thanks Stratton and good afternoon everyone. As we've talked about previously, while we are disappointed with the performance of the mobile content business in Q3, we were encouraged by the continued strong performance demonstrated by our Internet and core communications businesses. Solid execution in these business combined with focused expense management and deliberate spending reductions allowed us to deliver a record quarter of operating income overcoming pressure from the revenue shortfall in the mobile content business. Before I get into the detailed financial results for Q3, I would like to point out that on the acquisition front, we have now completed the iDefense, Weblogs and Moreover transactions. And our majority owned subsidiary VeriSign Japan has completed and announced the acquisition of an MMS company, SiteROCK, also located in Japan.

Finally, we continued to be very active in our stock repurchase programs buying back approximately 9 million shares of VeriSign stock for an aggregate value of $215 million. Now let's turn to detailed results starting with the P&L. On a consolidated basis, VeriSign reported $415 million of revenue for the third quarter representing a 28% increase year over year and a 7% decrease sequentially. This decrease was driven by the expected decline in mobile content services, that was partially off set by solid performance from both our Internet services group and our core communications and commerce businesses.

By reporting segment, the Internet services group delivered over $177 million of revenue for the quarter, representing 43% of total revenues and growth of approximately 5% from the previous quarter. The solid growth you see here was driven by continued demand for our security services and increased sales of new and renewed common net names in our naming and directory business. Even taking into account the dot net pricing decrease, which took affect in Q3. Our communications services group reported total revenues of $238 million for Q3, representing 57% of total revenues in the quarter. Within this reporting group, revenues from the core communications and commerce line of business grew 5% sequentially to $107 million. Off a solid network services revenue and growth in our wireless billing services.

The content line of businesses delivered $131 million of revenue, down 25% from Q2 due primarily to increased subscriber churn in the period. These results include $119 million of revenue from the Jamba!, Jamster services. Slightly ahead of the guidance of 115 million that we gave at the time of our preannouncement. As it relates to our international operations, the percentage of total revenue that was driven from our international customers, affiliates and subsidiaries was approximately 33% in Q3. This represents a decrease from Q2's 36%, driven primarily by the decline in the mobile content revenue in Europe.

Looking at cost of revenues and gross margin. Our cost of revenue for the third quarter was $129 million, a decrease from 136 million in Q2. This translates into a 69% gross margin for Q3, in line with our previous guidance. This gross margin reflects approximately 7 million of mobile content royalty settlements that occurred during the quarter due to favorable resolution of certain negotiated rates. The normalized gross margin would have been 67%.

Turning to the operating expenses and related items. Total operating expenses for Q3 were $189 million, down from 216 million in Q2. The majority of the decrease here is attributable to our ability to actively manage the variable spending from marketing associated with the mobile content services. As well as continued efficiencies being driven in G&A. As Q3 progressed and we began to see softness in the content services revenue, we dialed back the variable marketing expenses commensurate with the marketing opportunity and marketing effectiveness we were experiencing in the quarter.

VeriSign generated non-GAAP operating income of $97 million for Q3. Demonstrating solid growth quarter over quarter and a greater than 50% increase over operating income for the same period in 2004. This translated into a 23.3% operating margin for Q3. A historic high mark for VeriSign operating margins. Other income came in at approximately $6 million in Q3. Lower than previous guidance due to lower interest income on our reduced cash balances resulting from M&A activity and stock repurchases. As it relates to headcount, VeriSign ended the quarter with a total employee base of approximately 3,970, up from 3,760 at the end of Q2. The increase came mainly from planned hiring and investment areas such as security and messaging, as well as the integration of employees from the iDefense transaction.

VeriSign reported non-GAAP pretax income for the third quarter of $102 million, a 48% increase over Q3 of the prior year and relatively flat sequentially. This pretax income translates into non-GAAP earnings share of $0.27 for Q3. Earnings per share has been calculated using a 30% tax rate and diluted weighted average shares outstanding for Q3 of approximately 266 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 approximately $800 million in September 30. Representing a $134 million decrease from Q2 cash levels. This decrease was driven by total cash outlays of 281 million as follows. 215 million for stock repurchases. 39 million related to acquisitions and 27 million for capital expenditures in the quarter. These cash outlays were offset by the generation of extremely healthy outflows from operations. Our accounts receivable balances decreased to $271 million as of September 30. Driven primarily by strong collection efforts in the communications and content groups and the decrease in the content services revenue. This AR balance translates into a total net DSO for the Company of 51 days, versus 52 days in the previous quarter.

