威瑞信 (VRSN) 2006 Q2 法說會逐字稿

Thanks for holding, everyone, welcome to this VeriSign second quarter, 2006 results conference call. Today's call is being recorded and is at this time for opening remarks I'd like to turn the call over to Tom McCallum, please go ahead, sir.

Thank you, Operator. Good afternoon everyone, thank you for joining us for VeriSign's second quarter 2006 results call. I'm here today with Stratton Sclavos, Chairman and CEO of VeriSign and Dana Evan, our CFO.

In a moment Stratton will review Q2 and will provide some insights into the business performance. Dana will then follow with a detailed review of our Q2 financial results and she will then make some forward-looking financial guidance. We will then follow with a Q&A session and we anticipate the call will end at approximately 3:00 p.m.

We'd like to remind everyone that other than the historical financial data, today's discussion may include forward-looking statements and are 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 newswires after the market closed this afternoon.

The press release, the related financial information discussed on the call a reconciliation of GAAP to non-GAAP financial information can all be found in our web site at www.VeriSign.com under the investor relations tab. In addition to the live webcast, we are now providing a podcast of the call on our web site. 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 results for Q2 indicate, we had solid performance across our lines of business, meeting our exceeding our financial projections for the quarter.

We were also pleased to see the Mobile Content business continue it's progress toward stability and growth with B-to-C performance slightly ahead of our earlier projection.

It was also a very productive quarter in terms of strategic execution as we made significant progress in building out our intelligent infrastructure portfolio through newly launched services, and the organizational integration of key acquisitions including m-Qube, Kontiki and 3united.

All in all, we are pleased with our results for Q2 and are looking forward to incremental growth through the rest of the year as demand for our broad portfolio services continues to build. With that, let me dive into Q2 highlights for the business unit and then say a few words about our outlook for Q3.

Let's begin with the Communications Services Group. As you'll recall, we report the CSG group's revenues in two categories. Communications and commerce and content. The communications and commerce line of business includes our network connectivity, data base and billing services.

In Q1 of this year, we also moved our SMF and MMF messaging services into this category to more clearly distinguish them from the content services and applications. The content line of business now includes both the B-to-C and B-to-B components of Jamba! and the 3united, Kontiki and m-Qube results as well.

For Q2 the communications and commerce line of business achieved 120 million in revenue consistent with our expectations. In terms of business metrics, we delivered over 16.4 billion data base queries in Q1, up 14% year-over-year.

We also process billing and payment services for approximately 8.9 million wireless users, up 8% sequentially and 23% year year-over-year. Lastly, we enable the delivery of 8.9 billion SMF messages up 20% sequentially and 134% year-over-year.

Key drivers in the C&C business in Q2 included solid growth in wireless billing subscribers at MetroPCS and Leap. In addition, we saw continued traction with our MMF and SMF messaging services as we powered new mobile offerings for some key internet portals and E-Commerce sites including eBay.

We also added several large enter surprises and international carriers to the messaging customer base and have a strong pipeline of new deals in the works. On the partnership front, we announced our relationship with Oracle to integrate our messages and alert services into their application offerings. With the backdrop of continued consolidation and pricing pressures in our domestic carrier base expanding our communication in commerce footprint(ph) internationally has been a key objective over the last 12 months.

With that in mind, we were very pleased to announce several new contracts for our network and messaging services during the quarter, most notably with Korea's leading mobile provider, SK Telecom. As we announced last quarter, we have now established a network switching hub in Japan to support the growing number of opportunities we are seeing in Asia. We should be able to announce additional contracts in the coming months with the special focus on China. We would expect these international wins to ramp up over the next 12 to 18 months to help offset the declines we will see in intercarrier network services here in the U.S.

Now, let's move to the content line of business. Overall, we achieved revenues of 86 million during the quarter, up 10% sequentially and ahead of our previous guidance due to better than expected performance on the B-to-C side.

Given the most recent trends and developments, we are now more confident in our expectation the the B-to-C business will stabilize in the second half while the B-to-B business will fuel incremental growth.

With the successful completion of the m-Qube acquisition, as well as continuing momentum in our other B-to-B initiatives, we were also able to sign a significant number of new relationships with media and consumer product companies that should begin to add to our results by Q4.

Our broadband initiative has continued to gain traction as well, especially in the UK, where we are now supporting interactive media services for the BBC, Channel 4, and BSkyB. As we discuss last quarter, we believe we have now assembled a comprehensive portfolio of intelligent content services that carriers, Internet portals, consumer product and media companies can leverage to accelerate their go to market plan for interactive mobile and broadband services.

So in summing up the communications services group, I think it's fair to say that Q2 came in as planned and that we expect a greatly expanded portfolio of new services to help balance the revenue distribution in C&C throughout the latter part of the year. We'll see some pressures in the core communications business in Q3, we remain optimistic about the growth opportunity that exist across the portfolio including messaging, international signalling and content services.

