威瑞信 (VRSN) 2006 Q4 法說會逐字稿

Good day, and welcome to the VeriSign Incorporated fourth quarter earnings conference call. Today's call is being recorded. At this time, for opening remarks, I'd like to turn the conference over to Mr.Ken Bond. Please go ahead, sir.

Thank you, operator. And good afternoon, everyone, and thank you for joining us for VeriSign's fourth quarter 2006 earnings conference call. I'm here today with Stratton Sclavos, Chairman and CEO of VeriSign, and Dana Evan, our CFO. The Q4 fiscal year 2006 press release is available on First Call, Market Wire, and on the VeriSign website at www verisign.com. Also, at approximately 3:00 p.m. Pacific time, we will post slides to our website with additional information around our guidance comments today. A replay of this call will be available via telephone at 888-203-1112 or 719-457-0820 for international callers. The pass code for both numbers is 2572145. Financial results in this press release are unaudited, and the matters we will be discussing today include forward-looking statements, and as such are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically, the most recent reports on Forms 10-K and 10-Q, and any applicable amendments which identify important risk factors that could cause actual results to differ materially from those contained in forward-looking statements.

Due to the previously announced internal review of VeriSign's historical stock option grants being conducted by our Board of Directors, VeriSign is not providing detailed GAAP or non-GAAP financials for the quarter ended December 31st, 2006. Dana will provide additional details later in this call. In a moment, Stratton will begin our fourth quarter review, and he will provide some insight into the performance of our businesses. Dana will then follow with a discussion of preliminary non-GAAP financial results for Q4. Following Dana's remarks, we will open up the call for your questions. Unauthorized recording of this conference call is not permitted. We anticipate the call will end at approximately 3:00 p.m. With that, I would like to turn the call over to Stratton.

Thanks, Ken. And good afternoon, everyone. Let me add my welcome to all of you attending today's call. As our results for Q4 indicate, we saw overall performance for the Company that was in line with our expectation. Particular items of note were the continued strong results in the naming business and good unit and subscriber growth in SSL and wireless billing respectively. This performance helped offset modest weakness at Jamba! and at VeriSign Japan. In terms of strategic execution, Q4 was by far the most productive quarter of the year, as we executed on our Company-wide reorganization, acquired and integrated inCode Wireless and its 350 employees, received approval of our new dot-com contract with ICANN, and launched several new services, including our Intelligent Content Distribution Network and our extended validation SSL certificates. And, of course, as we announced just this Monday, we have now finalized our Mobile Content joint venture with News Corporation. So as I said, it was a very busy quarter. I'm extremely thankful for the teamwork and commitment to execution that our people demonstrated during this time, and believe that we have positioned the Company to address the key opportunities in the market as we enter 2007.

I'll now quickly cover the Q4 and year-end business unit metrics, before moving to a discussion of our 2007 strategy and goals. As a reminder, this will be the last time we report the metrics in the BU format. Let's begin with the Communications Services Group. We report the CSG Group's revenues in two categories. The first category is Communications In Commerce, which includes our network, database, billing and messaging services. The second category is Content, which includes our B2C and B2B content services. The Communications and Commerce line of business achieved $113 million in revenue during the quarter, down slightly from Q3's $114 million, and consistent with our expectations. A key driver in the legacy C&C business was the continued growth in wireless billing at MetroPCS and Leap, as we now support over 10.4 million wireless users with our billing and payment services, up 33% year-over-year and 5% sequentially. These gains were offset by the decline in connectivity and database revenues from our traditional carrier base.

While volumes in the legacy business continue to grow, we do expect revenues will be somewhat choppy over the next 12 months as we deal with the consolidation and pricing pressure inherent in these lines of business. As we said before, we are executing to a plan that offsets the domestic declines with new revenues generated from international penetration, continued growth in billing services with our key customers, and cost optimization on our legacy platforms. We did see strong growth in messaging services during the quarter, as we delivered over 13 billion SMS messages, up 140% from the year-ago period and 20% sequentially. Premium messaging and MMS volumes in the quarter were up 50% year-over-year to 88 million messages, as we provided the interactive voting services for several of the fall TV shows, including "Deal or No Deal." For future reference, all messaging services have now been combined with the B2B content platforms in order to offer end-to-end solutions for our media and entertainment industry customers.

Now, let's move to the Content line of business. Overall, we achieved revenues of $90 million in the Content business during the quarter. Jamba! revenues came in at $72 million, while B2B Content revenues totalled $18 million. We also had a major announcement during the quarter with the introduction of our Intelligent Content Distribution Network, or ICDN. The ICDN is designed to support the delivery of all forms of content, including long format high definition video and high fidelity audio. The service combines advanced video streaming capability with our proprietary Kontiki peer-to-peer technology, and our globally deployed secure infrastructure to provide for the highly efficient and economical delivery of rich media content. With the market for Internet-based video-on-demand beginning to emerge, we are targeting our ICDN end-services at both traditional and new media and entertainment companies, as well as large distributed enterprises. Current customers for the ICDN and/or the Kontiki peer-to-peer system, include BBC, BskyB, Channel 4, AOL, Axiom Pictures, Coca Cola, and GM.

At the recent Consumer Electronics Show, we also announced a strategic technology partnership with Adobe, to utilize their Flash streaming servers within our ICDN, and to integrate our peer-to-peer technologies in future versions of their media products. Our simple goal is to establish a ubiquitous platform for legitimate peer assisted delivery of professional and user-generated content. I'll talk more about this as we discuss our 2007 strategy. So in summing up the Communications Services Group for Q4, I think it's fair to say that our results came in as planned, and that we hope the greatly expanded portfolio of new services will help balance the revenue distribution in CSG in 2007. We remain optimistic about the growth opportunities that exist across the business, including messaging, content services and international signaling.