Net of the much higher DSO's we see in the content business, DSO's from our core businesses were approximately 36 days, down from 41 days in the previous quarter. Total deferred revenue on the balance sheet came in $493 million at the end of Q3, an increase of 16 million. The growth you see here was driven primarily by continued strong bookings from domain name sales and renewals, as well as growth in our security services. We also added approximately 2 million of deferred from acquisitions in the quarter.

Moving on the cash flow metrics. Operating cash flow generated for the third quarter was approximately $126 million. We continue to generate strong cash flows fueled by solid operating income and positive balance sheet trends. Particularly in the accounts receivable and pre-paid expense areas this quarter. Well, that concludes the financial review.

Now, let me turn to our outlook for Q4. First, let me clarify some details around the guidance. This guidance does not take into account the Ebay payment services transaction. As we've mentioned, we are targeting a close date sometime in Q4 and we'll update our guidance upon the closing. So, with that being said, as we look to Q4, we are forecasting total revenues in a range of approximately $395 to $400 million.

This guidance is consistent with the guidance that we discussed on our preliminary results call on September 29. and reflects the expectations for continued sequential growth in our core securities and naming and directory services. A flat quarter for core telecom services due to planned pricing reductions which will take effect in the quarter. And the expectation that we will experience another quarter of declining revenues in the mobile content business. As it relates to margins for Q4, we would expect gross margins in the 66% range. Reflecting the impact of the lower revenue guidance and the additional costs from the recent acquisitions I spoke about earlier.

And we would look for operating margins on the 23% to 24% range for the quarter. We would also expect the interest income portion of other income to be approximately 5 million, reflecting the lower cash balances after stock repurchases and the acquisitions that were announced in October. Looking at share count for Q4. We would expect the diluted share count to be in the area of approximately 258 to 260 million. Which reflects a full quarter of the weighted average shares repurchased in Q3 and the anticipated continuation of our stock repurchase activity. Taking into account the revenue and margin guidance I just gave, we would expect earnings per share of Q4 to be approximately $0.26 to $0.27, using a 30% effective tax rate, again consistent with the guidance we gave on September 29.

As it relates to operating cash flow expectations for Q4, given the revenue, margins earnings guidance I just spoke about, we would anticipate a base operating cash flow of at least $100 million for the quarter. So, to sum up the Q4 guidance and its impact on our full 2005 forecast results. We would expect to end the year delivering more than 40% year over year revenue growth and 55% growth in pro forma earnings. Lastly, as we look out to 2006, given a difficulty in forecasting the short term trends in the mobile content business, we are not providing 2006 guidance at this time.

With that said, we would like to reiterate the growth expectations we have previously talked about for our core businesses. Specifically in the Internet services group, we continue to look for both security and naming and directory businesses to grow at least 20% year over year. And the communications services group, we would anticipate the core VPS business to grow within a range of mid to high single digits. And with that I'd like to open the call for your questions. Operator, may we have the first question please.

[OPERATOR INSTRUCTIONS] And we'll take our first question from Drew Brosseau with SG Cowen.

Can you guys talk a little bit about as you finish up the quarter and what you've seen so far in the early part of October what the trends have been since in the mobile content business?

Sure. We really haven't seen much difference than what we were expecting. Obviously, we finished September a little better than our preliminary number had suggested. We had some assumptions going into October. And Those have pretty much carried out. I wouldn't say we seen anything different than what we expected. We are continuing to have a lot of discussions around new opportunities and - - white label services and others. We're continuing to see Sprint's willingness to open up their network to broader demand generation on our part, all be positive signs. But October came in pretty much as we would expect Drew.

And can you give us in some sense a - - in talking about it another down quarter in Q4 sequentially for that business? Can you give us some sense of performance by region? Do you expect U.S. to be up sequentially where as overseas might be down? Or how are you thinking about that?