Now, let's move to the Internet services group. The ISG group contains our Information Services business and our Securities Services business. As you know, VeriSign Information Services provides real-time information services that enable intelligent network interactions for naming, supply chain and real-time publishing application.

While we're very excited about the longer-term potential to build $100,000 million plus businesses in the supply chain and real-time publishing market, the main driver in VIS continues to be the naming business for dot com and dot net. During the second quarter, we process approximately 6. new million -- 6.0 million new registration for dot com and dot net domain names, and we also saw another 8 million names renewed or extended, adding up to 14 million domain name transactions in the quarter, up 37% from a year-ago period.

Renewal rates remain strong as well, coming in at 76% for the quarter. VeriSign's adjusted base of active names at the end of the period stood at an all-time high of 57.5 million, up 6% sequentially and 30% year-over-year.

The VIS team also delivered our new ePedigree solution on schedule to two of the largest pharmaceutical distributors in north America. We also signed several additional contracts for this solution during the quarter and believe we have the opportunity to become the defacto standard in this area as legislation takes hold heading into 2007. We continue to see strong momentum in the real-time publishing market as well and believe we are now handling over 80% of all global ping traffic at over 5 million beats(ph) per day up 25% quarter over quarter.

We are also serving over 200 million aggregate news articles on a daily basis. Additionally, we are now harvesting news from over 25,000 sources and tracking over 10 million blogs in our [inaudible]. As the real-time web continues to flourish, we will look to become the authoritative source of real-time information for enterprises, web portals and media companies.

So over all, the VIS team is executing well on the naming front and beginning to establish a blue chip list of customers in the supply chain and real-time publishing businesses including Novartis, Cardinal, Unilever and P&G.

Moving to our security services unit, we sold over 139,000 SSL certificates during the quarter, up 12% year-over-year. This brings our active installed base to 520,000. Demand here is still being driven by an increasing number of transactions at existing website coupled with continued international expansion. On the enterprise side of security, we're starting to see we're starting to see much broader industry segmentation in our sales efforts, as risk management, compliance, and business continuity concerns become a mainstream issue for most corporations.

During the quarter, we had a broad base of customer wins for our managed security, unified authentication and new fraud detection services. Notable contract awards included Schwab, Merrill lynch, Wal-Mart, AT&T, Intuit, eBay and Westpack Bank.

Of course the biggest news during the quarter was our announcement of our strategic partnership with Schwab to provide authentication and fraud detection services for millions of their customers. Schwab also announced its intentions to join eBay, PayPal and Yahoo as charter members of VeriSign Identity Protection Network. Customer interest in our new security offerings remains high and our sales prospects for the second half of the year look fairly strong. In fact, we are expecting sequential growth of at least 5% this quarter in Security Services, even taking into account the summer seasonality.

Let me say a few words about Q3 before turning it over to Dana. Overall, we believe the demand for our Intelligent Infrastructure Services is continuing to accelerate as the world migrates from physical to digital interactions. With the first half of the year behind us, we believe we've established a good foundation for 2006's overall performance.

The continuing momentum in the Internet Services Group, coupled with our new services and the contribution from the acquisition gives us confidence of that we will grow top-line revenues sequentially through the the rest of the year. Our top priorities for the second half of the year including making sure we continue to execute on our growth initiative and Information and Securities Services, while successfully integrating the B-to-B content acquisition. We will also continue to monitor the performance of Jamba! in key markets, and look for international market share expansion in our core communication services to offset continued pricing pressure and marketing consolidation here in the U.S.

On one final note, we know there has been considerable investor interest regarding our internal investigation into our past stock option practices. As we announced on June 27th, the board of directors has commenced an internal review and analysis of VeriSign's historical stock option grants. The board is being assisted in its review by independent legal counsel. The review is ongoing and not yet complete. The Company will make an announcement of the board's findings when the investigation is complete or when material facts, if any, come to light.

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

Thanks, Stratton. And thanks to all of you for joining us this afternoon. As you can see from our results, VeriSign delivered another solid quarter in Q2, demonstrating consistent growth in both the communications and Internet Services Group, which in turn drove revenue and earnings performance at the high end of our guidance.

During the quarter, we also saw several significant financial events. We closed the m-Qube acquisition, repurchased approximately $60 million of VeriSign common stock, and entered into a banking agreement that provides a $500 million credit facility to be used for general corporate purposes. While we certainly expect to continue generate healthy cash flows and maintain strong cash balances, this additive funding source provides us both financial and operating flexibility to execute against our strategic plans while we effectively manage our investment portfolio and our cost and capital.

Additionally, in Q2 our board of directors approved a new $1 billion stock repurchase plan. The repurchases under this plan will be financed by the Company's working capital and opportunistically executed. As we said before, we believe that investing our cash in VeriSign's share repurchases will be a long-term value creation vehicle for our shareholders.