Let's now move to the Internet Services Group. The ISG group contains our information and securities services businesses. During the fourth quarter, we processed approximately 6.2 million new registrations for dot-com and dot-net domain names. We also saw another 9 million names renewed or extended, adding up to 15.2 million domain names transactions in the quarter, up 30% from the year-ago period. Renewal rates remain strong as well, coming in at 77% for the quarter. VeriSign's adjusted base of active names at the end of the period stood at 65 million, up 6% sequentially and 30% year-over-year. Remarkably, our Atlas infrastructure is now handling an average of 25 billion DNS requests per day. As expected, we also received Department of Commerce approval for our new dot-com contract with ICANN.

Just to recap the facts, VeriSign and ICANN signed a new agreement which extends our contract for operating dot-com through 2012, and provides for much clearer processes for new product introductions, pricing changes, and contract renewals. It also settles all disputes between our respective organizations. Obviously, we're very pleased to have this contract process behind us, and look forward to working with ICANN to maintain and improve the security and stability of the Internet addressing system. We also continue to make progress in our real-time publishing and supply chain businesses. Notable contract wins in the quarter came from Unilever, Shell, Kimberly Clark, Wyeth, and Johnson & Johnson.

Moving to our Security Services business, we sold over 221,000 SSL certificates during the quarter. This brings our combined VeriSign active base to 807,000 units, including all VeriSign, GeoTrust, and [BOT] branded certificates. We were also the first Company to introduce and issue extended validation, or EV certificates, that support new security features in Microsoft's Vista and IE7 products. To date, over 300 leading online retailers and financial service companies have upgraded to our EV certificates. The mantra for eCommerce in 2007 is "Green Means Go" on the Internet. On the enterprise side of security, we're starting to see much broader industry segmentation in our sales efforts, as risk management, compliance, and business continuity become mainstream issues for corporations and government agencies. In fact, Q4 represented a record bookings quarter in our enterprise sales team. Notable customer wins in the quarter included new or renewed contracts with Merrill Lynch, U.S. Bank, Citigroup, Verizon, Wal-Mart, Intuit, and Boeing. The ISG Group in total had solid performance in Q4, and its lines of business are all seeing good demand as we enter 2007.

So in summing up 2006, I would say it will be remembered as an exciting transformational year for our Company. First and foremost, we invested in and developed several new technology and infrastructure platforms in support of emerging trends in the marketplace. These included our VeriSign Identity Protection Network, launched in February with endorsement from PayPal, eBay and Yahoo. We also acquired two wireless infrastructure platforms and combined them with our own to create a comprehensive set of solutions for carriers, media companies and enterprises. And the acquisition of Kontiki formed the foundation of our ICDN platform for rich media distribution. Of course, the divestiture of a controlling interest in Jamba!, which did in fact close earlier today, provides a partnership with the world's leading media and entertainment company for direct to consumer content offerings, while freeing VeriSign to focus on its core mission of delivering digital infrastructure services in the middle of the network. And finally, we are convinced that the acquisition of inCode and it's 350 consultants, along with our reorganization into a single sales and services group, will allow us to better serve our customer base going forward.

So that brings us to our outlook and strategy for 2007 and beyond. To put everything into context, let me start by saying that we believe the Any Era has arrived. The Any Era is characterized by consumer demand for any time, any where, any device access, to information, entertainment, and community. With over 1 billion Internet users and 2 billion wireless users on a global basis, we are seeing the world's interactions go increasingly digital. We believe it's a complete transformation of the way we think about communication, commerce, and content, and that we're just at the beginning of this tectonic shift. VeriSign's simple mission is to provide the digital infrastructure that enables and protects the world's interactions in the Any Era. Sitting in the middle of the networks, we can help our customers more quickly and economically deliver end-to-end solutions that have the necessary scale, trust, and intelligence.

So we start 2007 with two core franchises that are healthy, growing, and relied upon on a daily basis by the Internet population at large. These, of course, are our DNS and SSL businesses. We would expect both to grow at approximately 20% plus rates this year. We're also expecting our new platform initiatives from 2006, namely our VeriSign Identity Protection Network, our end-to-end mobile services platforms, and our Intelligent Content Distribution Network to begin to establish leadership positions in their respective markets, as the demand for greater identity protection and on-demand content delivery increases. Additionally, we'll continue to judiciously grow and expand our offerings in real-time publishing, managed security, and supply chain services, to meet the needs of our existing customers in financial services, healthcare, public sector and retail. We believe we have the technology, the infrastructure, and the people to make this happen.

Our new organization structure has been designed with three objectives in mind. Deeper customer relationships, faster product innovation, and better financial results. On the customer front, we believe our new combined Sales and Consulting Services organization under the leadership of John Donovan, will position us as a thought leader and end-to-end supplier for our key customers around the world. Our main goals are to execute on the obvious cross-sell and white space opportunities in our major accounts, while also positioning our capabilities to provide comprehensive solutions for new initiatives that our customers are pursuing. Early feedback from the field would seem to validate that we are on the right track. In terms of faster innovation, we now have more development and operations professionals within VeriSign than at any other time in our history. We believe the newly combined Products Organization under the leadership of Mark McLaughlin gives us the organic capability to create significant new intellectual property and to bring highly integrated services to market much more quickly.