I think the U.S. will be dependent on the ramp we see with Sprint and some other activities we're planning on in November, December with new content launches. So, we'll see how that goes. We'd expect it to be relatively flat other than upticks from those items. The bulk of the downside will come, again, in the UK. As that market has continued to be soft with all of the marketing restrictions and I think focus on the services there. Germany seems to be doing better in terms of stabilization. Low single digit churn of the base kind of so far in October. So, we're cautiously optimistic that that market is definitely stabilizing. Certainly over the next few months, UK remains the problem space.

And then just one last one. Dana, can you talk about the pricing changes you were referring to in the core telco please?

So, we had some labels that we had been having some longer term over several quarters. I'm sorry.

Talking about in the core. The pricing renewals.

So we - - a lot of the core services there are in contracts that are renewed over several periods. There was a couple coming up in the quarter in the database area that we are expecting that we already know have pricing reductions within those embedded contracts.

Okay. Great. Thank you.

And we'll go next to Peter Cooper out of Morgan Stanley.

Great. Thanks very much. Stratton, a little - - if you could clarify a little more. You talked about the ISG's were very strong and you mentioned certs and tokens in particular. Any pilot programs right now? We know you've had details with people like Bank of America on the enterprise side. Are you seeing momentum out these guys are gearing up for at least pilot trials on the consumer side of it or is it just too early for that?

I think we're seeing - - what I would say is the amount of discussions we're having about potential consumer deployments has probably escalated five x in the last 60 to 90 days. A lot of those are exploratory. A lot of those are a result of the eBay and PayPal decision. Obviously they're kind of at the nexus of online commerce and payments. And so lot of banks that fund those PayPal accounts, very interested in how to potentially latch on here. The announcement out of the regulator yesterday or last week to the banks has also escalated the number of calls into our sales force. So, there's just a lot more selling activity around the consumer opportunity Peter. My bet is; that materializes in pilots in the fir t half of next year and deployments in the second half.

And then just finishing with the security thing. You closed the deal in Japan for the MSS business. You're getting some pretty good scale there. A lot of it is the services oriented model. But given the scale, you're starting to gain and is that increasing demand for things like compliance. Is there some leverage in that model from the margin point of view as well as just revenues?

Yes. That team has been doing a great job over the last three to four years continuing to grow at the 20% to 25% level and increasing their earnings at a rate ahead of that. We'd expect them to be able to do that again in '06. Bringing this MSS business in, it is a profitable business. And it should help them kind of fuel the growth engine even a little bit more.

Great. Thank you very much.

Thanks.

And we'll take our neck question from Todd Raker out of Deutsche Bank.

Two questions for you. First, from a high level perspective, can you talk about customer acquisition costs within the Jamba! business? And on the surface it looks like you've done a great job of managing the sales and expense line. But what's the risk that you could starve it and you really see the impact long term on the revenue side?

I think that's the $64 million question. And that is really market by market question. So we have spending budgets for marketing in every country against revenue plans for those countries. And we watch those very closely month in and month out. And we will shift the marketing dollars across geographies based on that customer acquisition cost. Very tough call to make sometimes in some markets where you look like you believe you could grow it. But the customer acquisition is higher than it may be in a geography right next door. So, tough calls to make there. We - - the issue of starving any given country is the one we worry about. And as you know, we're going to keep watching that kind of daily and weekly right now with the team do the best we can in that space. But that is a significant issue.

Are you seeing any general trend in customer acquisition costs? Is it getting more expensive to drive incremental sub here?

Certainly in the UK and Germany that has been true for several quarters, increasingly expensive. Which is why we've gone into some new markets, as well as layered it on - - layered some more on in the U.S. One of the things we are seeing is that with the rise in direct TV marketing acquisition costs, the online acquisition costs have actually become more attractive. And so, we're starting to see more success with online direct marketing than we had previously. Especially as we brought Sprint on here in the U.S.

All right. And then the last question, Dana mentioned the $7 million impact positive on the gross margin, with I think some royalty settlements.

Yes.

And the guidance is 66% gross margins in Q4. Can you talk about what's going on in the royalty side from a cost perspective? And with the Jamba! shortfall I would have expected gross margins to remain relatively constant. How is that impacted by volumes on the revenue line?