So now let's turn to the financial results for the quarter starting with the income statement related item. On a consolidated basis, VeriSign reported second-quarter revenue of $392 million. These revenue results came in at the high end of the guidance we gave at our May analyst day, due primarily to stronger than expected demand in the domain name business and the positive trend towards stabilization we are now seeing in the Jamba! Jamster! B-to-C business.

Looking at the detailed revenue broken down by reporting unit, both the Communications Services and Internet Services Group grew approximately 5% sequentially this past quarter. With the Internet Services Group delivering approximately $186 million of revenue or 48% of the total, and the Communication Services Group reporting $206 million for Q2 or 52% of total revenue.

Within the core communications and commerce line of business, revenues were 120 million in the quarter. In mobile content line of business, which includes Jamba! Jamster!, as well as the new mobile and broadband infrastructure services, delivered revenues of $86 million. Jamba! Jamster! represented 74 million of this number and was higher than our expectations for revenues in the mid $60 million range. The mobile content results were driven primarily by a move toward stabilization in key geographies and early adoption in eastern Europe and China.

Moving to our international operations, the percentage of revenue driven from our international customers, affiliates and subsidiaries picked up a bit from last quarter to 31% for Q2. Growth in Aramia(ph) and Asian regions in both security and communication services drove this increase.

Looking at cost of revenues and gross margin, our cost of revenue for the second quarter was up approximately $9 million from Q1 to 144 million. This translates into a 63.3% gross margin for the second quarter, slightly below our previous guidance, driven mainly by the acquired revenues in the quarter which come at lower gross margins than the Company average.

Turning to operating expenses and related items, total operating expenses for Q2 were $169 million, up slightly from 163 million in Q1. This OpEx level drove non-GAAP operating income of $79 million for the quarter up 4 million from Q1 and translating into a 20% operating margin for Q2 in line with our guidance. As it relates to employee head count, we ended the quarter with around 4 ,640 people, up 240 primarily due to the m-Qube acquisition. VeriSign reported non-GAAP pretax income for the second quarter of $84 million.

Non-GAAP earnings per share for Q2 was $0.24 which came in at the top end of our guidance of $0.23 to $0.24. GAAP EPS for the quarter was $1.42. This EPS number includes stock-based compensation expenses of 13 million and certain one-time tax benefits totaling 327 million primarily relating to the relief of a deferred tax asset valuation allowance. This earnings per share calculation uses a diluted weighted average shares outstanding of approximately 247 million shares for Q2.

Now, moving on to the balance sheet and cash flow items. Cash balances decreased by $76 million in Q2, translating into cash equivalents and short-term investments totaling $734 million. Significant components contributing to cash balances at the end of the quarter included cash inflows resulting from operating cash flow of 91 million a drawdown on our credit facility of 174 million. These inflows were offset by outflows of 266 million for the m-Qube transaction, 37 million of capital expenditures, and 60 million for stock repurchases at an average price of $21.67.

As it relates to accounts receivable, net DSO for the second quarter came in the at 53 days, up from the previous quarter's DSO of 48 days but within our targeted range. The increase you see here is primarily due to a $34 million increase in receivables from acquired companies. Over 70% of which is coming from m-Qube.

Total deferred revenue on the balance sheet was $560 million at the end of the Q2, up 21 million from the previous quarter. The solid growth here was driven primarily from better than expected bookings and strong renewal rates in the domain name registry business and consistent deferred revenue growth from our security business.

Moving on to cash flow metrics. Operating cash flow for Q2 came in at approximately $91 million. The cash flow number in the quarter was adversely impacted by approximately $15 million due to certain tax-related activities. And lastly, with Q2 capital expenditures of 37 million, free cash flow for the quarter was 54 million before taking into account acquisitions. So that completes the financial review, let me now turn towards our outlook for Q3.

As it relates to revenue guidance for the quarter, we anticipate revenue in the $400 million range. This reflects the expectation that the Communications Services Group will represent approximately 51% of revenue in Q3, and the Internet Services Group approximately 49%.

In the Communications Services Group, we are forecasting a decline in the core communications and commerce revenue stemming from continued consolidation in the tier one carrier space as SBC integrates it's AT&T acquisition, and we see the effects of the Verizon MCI consolidation. For the mobile content business, we look for revenues in the low $90 million range with Jamba! Jamster! contributing approximately $70 million to that number.

The Jamba! Jamster! forecast reflects our expectation that we will continue to experience a stabilization trend in this business offset a bit by some typical summer seasonality. Looking at our expectation for the Internet Services Group, this guidance anticipates relatively consistent growth coming from both the information and security services businesses.

Turning to margin for Q3, we would expect gross margins to be relatively flat in the 63% range reflecting the reality of lower gross margins in our acquired companies which naturally dilute our consolidated gross margin percentage. In terms of operating expenses, we will continue to execute on our plan for investing in growth and next generation services. While remaining focused on expense management in all areas across all businesses. This is just a modest increase in Q3 for operating expenses.