And lastly, while we still need to make additional investments in our global infrastructure to meet volume, reliability, and security requirements, we do believe that 2007 will be a year where we significantly increase our operating leverage across the Company. As Dana will detail in a moment, we plan to increase operating margins throughout 2007, with an exit rate goal of no less than 25% as we finish Q4. In summary, 2007 is shaping up to be an exciting year for VeriSign, and with several catalysts slated for 2008, we will work diligently to continue this momentum. 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. Before discussing VeriSign's financial result, I would like to start with a quick update regarding our Board of Directors' internal review of VeriSign historical stock option grants. As you will recall, in November, we publicly announced that the Board had reached the conclusion that our historical financial statements would require restatement. This restatement will affect the years and interim periods from 2002 to 2005, as well as the first quarter of 2006, and will drive additional noncash stock-based compensation expense related to past stock option grants. At the time of the announcement, we estimated that these noncash charges would not exceed $250 million. As of this month, the Board's review has now been completed. This review did not find any intentional wrongdoing by any current member of the senior management team. The restatement process is currently underway, and we would expect to file our restated financial statement as soon as practically possible, but within the SEC 10-K filing deadline.

Additionally, at this point in time, we expect the noncash charges for this restatement to be substantially less than $250 million previously disclosed. In light of these activities, we will not be providing full GAAP or non-GAAP results at this time. We will provide you with as much financial information as possible, including preliminary non-GAAP results and guidance. Please note, though, that these are preliminary numbers and represent what we believe the numbers would be without any impact or changes resulting from the stock option investigation and the complete restatement.

So now let's turn to the financial result for the quarter and the year. Our results for the fourth quarter cap off what was a solid year for VeriSign. During 2006, we delivered revenue of nearly $1.6 billion. Year-over-year, we certainly saw the effects of the challenges we faced during 2006 in our Jamba! business, where quarterly and annual revenues were significantly lower than the prior year. Excluding Jamba!, however, most of our core businesses grew steadily and at healthy rates throughout the the year, particularly our naming, security and messaging businesses. In addition to generating solid financial results, we also maintained a strong balance sheet throughout the the year, ending 2006 with cash balances approaching $750 million. This was after we made significant investments in operations and infrastructure, repurchased over 6 million shares of VeriSign stock, and executed strategic acquisitions to support future growth areas, such as digital media delivery, mobile media management, SSL market expansion and the building out of a world-class professional services organization to better serve our customers.

So now let's dive into the financial results for the fourth quarter. We ended the year with Q4 delivering revenues of $413 million, slightly below our previous guidance due in part to weaker than expected results from our Jamba! business, and some delayed customer acceptances we experienced in the mobile services business over the holiday season. That being said, we continued to see sequential growth in all areas of our business during the quarter, with the exception of the core communications services, which were down marginally. As we turn to revenue by reporting unit, I would like to point out that this will be the last time we will be reporting revenue under these segments, which reflect our historic, business unit-based organizational structure. So looking at revenue under these reporting units, the Internet Services Group grew 4% sequentially and 21% year-over-year. Sequential growth [inaudible] approximately $205 million of revenue in Q4 or 50% of total revenue, and was fueled by continued strength in domain name sales and solid traction in our Security Services business. The Communications Services Group grew approximately 2% sequentially and reported revenue of $208 million, representing the other 50% of revenue for Q4.

Within our core Communications and Commerce business, revenues were $113 million for the quarter, down $1 million from last quarter due to weakness in our Communications business where we didn't see the volume of business in Asia turn up as quickly as we had expected. Our Content Services business, which includes Jamba/Jamster as well as our Digital Content services, reported $90 million of revenue. Jamba! contributed $72 million of that, and was down 4% sequentially, which was below our expectation for sequential growth.

Geographically, the percentage of revenue from our international customers, affiliates, and subsidiaries was 29% for Q4, consistent with Q3. For the year, international revenue represented 30% of total revenue. Preliminary non-GAAP gross margin improved from last quarter and was slightly higher than guidance at 65%. Q4 operating expenses were in line with expectations, driving a 20% operating margin for the quarter. As it relates to head count, we ended the quarter with approximately 5,330 employees, up from 4,860 in Q3. The majority of this increase came through the inCode Wireless acquisition completed in November.

Moving now to the balance sheet and cash flow items, cash equivalents and short-term investments at the end of Q4 were approximately $750 million. Cash balances were up 6% from Q3, and reflect strong cash flows in the quarter, fueled in part by increased year-end collection efforts, particularly in the Communications Services Group. From a balance sheet perspective, we were pleased to end the year with these healthy cash balances, particularly after deploying approximately $135 million of cash for the repurchase of VeriSign shares during the first half of 2006, and putting approximately $650 million to work for the strategic acquisitions you saw us execute throughout the course of the year. The strong collections I just mentioned also had the benefit of driving Q4 net DSOs down two days from the previous quarter, to 48 days.

Total deferred revenue at the of Q4 was $614 million, up $23 million from the previous quarter. The increase here was driven primarily by continued strong sales of new and renewed dot-com and dot-net names and solid bookings in our security business. For the year, deferred revenue grew over $100 million. Lastly, our capital expenditures for fourth quarter were approximately $40 million, bringing us to total capital expenditures for the year of $142 million. These capital expenditures broke down approximately as follows: 44% in Communications Services Group, 21% in Internet Services, and 35% for corporate infrastructure purposes.

Let me now spend a couple of minutes updating you on some of the Q4 and post-quarter developments, starting with the Company-wide reorganization we've undertaken to streamline our operations and better leverage VeriSign's broad services portfolio across industries and customer groups. As Stratton discussed earlier, we have reorganized the Company into a new functional organization, replacing the previous business unit structure with a new combined worldwide sales and services team and an integrated products organization. As a result of the reorganization, we would expect to run a one-time restructuring this quarter, incurring charges at the end of Q1 in a range of at least $35 million to $45 million. This charge is comprised of approximately $15 million for workforce-related charges, $10 million to $15 million for facilities-related charges, and $10 million to $15 million for hardware and software-related charges. Approximately $20 million to $25 million of these amounts are expected to be cash charges. We would expect to recognize this restructuring over the course of the next four quarters, and would anticipate seeing material positive effects of such beginning in Q2, and building incrementally throughout the year, as some of these initiatives are longer lead items. As part of the restructuring, we would expect to exit approximately 350 employees by the end of Q1.