So, there's a couple of factors at play there. That's why I wanted to call out the normalized gross margin, X that 7 million, would have been 67%. In that content business, about 50% of the costs in COGS are variable and about 50% are fixed. So, as you see the revenue declining Q2 to Q3 and then to Q4, you're going to get some declining gross margins in that area. Also, the acquisitions are coming in at about a 48% gross margin. And so that's putting some pressure on the gross margin into Q4 such that we guided to that 1 percentage point decline off of the 67% normalized.

Any feel for longer term how you see that trend? Is any of this kind of what I would call a core pricing issue, or a royalty rate, or is it all volume?

At this point it's mostly revenue volume related.

That's certainly true on Jamba! side. And then in the acquisitions, obviously, we've been pretty successful at driving gross margins and operating margins up on the acquisitions. But we've brought in three or four of them here in the last 60 days.

Speaking of acquisitions of Moreover and SiteROCK, do you expect any revenue in Q4 for those two?

You're looking at about probably 1 to 2 million each.

Okay. Great. Thanks, guys.

And we'll take our next question from Sterling Auty out of J.P. Morgan.

Thanks. Dana, I think you starred to go into it but can you give more color around the 7 million in the royalty payments?

So, they weren't payments. They were settlements with negotiations that have been ongoing for several quarters. And so we settled those at favorable negotiated rates that drove a lower COGS than what we had anticipated.

That's with the music labels as it relates to the content business.

Okay. And no particular geography or was there any concentration around who you were dealing with there?

Pretty much all the main labels and it was related mostly to Europe.

Okay. And then in the core billing - - or core communications space, the database queries and billing subscribers were flat quarter over quarter. But you saw a 5% increase sequentially in revenue. What drove the increase?

Well, in the billing side we gained more favorable subscribers at some of our higher paying billing customers. Right? So even though the net change was 0, we're the growth is coming from is in the premium side of our pricing curve. And then on the clearing business, which is also in commerce side, we had a lot more just messages we were clearing in the quarter. So, that's paid for kind of transactionally. That helped as well.

Okay. And then last question, the SMS updated platform you talked about for second half of next year, would that be an internally developed and VeriSign only platform or how would you go to market? Because I think in the past you've actually done that through partnership?

This will be a VeriSign developed platform leveraging a tremendous amount of what we have from the LightSurf acquisition. But also what we have been developing here over the last few years in our SMS area. So, it's a pretty big development project for us and I would say for the most part internally developed and offered.

Okay. Thank you.

And we'll take our next question from Sarah Friar out of Goldman Sachs.

Good evening everyone. Quick question on the Jamba!, Jamster side. For the quarter could you give us what the geographic split was so we can get a sense for what's coming from the U.S.?

I think the U.S. is in that 24, 25 million range that we had talked about. And you're coming off of about 100 - - 19 million of total revenue. So, the majority of the rest of it is Germany and UK. And maybe 15% or so is rest of world.

Great. Thank you. And then, just to go back to the acquisitions or Moreover and the Weblogs in particular. What's kind of the strategy there? Where does that fit and how will you go to market with some of the offerings that you're developing there?

Well, one of the things we found with the dot com and dot net infrastructure is it obviously is a very scalable real-time information delivery platform. And so as we had begun talk about in May, Sarah, we believe blogs and RSF feeds are really Web version 2.0 in terms of how information is going to be distributed and how it is going find subscribers. So, the infrastructure that we're putting in place with our own internally developed ping server infrastructure, plus bringing Weblogs traffic on to that. Plus bringing the Moreover aggregation services on top, we think gives us a pretty big jump start into being kind of the same central authority for those kinds of feeds and aggregation service as we are in common net.

Would the idea be to go out and sell to businesses that want to make use of that or actually go to whole way to the consumer?

We'll actually provide services directly to publishers who want to have their information serviced through this infrastructure to their subscriber bases. We will sell to enterprises for aggregation services around news feeds and the like. And then lastly, we are working with certain sites like MSN and AskJeeves to provide back end services for them as they augment their models with real time information feeds.

Got it. Okay. And then just one final question. On the token side, you talked a lot about the opportunity in the consumer side. Could you give us a sense, any sense r for pricing of how the pricing per user of a token when you start going to a consumer? Are you talking $10, $20, I don't know if you can just give us a general range?