Thus, given the revenue and expense profile I just laid out, we would expect operating margins to be in the 20% range relatively consistent with Q2. Taking into account our forecast for interest expense related to the credit facility, which is netted against our normal quarterly interest income, we would look for other net I'm sorry, for net other income of approximately 3 million in Q3. As it relates to share count, we would forecast the diluted share count of approximately 244 million shares for the quarter.

So in summing this all up, given the anticipated Q3 revenue levels, the full quarter's effects of all acquisition expenses and the margin guidance I just gave, we are guiding to earnings per share for Q3 of $0.24 on an after-tax basis using a 30% effective tax rate. This EPS guidance also reflects a full penny of the dilution we anticipate as a result of our recent acquisitions, as well as the additional interest expense for projected debt balances.

Lastly, in looking at operating cash flow, we would expect to generate a base level of cash flow in Q3 of approximately 90 to $100 million. So in summary, we are pleased with the results this past quarter. As we look to Q3, the solid performance we expect from the Internet Services Group and the trend towards stabilization of the Jamba! Jamster! business earlier than previously forecast, provides us a base from which we believe we can continue to grow revenue and profit in the second half of 2006.

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

Absolutely. [OPERATOR INSTRUCTIONS] First up is Peter Kuper at Morgan Stanley.

Great, thanks very much. Stratton, I want to focus a little bit on some of the things we talked about at the analyst day. You mentioned coming together here with a different pieces of the pie from the communications side versus the securities side. Are there any developments there beyond the recent wins with Schwab et cetera that would give investors a little more proof of concept here, what you laid out at the analysts day?

You're talking about kind of the broader initiative of integrating some of the technologies, Peter, a couple of things I would say. Clearly, in the content distribution, whether it be mobile or broadband, we have been bringing to bear both our naming capabilities in terms of ENUM capabilities and address translation capabilities, in fact we do a local number portability lookup and all kinds of various things in our content businesses with the VeriSign information services core technology.

In addition, of course, all the DRM technology is backed up by VeriSign's security and authentication. So, at the development shop there's lots of work going on. In fact, as we also talked about at analysts day, our security team is having our messaging team build them client technology that will fit in handsets as it relates to VeriSign authentication services going downstream and going mobile. So all that's in the works in the product shop, would expect that portfolio of things to be ready for launch in early '07.

The ePedigree solution that we talked about that we delivered in July to Cardinal, actually uses VeriSign digital signature and certificate technology. So again, I'm actually very pleased with the progress we're making on the product road map as it relates to integration.

I think the next step for us is in distribution and how we bring those solutions to market for our customers. And we're starting to have some very interesting conversations with large financial service firms as well as carriers about VeriSign becoming kind of more of an end-to-end provider for them, mobile solutions, as well as enterprise, security and commerce solutions. So I would say from what we talked about at analysts day just a few short months ago, we've continued strong forward progress on those fronts.

Okay, great. And then maybe, I don't know if you can comment on this, but there's been a lot of chatter, a lot of concern we've been hearing about, not that worried about it, the [inaudible] updates on that at this point?

I'm not that worried about it, either, Peter. The way I would characterize it at this point is we continue to have constructive dialogue with the Department of Commerce and we'll expect that to take its course over the next few weeks.

Great. Thanks very much.

Next up, we'll take a question from Rob Owens at Pacific Crest.

Good afternoon, guys. Can you talk a little bit about the growth of new names? I think this is your second largest increase sequentially that you've ever seen. When do we start to see that top out, Stratton, on the dot com platform?

What a great question. It's hard to imagine. As I've said in the previous conference calls, our goal coming into the year was an average of about 330 to 350,000 names per week in terms of net new names. We've been averaging north of 420, 430,000 names all year long. So it's got strong growth characteristics.

One of the things I think Mark also showed at the analysts day is only a very small percent of that is coming from this search-related pay per click market on domain. So, in essence we are benefiting from a global demand more broadly for names right now.

I think driven significantly by international uptake of dot com and dot net, as well as by local markets beginning to really kind of fulfill the promise that they had about your local retailers, merchants, dentists, lawyers, all putting up web sites as well. So that seems to still be fueling it. Renewal rates, as you've seen, are really at an all-time high. I mean all-time even from the early '90s. So at this point in time, we're tracking well ahead of plan this year there, and we don't see any near-term obstacles to continuing that growth.

Didn't last quarter, didn't you expend some gross margin pressure because your doing incremental advertising in that business and did that that continue here into the June-quarter?

That was co-op marketing activities. And it really didn't impact gross margin. That comes out of the marketing [inaudible].

Right. So this quarter, the gross margins and the spending and that doesn't [inaudible].

Okay. And then lastly with the tier one consolidation going on and some of the weakness you're seeing in the communications and commerce business, when would you expect that to flatten out, I guess, if we look at the core, not the messaging side and potentially start to pick up?