Prior to any additional strategic investment initiatives, and once the restructuring is fully realized, we anticipate annualized run rate savings in the $50 million range. As we move to complete our formal restructuring plans by the end of this quarter, we will update you in Q2 as to the full impact of our restructuring plan and the related savings for the rest of the year and beyond. I will discuss the financial impacts of the restructuring more in a moment when we discuss guidance. Additionally, as I mentioned before, and as a result of the reorganization, in Q2 we will be revising how we discuss our business externally. We will describe these changes in more details during our Q1 2007 earnings call.

Another key event during the fourth quarter was our acquisition of inCode Wireless. As a result of this acquisition, we recognized approximately $5 million in revenue and a slight operating loss in Q4. The inCode acquisition brought approximately 350 new employees to our VeriSign workforce. As Stratton mentioned, inCode is a strategic services organization. And as such, it comes with a different financial model than traditional VeriSign businesses. Revenues are recognized as completed and delivered, and gross and operating margins are substantially lower, but not atypical for a services business. We expect the acquisition to be $0.01 dilutive in Q1, but break even for the remainder of the year. And lastly, as Stratton mentioned earlier, we closed our joint venture transaction with News Corporation today. We discussed this in detail on our special call this past Monday, but I will touch on it again as part of our guidance.

So let me now turn towards our future outlook as we begin fiscal 2007. Looking at the full year, we would expect organic top-line growth to be consistent with our prior guidance, calling for revenue growth of 15%. Additionally, revenue will reflect a full year of the inCode business and one month of Jamba!, leading to an expectation for approximately $1.55 billion of revenue over the course of the year. As you saw, we exited fiscal 2006 with operating margins of 20%. Entering 2007, we expect operating margins will tick down a bit in Q1, as we transition to the Jamba! joint venture and integrate inCode Wireless into our business. We do fully expect, though, to see operating margins expanding significantly throughout the year, and reaching the lower end of our long-term operating margin goal of 25% to 30% as we exit 2007. The revenue and margin guidance I just laid out would be expected to drive earnings growth in excess of 25%, with non-GAAP earnings per share guidance in the $1.06 to $1.07 range. This 25%-plus growth target reflects the earnings growth as compared to 2006 non-GAAP earnings per share which, as you know, we are not able to provide today, less the 51% share of Jamba!.

I'd like to point out that this guidance does not reflect the full benefit of potential savings, which we believe should be realized as the restructuring efforts continue. We do believe it is prudent to be conservative in our initial guidance for 2007. With that being said, as we complete the efforts on our restructuring plan, and look to incur the restructuring charge at the end of this quarter, we think it is reasonable to expect an additional $0.03 to $0.04 of earnings upside potential to be driven off of the restructuring benefit.

Now, drilling down a bit into the current Q1 period, we anticipate we will drive revenue of approximately $380 million. This includes $22 million in revenue for the January month of Jamba! results, and approximately $10 million in revenue for inCode. As a basis of pro forma comparison, Q4 revenue excluding Jamba! was $341 million. This guidance reflects organic revenue growth of approximately 3% to 4%, driven mostly by all areas of our business.

Turning to margins for Q1, we would expect gross margins will decline to approximately 62%. This would suggest a decrease of approximately 300 basis points. Let me take a minute to walk you through the three primary reasons for this change going forward. First, as a professional services business, inCode's gross margin is significantly below the VeriSign gross margin range. Therefore, as we integrate inCode into our business, we would expect on an ongoing basis that gross margins will be lower by approximately 150 basis points. Second, as we discussed on our call earlier this week, gross margins for Jamba! have been in excess of 70%. As a result, the disposition of the Jamba! business will result in an additional decline in gross margins of approximately 150 basis points. The 100 basis point decline in Q1 reflects the exclusion of Jamba! from operating results for the full two months. Third, as a part of the terms of our new contract with ICANN, which was approved by the Department of Commerce in November, we will pay an additional $10 million in fees to ICANN on an annualized basis. This will further reduce gross margin by approximately 70 basis points. In total, we would expect these three items will reduce gross margins in the aggregate by approximately 3% during Q1.

In terms of operating expenses, we will continue to execute on our strategic plans, investing for growth and next-generation services, while remaining focused on disciplined expense management in all areas across the Company. As such, we would expect an operating margin for Q1 in the 19% range, reflecting the impact of the lower gross margins I just discussed. As discussed earlier this week, VeriSign's 49% minority interest will be reported in our financial statements as other income. For Q1, we would expect that other income will include an additional $1 million to $2 million for VeriSign's portion of the joint venture's operations for the months of February and March. As mentioned earlier, operating results from Jamba! for the month of January will be included in our Q1 financial statements, as the joint venture officially commences on February 1st.

As you know, we are currently precluded from stock repurchases due to our internal review of stock option practices and our current restatement effort. We would, however, anticipate the full resumption of our share repurchase program late in Q1 or early Q2. However, given the timing of these events, we expect this activity will have little to no effect on diluted shares for Q1, and we would expect that the share count for the quarter would be flat to slightly up from the 248 million in Q4. Taking into account the revenue, margin and other income and share count guidance I just laid out, we would expect preliminary pro forma earnings per share in Q1 of approximately $0.22 on an after tax basis, using a 30% effective tax rate. Additionally, as we said on Monday's call, the Jamba! joint venture delivers other income to us that is already taxed, and thus, should not be taxed again when applying the VeriSign pro forma rate to our income before taxes. Please note that this non-GAAP earnings per share guidance reflects a full $0.01 worth of dilution in Q1, stemming from the inCode Wireless acquisition. Also as a point of reference and comparison, Jamba! would have contributed approximately $0.03 to our Q4 EPS.

