威瑞信 (VRSN) 2007 Q3 法說會逐字稿

Good day and welcome to this VeriSign Incorporated third quarter 2007 earnings conference call. Today's call is being recorded. At this time for opening remarks, I would like to turn the call over to Mr. Ken Bond. Please go ahead.

Thank you operator. Thank you for joining us for VeriSign's third quarter 2007 earnings conference call. I am Ken Bond, Vice President Investor Relations and I'm here with Bill Roper, President and CEO, of VeriSign; Bert Clement, our Chief Financial Officer; John Donovan, Executive Vice President is also here as well and will join us during the question and answer portion of the call. Replay of this call will be available beginning at 5:00 p.m. Pacific time, via telephone at 888-203-1112, or 719-457-0820 for international callers. The pass code for both numbers is 6843620 . The third quarter press release is available on First Call, Market Wire, as well as the Investor Relations site at investor.VeriSign.com. For those of you joining us via web cast we also invite you to view the slide presentation which accompanies today's conference call. These same slides will be available for download from our website after the call.

Financial results in today's press release are unaudited and the matters we will be discussing today include forward-looking statements and as such are subject to risks and uncertainties that we discuss in detail in our documents filed with the SEC. Specifically, the most recent report on Forms 10-K and 10-Q in any applicable amendments which identify important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements. Additionally, financial results in today's press release and the matters we will be discussing today may include non-GAAP measures used by VeriSign. Our non-GAAP income statement and a description of items excluded in non-GAAP financial information are located on the VeriSign Investor Relations website. In a moment, Bill and Bert will provide some prepared remarks and afterward we'll open up the call to your questions. Unauthorized recording of this conference call is not permitted and we anticipate the call will end at approximately 3:00 p.m. With that I would like to turn the call over to

Thanks, Ken, in this call we're going to continue with the format that we introduced last quarter. My opening comments will be followed by Bert with a discussion of the financial results for the third quarter and our limited guidance for the fourth quarter and then at the end I'll share some thoughts as they relate to the business outlook and what we believe to be areas of particular interest to investors including the status of our strategic business review and our capital structure, before we move on to the Q&A portion of the call.

With that, let's take a look at the third quarter. The third quarter was a solid quarter as we reported total revenue of 377 million including 374 million of revenue from continuing operations, which is consistent with our previous guidance. Non-GAAP earnings per share were $0.27. The solid financial performance was again driven by our core franchises of Naming and SSL. We ended the quarter with over 77 million domain names in our adjusted zone for .com and .net compared to 73 million names last quarter and our install base of SSL certificates total 912,000 compared to 883,000 searched at the end of the second quarter. The reorganization that we announced earlier this year, and discipline expense management are continuing to bear fruit as the operating margins for the quarter improved to 23.4%.

On the staff side of the house, Kevin Werner, joined us to run our corporate development and strategy group as Bob Korzeniewski transitions to a part-time position beginning early next year. [Korzo] has been a main stay of our organization for a dozen years and we expect to continue to tap his knowledge and experience as Kevin takes over the responsibility for M&A activities. Kevin and I have worked together for 13 years now and he will be a tremendous successor to Bob. Grant Clark also joined the team as our Chief Administrative Officer with responsibility for improving our business processes in addition to overseeing the company's operational and risk management activities, this is a newly created position on our executive team and having known and worked with Grant for 14 years now, he has the right mix of experience and skills to help us add needed structure and discipline.

Mark McLaughlin has indicated he would like to spend more time with his family before considering new career opportunities and I appreciate that Mark made his decision to leave the company in a way that enables us to develop a smooth transition that he will personally help to execute over the next month or so. On behalf of the team at VeriSign I want to thank Mark for his significant contributions to the company over the last 8 years and wish him luck as he enters the next chapter of his life and his career. And then finally I'm really particularly pleased that Jim Bidzos has returned to the role of Board Chair. As you probably know, Jim conceived of the SSL Heritage business of VeriSign. He founded our company in 1995 and he has been a part of it ever since. Jim is a true technology leader and creative force for innovation and we were very pleased to have him walk in the halls, again, welcome back, Jim.

Moving now to the business metrics for the third quarter, I'll start with the information and security products lines, which include our Naming and SSL services. As stated earlier, our Naming business continues to show strength as the adjusted zone for registered names in .com and .net now exceeds 77 million names. That's an increase of 25% year-over-year. This growth is driven by continued global internet adoption with 7.5 million new domain name registrations for .com and .net during the quarter and as well as renewals for 10 million names during the quarter. Combined we booked 17.5 million new domain name registrations and renewals during the quarter and this is a record eclipsing last quarter's record results.

The underlying growth drivers are consistent with prior quarters with solid growth in both U.S. and international markets. We saw growth from all customer segments including corporate, small and mid-sized business, consumer, and pay-per-click customers. The PPC slice of the market remains small but it is a consistent part of our new-name sales and overall base.