I actually think it will flatten out here, no later than the end of this year. And it could pick up actually a little bit in Q4 certainly from Q3. I think we're right in the middle obviously of big consolidations of a lot of the mergers that happened earlier this year. And so that traffic, the inter-carrier traffic has been going away. And we'll see a substantial down tick in that particular network connectivity business this quarter. But we're expecting that will pick back up again, start growing ing Q4 or Q1 at the latest.

Great. Thanks, guys.

Moving on to Phil Winslow, Credit Suisse. And Phil your line is open if you have a question. We'll move on to Todd Raker at Deutsche Bank.

A few questions for you. First, following up Rob's question, if you look at the core communications business, it looks like you're seeing or forecasting the sequential decline of about 9 million to 10 million. Can you just give us some insight in terms of this renewal of large contracts, is this pricing pressure? And, if you look at the messaging side of SMS, MMS how is the growth profile there? Is there any indication that you're losing traction or momentum around [inaudible] and some of the other messaging functionality?

So, the down tick is going to be slightly less than you said, Todd. However, it's really just two simple facts. It's continued price pressure on data base services for some key carriers, especially now that they have got much more volume, as well as the loss of intercarrier traffic. So in one case, it's pricing pressure.

In the other case, it's because they no longer require intercarrier links. Those two things just happen to come together at the same point in time because of those two very large mergers. Again, volume increases will begin to let that grow again after we've reset. And, we don't see any other contracts coming up for pricing renegotiation for the rest of this year.

And as Stratton mentioned, Todd, a big part of this strategy is leveraging the technology into these international markets so that we can start to drive revenues from international markets to offset some of this tier one consolidation in the U.S.

The second part of your question, the SMS revenues are up 100% year-over-year. The MMS revenues on a messaging basis are also up year-over-year. What you're seeing there is a decline in the professional services contract where we integrate into these carriers. So we're now kind of past the integrate phase and into the volume build phase on MMS messaging although it's still a relatively small percentage.

Okay. And then second question, Jamba! put up pretty good results this quarter. Can you give us some more insight from a geographic perspective, are you seeing Germany and the UK starting to outperform your expectations or is this really the emerging geography coming on stream trying to offset weakness in established geographies?

Rattle them off by key geography. UK has pretty much become irrelevant as it relates to revenue contribution because of the steep decline there. So that's really not a factor any longer in declining revenues at Jamba! for any large part. Germany has continued to slow although it's still shrinking a little bit although it remains the biggest market. And we did see some months of growth and some months of decline there in the quarter.

We did see a substantial uptick in China during the quarter and took some of our first revenues from that marketplace and we're interested in seeing that continue. And the U.S. was, you know, also declined. But in recent weeks, we've actually seen it start to grow again. So there's, I would say the bigger markets we had are reaching their stabilization point. And allowing some of the smaller or newer markets to start to contribute to growth again. Which as you said, led to better than expected results here. And I think more confidence in the management team at Jamba! and certainly here at corporate, that we'll be able to extend those -- that performance into Q3 and Q4.

Okay. And this quick follow-up on that. If you look at the Chinese market, I believe the largest carrier there has changed from what we'll call third-party vendor billing capabilities so you have to renew your customer on a monthly basis for some value-added services. Is that going to have any impact on you guys?

We're tending to be fairly conservative about [inaudible] right there and seeing that stuff coming and built it in. So I don't think it will have an impact for us going forward.

Okay. Thanks, guys.

We'll go back to Phil Winslow at at this time from Credit Suisse. Mr. Winslow.

Hi guys, sorry about that earlier. Just want to dig a little bit just on the ISG group. Last quarter you mentioned a little bit of lightness in some of the services area, specifically securities services. Just wondering if you could comment on what you're seeing there in Q2? And then also just on the gross margin comment that you all made about your new revenue streams, wondering if you could give us a sense of what the gross margin is on the m-Qube side of the business versus Jamba!

Security and the Internet Services Group had a decent quarter in Q2. I would say no real weakness in security of any measurable amount. And a very strong forecast for Q3, which as you would expect, is pleasantly surprising given we're into Q3 and a summertime in Europe and the rest. So, I think securities seems on track and going to do well through the rest of the year.

And of course Internet Services Group being driven by the dot com growth. Most of that banked into [inaudible] revenue at this point. So I think we're very confident and comfortable with the performance over there.

And on the growth margin front, most of the acquired companies' gross margins are just in the low to mid to 50% range. Some [inaudible] revenue really don't need [inaudible] lower than that because they're in early stages of their business.

It's just one of the things we tend to do with the acquired companies is obviously try to improve their growth margins and their operating margins sequentially quarter over quarter. So our hope is that those businesses over time, right, will in fact get through the corporate average and gross margin if not higher as they achieve critical mass.

All right, great. Thanks, guys.