So to sum it all up, we are pleased with what we have accomplished during 2006; our continued execution on strategic initiatives, the growth we delivered in our core businesses, and the investments we made in new strategic areas. As we enter 2007, we are optimistic about our new opportunities, the momentum we are seeing in our core businesses, and the resulting growth trajectories we anticipate for revenues, margins and earnings. We continue to believe our strong financial position allows us to focus on profitable investments, expanding operational leverage, and delivering increased shareholder value. And with that, I'd like to open up the call for your questions. Operator, may we have the first question, please?

[OPERATOR INSTRUCTIONS] Todd Raker, Deutsche Bank.

Two questions. First, Stratton, can you just give us some insight in terms of the EV certs, and how we should be thinking about the uptake of those on the base, and the potential economic impact, especially kind of in the back half of the year? And then secondly, very similarly, can you give us your most current thinking on a dot-com price increase?

I missed the first part, or the first question. What was that?

Yes, extended validation certs, how you see uptake, any early expectations in terms of how you think the base will play out over the the course of the year?

Yes. Certainly, we're pleased with what we're seeing right now. Which is there's some pent-up demand, obviously, a lot of retailers and financial service firms who want to be able to display that green address bar early on in Vista's launch here. So right now, about -- we'll issue a release I think on Monday of the 300 customers that have chosen to move over. Our goals are relatively modest in -- early in the year, since we don't really know what the penetration rate of Vista and of IE7 will be. I think we'd like to see at least 5% of the VeriSign retail certs heading towards the EV upsell in the second half of the year. And maybe 10% of our larger enterprise customers, that include most of the large financial service firms. In fact, we've already sold one firm over 2,000 of them as they look to expand where they use SSL within their property. So I think early returns are good. A little bit of a honeymoon period because of the pent-up demand, and obviously with Vista's launch just today, we'll need to see what the adoption rate looks like. But so far, so good.

As it relates to dot-com, I think our expectation is that we'll have some action here in the first half of the year. Don't want to be any more specific than that as we're still working all the plans around that. As you know, that action will be precipitated with a notice period that takes a full six months. So it's likely that the -- any benefit from a potential price action would really start to flow through no earlier than Q4, Q1 of next year.

Okay. And then just one follow-up. We're kind of in limbo here, in terms of the reporting structure going forward. Any sense for how you're thinking about -- when we rebuild our models here, how we should be thinking about the business?

Well, fair question. And I think Dana and Ken and the team will certainly be reaching out over the next few weeks to talk with folks and get some input. I think one way we're thinking about it, at least, is kind of legacy voice services in one potential bucket, and all the IP-based services, both for Internet, as well as wireless data in another. So we're really trying to separate, if you will, the traditional voice or legacy voice from what I would believe are more the next-generation IP-based services that kind of play to the strategy we talked about.

Okay. Thanks, guys.

Ed Maguire, Merrill Lynch.

Do you have any update on when you might expect to renew the dot-net agreement?

Well, dot-net was renewed earlier, I want to think, towards the end of '05, I believe, or '06, or the beginning of '06. So that, I believe, is on a four-year clock of its own. And it has automatic renewal provisions in it. Similar, but actually even a little better than dot-com. That contract also came -- the new contract there also came with the ability to raise prices by up to 10% a year, I believe. So in essence, that's already locked and loaded, as well.

Okay. And the timing of those increases would be synchronized with dot-com?

We were able to raise prices in dot-net as of January 1, 2007. So that clock is ticking, as well. Again, we're in the final process of really determining the strategy there. But it's likely that would happen simultaneously.

Okay. And any granularity you could provide around the new sales organization, in terms of comp, how you're structuring any overlay teams? And whether the sales people have their -- have quotas that are fully organized at this point?

Yes. As it turns out, we have a special guest, John Donovan is in the room. So I'm going to let John talk a little bit about the structure of the teams, and maybe what we did at the sales conference a week or so ago.

Great. Thanks, Stratton. Just very briefly, we -- in our sales coverage model, one of the things that's been a big benefit of the reorganization is the opportunity to not only eliminate overlap at customers, which can be confusing for our customers, but also the opportunity to ensure that we remove the white space, as Stratton mentioned, in our coverage model.

Ed, can you hear, John?

I can, yes. Thank you.

And so, in our coverage model, we have a much more quota-based system, where it's not only an expectation, it's a requirement for -- to really make your quotas, to go out and represent the full breadth of what the VeriSign portfolio of products would be into those customers. So, we put a lot more leverage into the system, higher expectations for the sales teams, and then we're going to provide them with the tools and education that they need to provide a much greater breadth. And just very, very quickly, we're organizing with certain strategic accounts and deploying ourselves a lot more aggressively against our larger relationships. And we're deploying -- where we're not deploying by named account, we still will have a geographic coverage model. But we'll be far more efficient in all of the metrics that you would use, whether that's bookings per head, revenue per head, and then obviously the expense to deliver both those bookings and the revenue.

Thank you.

Rob Owens, Pacific Crest Securities.

Relative to the inCode contribution in the quarter, where was it in revenue? And did it dilute Q4 results?

It was $5 million of revenue. And there was a slight loss, but it was less than $1 million in the quarter because it was a short period.

And relative to that historical view, Dana, where did you put that? Was that in the B2B section of Content?

That's right. In CSG.

And then, regarding the recent AT&T-Bell South merger, can you give us a little color? Do you have much exposure there, in terms of your database business or anything else?

Hold on, Rob. I want to go back. I'm not sure what you said we put in the B2B content.

[inaudible]

That's what he said. It's not in B2B content, it's in the overall CSG number.

It's in the overall CSG, so o that would be down in the core?

We're all looking at each other. I actually believe that's right. Sorry. I think that's right. We'll confirm that for you.

Okay, great.

Go ahead with the other question.

AT&T-Bell South exposure.