As a reminder, we implemented a fee increase last month and registry fees for .com and .net increased by 7% and 10% respectively to $6.42 and $3.85. The actual renewal rate for the second quarter was 76% and that's at the higher end of our historical range and higher than our preliminary estimate of 75% that we provided you at the first of the quarter. However, we do expect that the actual renewal rate for the third quarter will be a little lower than last quarter. And then finally our digital infrastructure is now handling peak loads of nearly 32 billion DNS requests a day. VeriSign's unique capability to operate global networks at this scale and reliability is unparalleled. That is the most active network on the face of the globe.

Moving on to our securities services we'll start with our second core franchise, the SSL business. Which sold over 217,000 certificates during the quarter, bringing the install base to 912,000 certs. We're pleased with this growth and it represents 3% sequential growth in this base. We're also pleased with the results of extended validation or EV certificates as customers like PayPal, Bank of the West, British Airways, Charles Schwab, Time Warner, Travelocity, and many more have gone green with EV. A demand for EV certificates was excellent in the third quarter and even after excluding a major customer win sequential growth was more than 25%. Now, this product is still in its infancy, but we are the number one provider of EV certificates in the marketplace at this time. And we continue to expect that the EV adoption cycle will be consistent with previous premium price SSL products that we've offered in the past. Microsoft's comments last week around Vista adoption further improve our confidence around the EV growth potential.

The annualized average selling price across the entire base of VeriSign's GeoTrust and thought branded certificates was $262, down from last quarter's $275. This decline reflects the continued trend of a product mix shift as the GeoTrust Branch certificates continue to grow faster than the overall portfolio. And additionally the ASP for the VeriSign branded certificates declined slightly during the quarter as we had two major wins with enterprise customers booked during the quarter.

One of our primary emerging businesses is Identity Protection. The VeriSign Identity Protection program, VIP, continues to be a great example of an internet scale service that's running on our global infrastructure to provide scalable and secure real-time validation capabilities that can support millions of on-line users. In addition to the VIP program we also provide Identity Protection Services, including fraud detection services and one-time password or OTP authentication services. This quarter a national Tier 1 bank launched a major pilot program using our OTP authentication services across tens of thousands of customers. We also met a key milestone this quarter having now sold over 1 million credentials across our OTP and VIP programs to partners such as PayPAl. Speaking of PayPal, with their official U.S. rollout in February and continued geographic expansion into Germany and Australia, we more countries to come, we continue to be pleased with the strong uptake of these credentials by consumers and we expect to see this adoption to continue to ramp.

I'll now move to our Communication Services Group which includes three categories. The first is digital content and messaging which includes our wireless and broadband content services combined with wireless messaging services. The second is communications and commerce, which includes our network, database and billing services, and the third category is professional services, which is made up mostly of wireless consulting and implementation.

Let's start with the additional content and messaging. We continue to see strong growth in core messaging volumes; however, pricing environment remains challenging as we discussed last quarter and we do not expect this situation to improve over the remained of this year. Our focus over the last quarter has been on strengthening our existing customer relationships and we've made good strides on this front in resolving past performance issues with our technical platforms. On the content delivery front, while we see continued interest, strong interest, in our intelligent content delivery network or ICDN, we see the broader content delivery market, rich media content, as a nascent opportunity, one which will take time and investment to develop into meaningful financial results.

Our legacy communications and commerce business continue to be a mixed bag of results. We saw growth in the wireless billing subscriber base at Metro PCS and Leib, as we now support nearly 12 million wireless users with our billing and payment services platform. However, the gains for these customers were offset by declines in our Prepaid Services business. And in closing our business review the Professional Services results were flat from last quarter as both revenue and expenses were lower, on lower billable head count. And now I'd like to turn the call over to Bert for a walk-through of our financial results for the third quarter and guidance for the fourth quarter. Bert?

Thanks, Bill and thanks to everyone for joining us this afternoon. We are pleased with the results this quarter especially the continued growth we've seen from the Internet Services group and the 190 basis-point improvement in our non-GAAP operating margin from continuing operations. Both revenue and earnings per share were consistent with our guidance. The non-GAAP results we'll discuss throughout this call reflect continuing operations for the third quarter, comparisons with prior periods exclude both Jamba and Jamba Service. You'll see Jamba Service classified as discontinued operations. In the third quarter, prior to its sale, Jamba Service generated revenue of 3.1 million and operating income of $1.8 million . VeriSign consolidated revenue for the quarter was $377 million including $374 million from continuing operations. Our non-GAAP operating margin was 23.4%, and exceeded guidance by 40 basis points given continued benefits of the restructuring efforts initiated earlier this year as well as having grown the top line faster than expenses. In mid-August we completed a $1.25 billion convertible debt offering. The large majority of the proceeds from this transaction will be used for share repurchases and to date we have repurchased 31.4 million shares at an average price of $30.12. We also recognize $5 million in interest expense this quarter and the debt offering would be accretive to earnings per share.