Moving on to Goldman Sachs, Sarah Friar.

Good afternoon, guys. Stratton, if you could just give us some update on the authentication side. I think last quarter you suggested that we might see some early rollouts with PayPal. Has that begun or when do you expect to start to see some traction on this side?

Good question, Sarah. I actually haven't seen the latest report but I think the product teams, the initial rollout is an internal rollout at PayPal. And if it hasn't started it, it will shortly. I know that they're on track for that.

And then, we have quite a long list of items, we're working with them as it relates to international rollouts, that look like they will start in Germany, Australia and even potentially China over the course of the next two to three quarters. So, as you expect, internal pilots and then it will go to external pilots, but they have already in some of their international market, been introducing the technology to the customer set and started to talk about pricing fees and kind of usages. So I would say on track, plus or minus a few weeks.

Okay, so maybe from a revenue perspective though, we should think about it a little bit more next year than this year, is that fair?

Certainly true. Because we defer the revenues on tokens in any event.

Sure. Okay. But it obviously would be a big [indiscernible] point to get PayPal rolled out?

Yes, it would be.

And the same goes for Schwab. Is it very early stages there is or have they started to do any sort of piloting at this point?

Well, initially, of course, they need to be FFEIC compliant by end of year. So that all the focus right now is on implementing our fraud detection solution. And that's the proceeding very well. And testing both load testing as well as performance testing I think very good. And then on the token side, that will come after we complete the project for fraud detection.

Okay, got it. And then, on the stock [indiscernible] purchase, are you prepared to get fairly aggressive there or is this $60 million you did this quarter a good run rate level to think about?

I think we balance our share repurchases with other uses of cash during a period. So we certainly had a lot of cash going out as it related to acquisitions in Q2 and had toned down our stock buyback a little bit. Stocks come under pressure and certainly wouldn't expect to have a significant amount of cash outlays and acquisitions so far in Q3. So we may in fact become more aggressive. We really do balance it on what we consider to be a reasonable use of cash in a given period across all those uses.

And the goal is, in terms of keeping cash on the balance sheet, what do you feel is a good level for the Company? Would you even get yourself into that position, would you be prepared to go that far?

You know, historically we've never been willing to do that. I can't foresee that coming. I think Dana and I feel comfortable that half a billion is certainly enough to comfortably run the Company, especially with the cash flow characteristics of the business. We're certainly well north of that at this moment.

Okay. And then just a final one in terms of cost. As you talk about going overseas with the TelCo offerings and I know you mentioned that you put a hub in Japan this quarter, how big of a capital spend is it to do something like that? And, is that already encompassed in the CapEx we saw this quarter or will there be more of that coming through the next couple of quarters, Dana?

So, it's a fairly inconsequential amount of capital. And it was already in the plans.

Okay. And so you don't see any other major spends coming around that as you look to China and so on?

No.

Okay, great. Thanks a lot.

Sterling Auty is next from JPMorgan.

Yes, thanks. Two questions. First, on the stabilization in Jamba! and some of the bigger markets, can you kind of add some color as to what you think is driving the success and stabilization? Is it some promotion programs? I think you talked about a Pepsi promotion program at the analysts day, what's driving the stabilization?

I don't want to take too much credit for stabilization, Sterling, in that respect. Let's say it's the same as we saw years ago with domain names is the fluff and the false demand is out of the market. So what you're seeing is more of the real demand. And the team has done a nice job in improving the offerings, improving the clarity, improving the marketing conversion rate. And entering some of these new markets.

So I think mostly I would say we've reached stabilization out of hitting bottom on real demand and then growth will come from just continuing step by step improvements across the platform. All those things are helping modestly at this point. But I wouldn't want to take tremendous credit for them.

Okay and then last question is, on the going international on some of the core TelCo services, you talk about kind of pick up in revenue. But I'm a little unclear. Is the pickup in revenue from that from like SK telecom comming on line? How are the contracts actually structured internationally versus domestically?

They're relative think same as they are here. And what we've been doing internationally so far is winning signalling business, transport business and then messaging business. So in essence, we'll be being paid for particular amounts of messages and signals that are getting sent. And so what we have to do, of course, is sign the carrier, integrate with their network and then give them the inner carrier connectivity to all the carriers here and abroad that they want to touch base -- exchange messages with. So it's kind of a very linear ramp in how you do that.

In fact, right now with SK we are doing certification testing with one very large carrier here in the U.S. where a lot of their traffic goes. So, as we bring carriers up here, connect and test and certify, you'll start to see the revenues grow as the messages flow.

And will you actually provide connectivity between carriers and Asia pacific region locally or is it all signalling back to north America?

We will do both. And in fact some of our probably more interesting long-term opportunities are coming from talking to the carriers in Asia about helping them go intercarrier in their region.

Great, thank you.

We'll move to Ed Maguire at Merrill lynch.