A little bit on signalling, right. And that will hit here as we expected in Q1 and Q2, which is why the guidance in the legacy stuff is very modest. However, Bell South being one of the more aggressive providers of data services, one of the more aggressive providers looking at on-demand video, and one of the more aggressive providers in small and medium-sized businesses, network services and security services, we actually are looking at that as a positive for us, in terms of the breadth of things that we can work on with AT&T, which is the largest named account in John's strategic account model. So between Bell South coming in and now a single decision process around Cingular, we're pretty excited about the overall new AT&T structure, and our touchpoints within it.

Great. Thanks.

Israel Hernandez, Lehman Brothers.

Question on buybacks. Once the restatement is completed, do you have any plans on reaccelerating the buyback above and beyond what you're expecting to do with the Jamba! proceeds?

I think as you saw in 2005, we've been pretty aggressive with our buyback programs and the Board in fact authorizing a new $1 billion program last year. So I think you'll see us be aggressive, including using those proceeds and continuing to use additional cash flow -- free cash flow, to be pretty aggressive there. Certainly around these price points.

Thanks. I'm not sure if I heard this on the call or not, but did you give a cash flow from operations number? And what should our expectations be, at a high level, in terms of cash flow growth in 2007?

So, because the cash flow statement will be impacted by many accounts that are part of the restatement, we're not able to actually report that to you. And thus, we haven't actually given guidance on it for the '07 year, either.

Okay. Thank you.

Robert Breza, RBC Capital Markets.

One housekeeping item, Dana. Did you talk about the CapEx plan for 2007?

Right. So we typically talk about CapEx for the Company at about 10% to 12% of revenue. And we would expect for our core business that CapEx again in '07 would be in the $160 million, $165 million range. We are in the process of building out a new data center that Stratton talked about on the last call, and that will add about another $30 million to that number, just as a one-time expense in 2007.

Great. Thank you. One follow-up question for you, Stratton. You talked in your prepared remarks about Japan having some weakness and not getting the customers kind of turned on. Can you kind of just give us a little more color there, and maybe your outlook for that geography specifically for '07?

Yes, I think '06 was a mixture for Japan. We obviously had some FX issues there, but in addition the business did not perform up to plan. Most of that was centered around the SiteRock acquisition that they had done in 2005, which was a small security operations and monitoring business that did not live up to its plans for certain reasons, and is kind of unique to the Japanese market. The team has kind of factored that in as we go into '07, believe we've got that well in hand, and restructured and reorganized, as well. And then, the -- moving forward on the more traditional VeriSign businesses in Japan, pretty excited about the security operations. We've, in fact, just signed the largest token customer ever, is actually coming out of Japan. And we'll be announcing that shortly, who that is. But that's for north of a million tokens to be deployed over the course of the next couple of years. So the security business seems firm. And John and the team are looking at using the same organizational model in Japan as we go forward. So they'll be bringing more of the VeriSign products to bear. So I think '07 will be a decent recovery year in Japan, and will set them up for good growth in '08 and '09.

Great. Just one last follow-up. Dana, did inCode have any effect on deferred revenue in the quarter?

No, it did not. And let me follow-up to Rob's previous question. The $208 million for communications services that I talked about actually, the $5 million of inCode was not in either the 113 of core, nor the 90 of Content. It's an add-on to that. So it's separate from those two buckets that we normally talk to you about.

Thank you.

Sarah Friar, Goldman Sachs.

This is Derek Bingham on behalf of Sarah. Real quick on the options issue. You've completed the Board review, but my understanding is also that the SEC and U.S. Attorney are involved here or are involved here, or engaged in some way. Is there anything you can tell us in terms of what they need to see? Or when their requirements are satisfied, so when the door shuts kind of from their perspective?

Our process is like 140 other companies. The internal -- the SEC and U.S. Attorney have tended to be waiting for the ad hoc committee's investigations to complete, which is now down. They have been apprised all along the way of what's been found. And they'll continue to work with the Company's outside counsel to respond to their inquiries. But there's really no definitive timeline for what they're looking at.

Thanks. And then one more on any update on decisions on what you'll do with the GeoTrust brand? As well, what you might do or what you maybe have done already with pricing on the GeoTrust side?

No definitive decisions here. That team has lots on its plate right now, rolling out the EV certificates across the different brands, and building in some new enterprise services. So as we talked about, we now have the three leading brands in the market space. And we'll continue to make pricing and packaging decisions based on what we're seeing in the market. But right now, I think we're very comfortable being the price leader with the VeriSign brand, being the channel player with the GeoTrust brand, and competing on the lower end of the price side with the [Thought] brand. And obviously, our unique counts are very strong right now. So we're pretty happy with where we are.

Great. Thank you very much.

Kevin Buttigieg, A.G. Edwards.

Stratton, I thought I heard you mention catalysts to 2008 results. And I was just wondering if you could talk about that a little bit. And perhaps in that context, obviously the new ICANN agreement allows you to provide some ancillary services around domain name registration. And I was wondering if you had any plans or any thoughts about that at this point in time?

We certainly do. And we'll be making some announcements on that here in the first half of the year. But the catalysts I was particularly speaking about are, one, certainly what we now have the capability to do within the dot-com and dot-net structure of the contracts as it relates to new product introductions that are ancillary, and have a much quicker and systematic review process, as well as any price changes we would make. That, as I said earlier, would mostly impact the P&L starting in 2008. Second, in the SSL business, because of having to write down the deferred revenue, or majority of the deferred revenue from the GeoTrust acquisition, as that builds back up on the deferred revenue line, you'll actually see growth rates accelerate on the revenue side as we exit the year. And, of course, we would expect to see economies of scale and synergies there on the operating side as we continue to integrate all the GeoTrust operations. Certainly, we've also got, with the Intelligent Content Distribution Network and the mobile side, what we believe will be improving margins and high growth rates in 2007, leading to hopefully pretty strong performance in 2008. So you put all that together, and I think we like the portfolio we've got, and some of the opportunities we see for improving margins even more as we head out into the future.