Well, I think what you're going to see us talk about here in the next few months is a very different model for how we believe the consumer side is going to play out. I'm a little - - I want to keep a little of that under wraps. But we're likely to not see the consumer paying for these services. We're likely to see it being subsidized and leveraging a network like effect much the way credit card or ATM credit cards have come to allow sharing and subsidizing through multiple parties using the same credentials. So, I think that's probably enough of a hint. We have a very different idea about how this will roll out. And eBay and PayPal are on board with us in terms of pushing that model forward.

Okay, got it. Okay. Weel, thanks a lot.

And we'll go next to Ed Maguire out of Merrill Lynch.

Could you talk about some of the progress you're making in the non-U.S., UK, Germany regions? And whether some of the regulatory brush back that you've had in the UK has had any impact in some of the new geos you've been working on?

So, I think that we said that kind of a non - - outside of those regions we added 400,000 subscribers during the period. That included a couple new markets like Poland and Portugal and some continued growth in some other markets we've been in in Europe and southern Asia. So, I think we were pretty pleased with that. I think that was like 5% to 7% growth sequentially across that base. And we'll continue to see that. I think what it has done - - all the restrictions and things; what it has done is made us take pause about launching into these markets so quickly. And reevaluating the way in which we will go to market in some of those new places. So, you will see us relaunch the Jamster brand here in the U.S. shortly. Right? Around some new value propositions and promises to the customers. We're going to be taking those same types of things into these new markets. So, I think we probably will go a little slower into some of the eastern European markets than we would have otherwise. Making sure that we don't get tripped up the way we have in the UK.

Okay. And on the services side, it looks like you've been active on the M&A front. Can you talk about the iDefense acquisition brings to your portfolio and really what your - - how that may change or enhance your core go to market strategy?

Very simple. We talk about that as large scale threat intelligence. So, they have a couple hundred contributors who are researching vulnerabilities, finding exploits and the rest. We have our own teams in Virginia that are analyzing all that and attempting to apply exploits as well as patches to the various systems that we see those viruses or attacks on. And then we package that all up into real time intelligence to our customer set. So, we think we are able to give our managed security customers that threat intelligence in a real time way with much more depth and much more prioritization around what they should do. What's going to have the biggest impact given their existing network configuration. So, we see it as a huge value add in "the intelligence layer" of our managed security versus other vendors who are simply managing or monitoring firewalls on unique one by one networks.

Well, would that translate into potentially increased success in penetrating the bid market for management service?

We think so. And that was certainly the design behind the acquisition. You couple that with some of internal data feeds that VeriSign gathers around DNS and the security events we're already monitoring for our customers at over 1 billion day. And we think we're going to be able to package up a set of data streams that are more intelligent and more actionable than our competition. Early returns from the sales force are that the iDefense offering is of high interest to our existing customers and a new prospect. So, we're pretty bullish on it.

Just a question on eBay. And just a final question on eBay. Outside of the authentication services that you're going to be working on, what is the scope of other services that you'll be providing to eBay?

eBay's been a customer of ours for several years. So, we'll continue to provide them with consumer authentication services. We'll continue to provide them with SSL services. We'll continue to provide them corporate level domain name services. We also will be working some marketing programs with them to really push the VeriSign Secured seal across the eBay and PayPal properties. As well as incentives for token usage and deployment in their bases around things like merchandising and seller protection and the rest.

Thanks a lot.

Okay.

We'll take our next question from Mike Latimore out of Raymond James.

Just on the content business, what percentage of your ring tone transactions are true tone at this point and versus a quarter or two ago?

Varies by market Mike. But I would tell you that the U.S. actually has the highest percent we've seen. It's probably approaching - - it's somewhere between 40%, 45%. And again, our blend is not just true tone versus poly. It's true tone, poly, and graphics and games. We obviously have a high degree - - or a high amount of internally developed graphics that sell as well. So, in that overall mix, true tones in the U.S. are 40 to 45. In Europe, we've tended to see them be 35 to 40 over the last few quarters.

And then just the white label or sort of direct to carrier model. What percent of your content business do you think will be - - sort of fall under that model over time. Is there any target there or are you just going to just be more aggressive in that segment and see what you get?