Yes, good afternoon, could you talk about the GeoTrust acquisition, what that will mean for pricing and branding on the digital certificate side?

Obviously, until that is complete, we really won't be talking much about product pricing and packaging. Nor do I actually think we have our plans anywhere near thought through there. Obviously, to get a bigger base of customers right off of the supporting infrastructure, should allow us over time to get efficiencies there. But again, that we're still in the process of receiving clearance from some international authorities around that acquisition. And in doing our own due diligence. So, we expect to be able to update folks on this at the end of this quarter.

Okay. And back to the mobile content side, just wanted to get a sense of where you saw upside in the, on the consume side, and really more to the point, you've been really pulling away from investing in -- on the consumer side although it looks like you got some upside this quarter. Going forward, do you expect to continue to expand geographically and invest more in direct to consumer programs, or should we, should we really look for that to stabilize or tail off as the more B-to-B services take their place?

I think we will continue as we said to run the B-to-C side in the high teens of margin, potentially a also bit better than that. And so we make our investment tradeoff in terms of marketing based on constraining the problem around margins. So to the extent we see things in China or eastern Europe take off, we'll invest more dollars. To the extent we don't, we're not in a position, I would say, to commit aggressively into new spends to try to act as a catalyst. So I think we're running it, as you say, in a more stable and manageable approach. I would tell you we're pleasantly surprised with the progress in China at this point and we'll continue to make incremental investments as we see incremental growth.

Okay. That's all for me, thanks.

Next up is Gregg Moskowitz at Susquehanna.

Okay. Thanks, very much. Stratton and Dana, if were you to back out the effects from the tier one consolidation in the Q3, how would communication and commerce sequential performance look? Would it be flattish, would it be down a little bit?

No. No. It would be up a little bit, actually.

It would be up. Great. And, wondering if you can elaborate as well on what gives you the confidence in the 5% sequential security growth in Q3 and what services specifically are driving that?

So, that business, much of it that doesn't go into the deferred revenue which is obviously highly visible is also on a booking space system. We have solid bookings that we know will be delivered in Q3 that will drive that sequential growth.

Okay, but I guess I'm wondering if it's kind of more in, say, in PKI managed services or some of the newer authentication areas.

We had very strong bookings in SSL coming out of Q2 which does hit deferred revenue and helps. We also had very good pipeline growth, if you will, in the unified authentication business in the MSS business, and then kind of more generically, kind of in international markets where we brought on new leadership in Europe that seems to be acting as a catalyst for generating a lot of new pipelines, as well as VeriSign Japan which underperformed in Q1 starting to get more aggressive as they look into Q3 and Q4. So, just saying that I think the demand for the security services portfolio we have is increasing. The team is pretty bullish on Q3 and Q4 right now.

Great. And then just lastly, Stratton. In RFID, is your business there still on target for 20 to 25 million in revenue this is year? When do you think we move from more of a consultative stage to an actual build out of the EPC Network?

Yes, I think on the booking spaces, we'll certainly hit that. On the rev-rec side of it, it will really depend on when the ePedigree solutions kick in with the various states and when some of the consulting projects go live. So I think we're still looking very good on a pipeline and booking phases. On a rev-rec side it's more up to the customers in terms of when they roll out. On the EPC global front, there's a lot of activity there, lots of pilots still, when we talked about 20 to $25 million, it included all the supply chain services that were EPC, the ePedigree stuff, as well as the point of sales stuff. So you put that all together. And I think we're still right there around the booking target and certainly delivering what we would expect at this point.

Okay. Thank you.

Next from Cowen and Company, this is Walter Pritchard.

Hi, just wondering on the international side, Stratton on the TelCo, first just talk a little bit about your plans if any in Europe? And then just had a follow-up question around with what Sterling asked, should we look in general at the STPs placement as the catalyst there and do you need to place more STPs into Asia or do you plan to place more STPs into Asia as we roll out over the next 6 months or so?

Let's talk about Asia first. That STP deployment was thought through and evaluated over a course of about 12 months. So putting it where we put it and put some redundancy in and getting the network connections we have built up there were really put there so we could handle what we believe to be that northern Asia traffic, which would be China, Japan, Korea and then some of the surrounding areas like Singapore. So, we're very comfortable that that STP placement is going to give us the interconnectivity we need to service that market very aggressively. And just to repeat from last quarter, we are the only U.S. provider with connectivity hardware in that region. So it's giving us a competitive advantage right now. With think we'll be able to capitalize on that, and certainly are starting to see that.

As it relates to Europe, I guess I'm less convinced that that opportunity exists. More mature market clearly in western Europe and one in which I'm not sure we bring a lot of value add. Eastern Europe could be an opportunity although there's nothing planned for this year. Or early next year in terms of hardware deployment. We'll see how that market goes. I think we're more opportunistic there around messaging and content than we are around traditional voice connectivity. It just so happens that in Asia there are pretty poor providers that have been delivering those services and we've been able to pick up contract wins and market share because of it.