Okay. And then, as far as the restructuring is concerned, you mentioned about the potential for three to four in upside, or actually Dana did. And I was wondering if you could address, if you received that upside, would you expect it to come more so through the form of better revenues, or more so through the form of lower costs?

It would be cost savings from the operations.

Okay. And then just finally, a cleanup item. Dana, I noticed that there was a bit of a restatement to the '05 numbers that were included in the package, a slight reduction to revenues there, I believe. Could you mention what that was about?

All right. So that's all part of the ongoing restatement effort. As you may or may not know, when you have an official restatement, you do have to go back and restate things that had in the past been passed in terms of restatement and prior audits. And so there are small amounts here and there. But you will see that when we file the 10-K, as well.

Okay. Thank you.

Walter Pritchard, Cowen.

Just a couple questions on my end. Stratton, at a high level around the restatement -- or around the restructure, not the restatement, you're basically bringing on 350 sort of lower margin-type employees related to consulting, and you're exiting 350 of your own employees in the restructuring. And you're looking for operating margins up about 6% between Q1 and Q4. Just wondering if you could maybe talk us through how you get to that, with kind of similar mix of business? And maybe give us some examples of large areas where costs are coming out that enable that to happen?

Well, certainly so -- the numbers Dana talked about on the head count side, Walter, are roughly 8% of the employee population at VeriSign, excluding the inCode bringover. But if you look at how the affected employee list was put together, it represents more about 16% to 18% within what we would call the management layers of the Company, right? And less so at the bottom. So in essence, there is a higher cost component to the folks who have -- are leaving the business, or are being repositioned within the business. Second, in terms of bringing on the consulting resource, a lot of those heads are filling rolls that we would have believed we would have had to add into our '07 plans to support the revenue growth in some of these key areas, especially around implementation services on things like video, mobile and voice. So, in essence, those heads are filling critical hires, if you will, in many locations. Whereas the management infrastructure that's leaving is really the potential redundancies that come from having three sales organizations fold into one. The redundancies of three sales operations teams, and the rest. So I think we feel pretty comfortable around how this has all been done. Very, very effective teamwork across the management team in getting this done. So the numbers we are showing, as we said, likely have a little bit of upside, that as we get through the restructuring, we'll be more comfortable talking about.

Okay. And then just on the domain name business, I know with some talk of price increases [inaudible] you haven't given any official notification there. Are you starting to at all see term length increases, maybe registrars start to anticipate that the price, their costs are going to go up?

No, not at all.

Okay.

We're actually seeing the registrars continue to do some of the same marketing programs they were doing before, which is increasing volume. In fact, last week is the highest volume week we've ever seen.

Okay. And then lastly, Stratton, maybe you could talk a little bit about on your ICDN offering, how do you position that relative to some of the incumbents in the market? Maybe specifically Akamai, who is maybe a more traditional CDN. But just trying to get a sense for how it compares.

Well, I think what we're trying to do is really two-fold here. First of all, we're bringing the best of peer-to-peer and the best of streaming together, underneath a VeriSign brand with our own global infrastructure. So, when we really go out and start talking to most of the media and entertainment companies who are today delivering through streaming services, they will tell you it's their single largest cost, and it continues to be unprofitable for them. So, by leveraging the peer-assisted technology and by putting it into VeriSign data centers that have massive network capacity due to our DNS services, we believe we can reduce by up to 40% the cost of delivering high-definition-quality video. And if you start talking about high-def films in long format, right, you're really looking at something that the market has not yet done yet. And one of the barriers has been the efficiency of delivery. I can tell you, I've met with several of our UK customers who are already using the peer-to-peer service, and they're getting anywhere from 50% to 80% peering rates already. And in many respects, seeing that bandwidth cost savings very dramatically. So you do all of that, and we think we have got a very competitive offering in the market. But we'll really be targeting the high end of rich media delivery, less of the more traditional Akamai services around web pages and the rest.

The second thing, then, is our relationship with Adobe, where we'd like this to become a ubiquitous client technology deployed on somewhere near their 700 million Acrobat and Flash desktops around the world. As you know, obviously client downloads, or client code downloads are a barrier to entry. But if you're riding along with the prevailing ubiquitous video technology in the marketplace, you have an opportunity to really create a standard. So I think 2007, we have to prove that out and execute with our partners at Adobe. But we're pretty excited about the opportunity. And we do believe the market is going to be very large and will support several players.

Okay. Thanks a lot.

Peter Kuper, Morgan Stanley.

Most of my questions have been answered. But actually, Stratton, you piqued my interest with that last comment on the video delivery. In particular, how much of an opportunity do you think this is, near-term, versus this is a long-term, let's worry about it in a couple of years from now. Because I agree with you, the opportunity in video growth is going to be massive. But are you well positioned today versus, let's say, better positioned down the road? And then the other question I had actually in line with that is, on the margin side. Talking about 25% to 30% towards the end of this year going to '08. Is that a sustainable target range now or [two] years going forward for our modeling purposes?

So I think very much the ICDN will follow a traditional VeriSign infrastructure build up. Last year was the investment year. We built it, put it into the market, we've got it in four of our data centers, plus the peer-assisted technology out. Now, we'll be putting it into 8 to 12 of our data centers over the course of the next few quarters. So we can deliver from the streaming perspective with our grid servers, and then obviously support it with our peer-to-peer assist. I think you'll see revenues ramp there relatively nicely this year. But you'll still be in the low double-digit millions here in terms of revenues. I think the marketplace itself is going to have a year of inflection here, where you're going to see a lot of decisions get made. So I think we're hitting the market at the right time. Lots of announcements most likely this year. More and more revenue, '08 and '09. As it relates to going from our exit rate of 25% margins in Q4 of this year, to closer to our 30% margins, we do believe that's achievable in the new structure, and we'll continue to push for it. That's probably 6 to 8 quarters out, right, from the end of this year. But something that we can see within our sight.