I think that's a very good question. It's approximately 5% today. And over time we expect to drive that to 20% in the next couple of years. And again, I'm mostly talking about mobile content as it's viewed today. We're also pursuing some full track music opportunities that could change that number up significantly.

Great. Thank you.

And we'll take our next question from Steve Mahedy out of Bank of America Securities.

First question would be relative to guidance. And you put some growth rates, Dana had for '06, as it elated to ISG and core communication services. I'm wondering first, from a standpoint of margins again '06 is a ways out. But just kind of what some of the assumptions are and how those related to how you manage the business over the next 12 months?

Given that we haven't given full '06 guidance, I would tell you that we would anticipate, just like we always do, margins in those core businesses, growing at a rate and earnings growing faster than the revenue percentages. That's what we always target as our internal strategy.

And then specifically on mobile content, during the conference call just prior, when you announced the numbers, you had talked about a mobile content number. I believe that was in 90 to 95. Is that still part of kind of the overall guidance and relative to the numbers you've put out today?

We have not changed that.

And then the final question would be just relative to the eBay PayPal, sale of the asset. I'm wondering - - there's a lot of parts to that obviously that benefit VeriSign longer term. I'm wondering how you just weighed the different options relative to carving out that part of the business? How you think about return on invested capital? And then specifically the cash that comes out of that acquisition. What are the best uses, do you think, for that cash?

There was a lot of questions there, so let me try to break them down. First of all for us, that payment business was a very successful business for us. Had grown it from a couple million dollars to this $55 to $60 million this year over the course of the last four or five years. But as the security business had grown fairly dramatically and as we have seen the communication business do the same, it had become a lesser and lesser part of our percent of our revenue. This year somewhere around 3% or 4%.

So as we looked at that you either have to decide you're going to double down and try to expand your market opportunity there, or look to get out in a favorable terms. And I think for us, that business - - we didn't see a breakout strategy that VeriSign could execute too. Although I think in PayPal's hands there is is a breakout strategy because of the back end infrastructure in systems that they employ. So to make a long story short, we did feel that it was good to divest of that asset at this point in time. And we had a very willing and I think successful partner to do it with. Who also was very interested in our security technology as they had been seeing a lot more spamming and identity theft and phishing going on within their customer bases. So, I think it worked out well for both parties.

In terms of how we're going use that cash, clearly given the operating cash flow you saw that we are able to currently generate certainly not for operations. So, it's likely that we will deploy that in our stock buy back program as well as have it available there as we see tactical acquisitions that make sense, as Moreover or Weblogs did.

Okay. Thank you very much.

And we'll take our next question from Gregg Moskowitz out of Susquehanna Financial Group.

Okay. Thank you. First off, I guess on the content side of the business. What are the current mix of subscription based versus transaction based revenue and has that changed at all over the past few months?

I think we've always quoted that north of 80% subscriptions. And nothing has changed there. We are in some of the new markets - - some of the carriers don't support subscription billing technology so we have gone in with a per download starting point. But we will move those over subscriptions. And it's very very nominal volume at the moment.

Great. And you talked about Germany Stratton, is the low single digit churn rate that you've seen thus far in October, is that actually maybe a little lower than what you were seeing in September?

It's a little lower than what we had seen in September. And that is also the biggest base of customers that we have in Europe. So, that's really the key market that the team has been focused on. Making sure that we are doing to the best job possible of retention. As well, as looking at new more cost effective ways of acquisition. So, I wouldn't say we're claiming victory in that market but the September and October rates were better than we had seen in June, July and August. And we're hopeful that will carry through. Meanwhile in the UK, we've continued to see a pretty steady dropoff.

And in the MTV advertising curve in Europe, you did in fact get [All in store] initiated on October 1, is that correct?

That's correct. But by that time we had had all of our minutes of advertising reallocated to other channels at other times.

Right. And then maybe just one fine one on the blogging side. We've seen the spam blogging or splogging really start getting out of control. News media has picked up on this as well. But can you give us a sense of how you might approach this perhaps from a filtering or authentication perspective? And also, are you working with or talking to the Googles and Yahoo's of the world towards some sort of joint solution?