And how do we just look at, you're doing about 100 million a quarter. So, in the traditional TelCo business in primarily in the U.S. and I guess some in Latin America, how do we look at the size of the Asian market opportunity versus what you have in the U.S. already?

I think it's a great question, Walter. I don't know how to size it yet. What I want to see is the contracts in China turn up, the certifications happen with FKT and then SingTel bring on more of its affiliates. So I think that as we exit this year, we'll be in a good position to kind of model what's happening with traffic. And, therefore, give you a better answer to that. I think the good news for us is we're starting from a zero base so it's all incremental revenue coming onto the traditional [inaudible] business.

Great. Thanks a lot.

And we'll move to Morgan Keegan's Chris Hovis.

Good evening, guys. A couple questions. One, how do you see the pending acquisition of RSA by EMC changing the dynamics in the authentication services space?

You know, I haven't given it a whole lot of thought. I mean, I think that we're not sure that customers are looking for their storage hardware provider to be their security expert. You know, time will tell on that. EMC is a great company, we buy a ton of their product. And we'll continue to do so. So, you know, I guess we'll see how that works.

Meanwhile, I think the market is moving into some new areas that are highly interesting to us and others around consumer authentication, around content authentication, and around kind of the new set of services that Vista is going to enable around media and around user experience. So I'm sure EMC has good strategic reasons for doing it. We don't think it's going to impact our strategy much.

And then second question, can you give us the latest update on planned domain name price increases?

Again, until our contract with the Department of Commerce and ICANN are finalized, we really can't make any comment about what we'll do. Subsequent to that, we'll take into account market conditions, cost of operations, and our ability to withstand the new attacks that we're starting to see on the internet and we'll make the appropriate decisions then.

Where do you think we are in the approval process?

As I said a little bit earlier, I think we're still a few weeks away.

Okay, thanks.

The question from Kevin Buttigieg at A.G. Edwards.

Thank you. Earlier this year, obviously you stopped providing annual financial guidance citing the volatility in the Jamba! business. Now, obviously, you're seeing more consistency to that business this quarter and in the forecast as well. Why not return to providing annual financial guidance, particularly with the changes that are now occuring in the core communications business?

I think we'd like to get two in a row under your belt, right? No more complex than that. I think if we see similar stable performance out of Jamba! here in the summer period, we see the growth in security that we're expecting and we see that core return to growth in Q4, then I think as we exit this year, we'd be likely to give annual guidance for '07.

Okay, thank you.

Next is Matt Headberg(ph), RBC.

Actually, my question has been answered already. Thank you.

We'll move on to Scott Sutherland, Wedbush Morgan.

Thank you, good afternoon. First question I want to ask about is on the content side. What do you see on the cost of the licensing the content? Is there any increases or is it more stable out there?

For this quarter, we took a little bit of a margin pressure hit last quarter on that, this quarter it was a little bit more stable and we would expect that to continue.

I think what happens, as we talked about last quarter, is we renegotiate the contract with the various publishers and content owners at various stages. And we tend to have to give up some margin when we do it. But we tend to get access to a broader set of the portfolio, broader set of their catalog and be able to take it into new uses like full track music. So I think we're kind of going to see stabilization there as we head through the rest of this year.

Okay. And on the dot com with the Department of Commerce, I know I discussed that with some of you at the analysts day, but is this something thing that is just a yes or no or possibly the Department of Commerce is going to come back to you and say with some adjustment this is will go through?

You know, again, I can't speak for the Department of Commerce. As I said earlier, we're having very constructive discussions with them. I think people just have to be patient for a few more weeks and see what happens.

Lastly, quickly, Dana, what was the contribution of m-Qube in the quarter?

About $6 million

Thank you.

And we have time for one more question, this is Katherine Egbert at Jefferies.

Hi, thank you. Just a couple of quick ones. As far as GeoTrust go, have you passed HSR review yet on that?

We were not required to file HSR on GeoTrust because of the size of their asset base. But we do have a German filing because of property they owned in Germany that has to go through German regulations and that filing has been made in recent weeks and then updated again in the last few days. So we're on a wait and see on that filing.

Okay, thanks. And then, Dana, you said there was a $15 million in tax activities that was a head wind for cash room operations, what is that?

So, as you noticed, we had a very large release of a valuation allowance related to tax benefits, and it is the balance sheet effect of the taxes payable and deferred tax asset accounts that hits the operating cash flow section of the cash flow statement. It's pretty complicated tax accounting. But that occurred in the quarter that drug what we thought would be operating cash flow north of 100 million down a bit.

And it's not nonrecurring?

That's correct.

Okay, thanks.

Thanks again for your participation. That will conclude the question and answer session. I'd like now to turn things back over to our speakers for closing remarks.

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

Again, thanks for joining us. That concludes today's conference call. Have a good day.