Okay. Thanks very much.

Phil Winslow, Credit Suisse.

A lot of my questions have been answered. But just to spend a little bit more time on the core communications services side, Stratton, you sort of mentioned this. We'll have a slower ramp-up in Asia than expected. But wondering if you could comment just on North America here. It seems like you had another sequentially decline. And what would your expectation be for this business, I guess, Q1? And then just sort of growth longer-term?

Phil, I think it's kind of the simple way to look at it is, we've projected it at zero to minus 5% decline this year on the legacy services around the voice stuff. We hope we'll do better than that if we can kick the international in. And if we can obviously, raise the profile in our billing services a little bit with our key customers here, who are experiencing pretty strong growth right now. But I think we're being relatively conservative and assuming 0% to minus 5% this year on the core legacy telecom stuff. If we do better than that, it will be a bonus. Meanwhile, we'll continue to manage it for profitability.

And then, I guess when you do look at that, when sort of the strategy that you laid out here focusing more on IP, how do you see the legacy com services side sort of fitting in your roadmap?

I think we'll continue to evaluate it. As you've seen over the last few years, we've been relatively disciplined and relatively candid around getting out of businesses we didn't believe we could be the best in the world at, and that didn't fit the strategy. So, we'll continue to look at all the product lines within VeriSign around that. And we'll take the same actions at the right time on any of those. But again, all these businesses are profitable within our portfolio. And so it's not something that we worry about on a minute by minute basis. We look at it more long-term and making the right decisions at the right time.

Great. And one last housekeeping item. Dana, what fully diluted share count are you using for next year?

For Q1 we have 248. And because we will institute the share repurchase program, we have that ticking down a bit each quarter throughout the year.

Great. Thanks.

Gregg Moskowitz, Susquehanna.

Stratton, it sounds like you had pretty solid results in Security Services overall this quarter. I know there was some weakness in Q3 in Europe and Japan. Can you just kind of walk through how it performed this quarter across all major geos?

Very, very strong performance in the U.S., as I said during the call. Record bookings quarter in the enterprise team in Security. They really had great, great performance and booked some very new, some very big new deals for us in some key accounts. Japan, as we talked about, was a little bit weak by a few million dollars. About half FX-related, half performance-related. And then Europe was, I would say, on plan. I mean, no major surprises one way or the other.

Great. And Dana, in terms of the delayed customer acceptance that you saw on the mobile services side, can you just elaborate that -- elaborate on that a little bit for us, and what kind of effect that had in Q4?

Some of the services that we deliver, we actually need to receive some acceptance from our customers. And with the holidays, it just happened that the customer didn't get the acceptances done before the end of the quarter.

It's related to some of our content services delivered for customers in Europe as a subcontractor.

That kind of sort of in the few million dollar range, if you had to put a -- ?

A few million dollars.

Okay, perfect. And just one quick housekeeping. Since this was the first full quarter with GeoTrust, just wondering if you have any color in terms of what the revenue contribution was, and/or the amount of the deferred revenue write down pertaining to the Q4?

We're -- we didn't count it up that way. We roll them up all in [inaudible]. So we don't have that at our fingertips, Gregg. Glad to get back with you on that. As I believe from the deferred revenue write down, I want to say was something close to $18 million, or something. But we'll have to get that number for you, as well.

Great. Thanks, guys.

[OPERATOR INSTRUCTIONS] Gene Munster, Piper Jaffray.

Stratton, just to clarify. I know the question has been asked a couple of times. But exiting 2007, Stratton and Dana here, at 25% operating margin, and then the 30% is 6 to 8 quarters after that?

That's our goal, Gregg. I'm sorry, that's our goal, Gene. We believe we know how to get there. But we're not pegging an exact date for that. But we do believe we can continue our progression towards the 30% level over the next couple of years.

Okay. Great. And the second is the whole Any Era theme, obviously that's a new theme, and you touched on it at the beginning of the call. But obviously your two core businesses really tap into that. And you touched on some other areas where you could be developing new products around that. Can you just conceptually touch on how that Any Era theme is going to evolve from your two core businesses going forward?

Well, I think the product teams are obviously putting together solution sets that really drive towards serving up interactions on these networks. So we'll be focused in communications in a broad sense, as it relates to Web-based and wireless-based communications, voice and data. We'll also be focused on commerce and transaction support, both over wireless and broadband. So I think all the platform investments you saw us make in '06 were strictly around this focus on the Any Era, and being the key provider in the middle of the network to enable and protect those interactions. So that's one of the ways you'll judge our portfolio going forward, is ask yourself does this service enable or protect an interesting set of interactions that needs somebody in the middle handling billions of transactions a day?

That's kind of how we gauge it ourselves. So while it may be a new theme, we did start talking about it last year. It certainly was in our analyst day presentation, has received very, very strong kind of support in the customer base, as we go in and talk about these end-to-end solutions that help them accelerate kind of their move into some of these service areas.

So you really have all the key pieces already in place for it?

I believe so. I mean we clearly are going to be building out more infrastructure in the constellation, as we call it, to support not only the delivery of these other services, but obviously also the monitoring and the localization of them. So I did talk about some of the investments that we will make around volume, security and reliability are related to that. But for the most part, I don't see us venturing into a new service area in 2007 that we haven't talked about.

Great. Thank you.

And at this time, we have no further questions in the queue. I'll turn the conference back over to Mr. Bond for any additional or closing remarks.

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

That does conclude today's conference call. You may disconnect at this time. We do appreciate your participation.