Yes. I'm not going to make any amounts in that space. That is one of the main value propositions we think we can bring to this area. And you will see us doing a lot of things in that - - around that topic very shortly.

Okay. Thanks very much.

And we'll go next to Laura Lederman with William Blair.

Yes. A few quick clean up questions. One is, I didn't see anywhere the renewal rate for the dot com dot net. What type of renewal rates are you seeing?

It was 73% or 74%, again Laura.

Okay great. Moving on, obviously the customer acquisition has become a problem in the mobile content business. Can you talk a little bit about competition? Is that an issue at all. Has that changed at all, so the relationship with the content providers. And on the other side, the relationships with the carriers and are they trying to get a bigger piece as well? So, a broader picture of what's going on in that business.

Actually, as it turns out, we've actually not seen either our carrier relationships or our label relationships deteriorate. They've actually gotten better in some ways as we've been going to them and proposing certain production agreements around generating unique content for certain labels or for certain artists. So, both of those have seemed to go very well. There is a crowded market place of other independent providers in Europe. In particular Germany and the UK because of the success of Jamba! and Jamster there. And so, we see a lot of "me too" and copycat type offerings there. I would tell you that I don't think we're losing a lot of market share to those players as much. As the higher churn and the restrictive marketing practices have been impacting us much more.

Okay. Following up on that thought of the cost of customer acquisition, what other type of ideas do you have in terms of getting customers at a reasonable price?

We're doing a lot more in online. And think you'll find that is going to be successful for us in certain markets. Particularly westernized markets like the U.S., Australia and a few others. We're also working in nonbroadcast type TV, DIRECT TV marketing in certain markets, doing some cable work. Producing more more what I would call music and ring tone shows as opposed to advertisements. Where we have become the provider of charts, if you will, for certain music stations in Germany and other locales around there. We're working on a direct fulfillment model to have Jamster type content available at point of sale in retail outlets in certain markets. And we are testing some prepaid type services, prepay cards as well as prepay services in some markets as well. So, there's probably a dozen unique things trying to drive customer acquisition costs down. I think we'll have a better read on which ones are being successful as we head towards the end of the quarter.

And a follow up on a question asked last quarter. Clearly, you're not giving guidance for total revenue for '06 because of the difficulty in forecasting the mobile content business. So, what is your tolerance for holding on to it long term if it remains so difficult to forecast and remains such a drag on stock?

I think we've seen it be very hard to forecast both to the upside and to the downside. There is a - - based on number of incoming requests we are getting from our sales team around working in this area with large branded partners, whether they be carriers, whether they be portals, whether they be labels. We do think the opportunity is still mostly ahead. But we will watch it very carefully. And pur intention is to run it profitably and to make those decisions in a disciplined way as we move forward. And there are lots of options for the space.

Okay. Thank you very much.

And we'll take our next question from Scott Sutherland with Wedbush Morgan Securities.

Good afternoon. Just a question on the content business. With the new handset cycle coming out here around the holidays, do you expect any changes in the marketing spend? And would it be more end of this quarter, start of next quarter? And on the Spring relationship, I understood that as you launch a new carrier, there's some new billing delays. So, will that be falling into more Q1 or some of this quarter as well?

So, on the first part, there are certainly going be both handset - - new handset buys coming here in towards the holiday period as well as several new content launches from the major labels. So, we would expect to see, starting in December, a little bit of ramp in the marketing side. Generally what we saw last year and the year before - - I'm sorry, this year around that time and then the year before, was that December, January are really where this is all concentrated. So, we'll be watching that carefully. And we do have some programs ready to launch in that time period. As it relates to - -.

The Sprint billing issue. Because Sprint was an existing customer for other services and we have an established billing relationship with them, we'll be recognizing that in the quarter.

Okay. Great. And kind of looking out farther in your naming group. RFID, obviously there's an opportunity out there in late '06. Could you talk about how you expect that opportunity to unfold and maybe discuss a little bit about some of the push back in the China market?

Yes. There's two separate things. In general, this whole intelligent supply chain market where RFID and electronic product codes are a big part of what we're going to do there; it seems to be progressing as we expected around pilot. We have begun to win some contracts where our technology around directory and tag services, combined with our security technology, actually seems to be a very well suited to things in the pharmaceutical area. So, we're getting to win some contract. We see this business being approximately a $10 million plus business next year. We all believe there are, just as we did in the blogging and RSS feeds area, there is a need for real time information services here. We'll have a product launch there in the next few weeks.

So, I think we're building out our portfolio based on what we're seeing in the market. And I would expect to generate real revenues next year in that $10 million or so range and growing pretty significantly in '07. This China situation is obviously a difficult one, in there's so much of the manufacture of the goods that are going to come into this market tagged; are going to be manufactured there. Yet, the current posture of the government there and of the manufacturers is for a Chinese grown solution. So, I think that is going to be a politically charged debate for the next six to twelve months. Our bet is it will work out in such a way that there will be interoperable - - multiple interoperable standards. Of which we'll have to support all of them.

If mainly to some sort of joint venture or something? Is that sort of way to get in there?

It could be. Or we could use some of our manufacturer relationships to go in there through kind of indirect ways.

Okay great. Thank you.

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

Good afternoon. On the domain name side, can you just give us a little more color on the strength you saw this quarter? And then should we expect the same type of seasonal acceleration in new names that you've seen in the last couple of years in Q4?

Really interesting question. We pretty much had a very steady summer, which is unusual. Usually, you see a dip in the summertime from Q2. It was very steady and renewal rates have remained strong. Interestingly the renewed and extended number of names was the highest ever in the period. 6.3 million. So that also shows you that as that base continues to get bigger and bigger, so much of the transactions will - - or a majority of the transactions will start to come from renewed versus new. That being said, this far through October we're continuing to see steady performance in the new names every week. It's likely that you'll see a little bit of an uptick towards the end of November, early December as we have other years. But it's unclear. The rates have been so strong all year long it's hard to predict an up-cycle.

And what about the pricing front? I know there's been kind of an argument with the registrars out there in terms of how much you can increase price. Do you think as we get into '07 is there any resolution to that?

I wouldn't say there's an argument. We agreed to relook at our agreement there and as of the last ICAN Board meeting a week or so ago, the dot net agreement was finally agreed to and voted on favorably by the ICAN Board. That includes in it an ability for us to raise prices 10% per year starting in 2007.

Great. And then on the SSL front I guess it's been a year where we've kind of seen the total installed base creep up modestly. Why aren't we seeing more of an acceleration there? And then are you seeing a change in the duration of SSL certificates from two year to one year?

Actually, we're seeing the opposite. We're seeing it go from one to two years. And we actually several months ago introduced a three-year capability. So, we're starting to see people because that market is a more mature market lock in for longer periods of times. Which makes the transactional number harder to grow. And there's less new uptick. Although, we think there are some technology changes coming in the next few years that will drive an uptick in the overall SSL market. Including the result of Longhorn, which has some real-time validation technology in it. Which we'll expect all Websites that are looking for a certain kind of information or certain kind of user id to be SSL enabled and we'll validate that on our global infrastructure. So there's things coming in that time frame that we think could reaccelerate the growth rates there. But as you say it's been relatively sober this year.

Great. Thanks.

We'll take our final question from Phillip Winslow out of CSFB.

Good afternoon guys. Just wanted to focus actually back on the core communication services business. I was wondering if you could just talk what your outlook is for the SS7 networks database? And if you have any significant contracts up for renewal in 2006?

I think as we've kind of relived every year, there are always contracts up for renewal. They generally come with new long term commitments, higher volume commitments and lower per dip or per trunk signaling fees. So, we typically will see that happen. As you know, usually it does happen in kind of the late Q4, early Q1 time frame over the last few years. It's likely to do that again. But our expectation is we'll come into Q1 with an ability to hold revenues roughly the same as our exit rate here in Q4 and then grow it sequentially from there every quarter. So, the quarter looks pretty good. And we think the new product areas are likely to start to kick in in '06 especially around some of the WiFi, the connect and the messaging stuff.

Great. Thanks, guys.

And at this time I would like to turn the conference back over the Tom McCallum for any additional or closing remarks.

Thank you very much for joining us. And we look forward to any questions have to followup. Thank you.

That does conclude today's conference. We thank you for your participation. You may disconnect at this time.