Let me now give you additional detail on the financial results for the third quarter. Reported revenue from continuing operations of $374 million. Revenue grew 3% sequentially and 15% year-over-year in line with guidance provided during our last conference call. Past trends continue to hold where we see strongest growth in our core businesses and positive growth in our emerging businesses. Our communication and commerce businesses continue to be an exception.

As in past quarters, we are reporting revenue based on our two business segments, ISG and CSG. The Internet Services group grew approximately 5% sequentially and 21% year-over-year with revenues of $236 million or 63% of total revenue. This growth was fueled by strength in .com, SSL and Identity Protection. Communication Services Group reported revenue of $138 million for Q3 or 37% of total revenue, down 1% from last quarter and up 5% year-over-year. The ISG revenue is comprised of digital content and messaging which was up slightly, communications and commerce, which was flat sequentially and professional services which was down over last quarter. Moving to international operations, percentage of revenue from international customers, affiliates and subsidiaries is 16% compared to 15% last quarter. Cost of revenue for the third quarter was 143 million. Non-GAAP Q3 gross margins was 61.8% up from 60.3% last quarter. The factors contributing to the increase in gross margin include reductions in head count and contract labor costs as well as decreases in direct costs of revenues in ISG.

Turning to operating margin, total operating expenses for Q3 were $143 million or 38.4% of revenue, down from 38.8% last quarter. Percentage decline was expected given our expectation to grow expenses at a lower rate than revenue. We saw similar benefits in other operational areas, as well, driving a non-GAAP operating margin of 23.4%, as compared with 21.5% last quarter and exceeded our expectations by almost 40 basis points. Other income including minority interest was slightly more than $5 million for the quarter. This includes 6 weeks of interest expense on a convertible debt transaction and no contribution to other income from Jamba.

In the fourth quarter we expect a one-time loss of 1 to 2 million from the Jamba JV as a result of unplanned one-time expenditure. We'll be monitoring this situation very closely. With the expected loss from Jamba and a full quarter of interest expense, we expect other income will be approximately 1 to 2 million for the fourth quarter. Non-GAAP net income for the third quarter was $66 million including Jamba Service with earnings per share of $0.27. Diluted share count used in EPS was approximately 246 million shares. Moving on to the balance sheet and cash flow items. Operating cash flow for the quarter came in at $109 million. Drivers to the positive free cash flow were approximately 70 million net of stock repurchases from the debt deal, 13 million from the sale of Jamba Service and 220 million from stock option exercises.

Capital expenditures for the quarter were 47 million with 16% attributable to ISG, 48% to CSG and 36% for corporate infrastructure and bringing the year to date total to approximately $94 million. We do not expect capital expenditure for the year to exceed 150 to 160 million. Our ability to consistently generate solid operating cash flows resulted in our maintaining a strong balance sheet with ending cash equivalents and short-term investments approaching 1.2 billion an increase of $371 million from last quarter. Net DSO for the third quarter was up six days to 50 days as a result of our transitioning to a new CSG billing platform late last quarter. During the transition, invoices were issued late, resulting in a higher DSO. The issue was identified and addressed during the quarter and we expect DSO would decline next quarter as we work the impact through accounts receivable. The deferred revenue ended the quarter $711 million up 26 million from the previous quarter and 21% year-over-year. The increase in deferred revenue was driven by strength in our registry and security services. We ended the secure with 4,370 people.

Moving now to guidance for the fourth quarter. In keeping with our new guidance policy discussed last quarter we're providing operating and revenue margin guidance for the following quarter as well as high level commentary about longer-term trends we expect to see in our business. We expect to see organic revenue growth accompanied by margin expansion and earnings acceleration. For the fourth quarter we anticipate revenue will be approximately 375 to $385 million, which is flat to up 3% from the third quarter. We expect to see solid and continued growth in our core businesses, partially offset by declines in our communications businesses. Referring to operating margins for Q4 we expect operating margins would be approximately 25% up from 23.5% this quarter. We will continue to execute on plan while investing for growth in next-generation services as well as remaining focussed on disciplined expense management. As discussed earlier, we expect a Jamba JV will occur loss of 1 to 2 million in Q4 which we expect to impact EPS by a $0.01.

Lastly, we expect diluted share count would be approximately 230 million shares assuming current stock price levels. The accelerated share repurchase or ASR program will be ongoing through the end of the fourth quarter. At the conclusion of the ASR program we plan to continue share repurchase activity over the following quarters using the 985 million of the authorization remaining under our $1 billion plan. In summary, we are quite pleased with the results this quarter. As we look to Q4 to continued strong performance we expect from our core services, increasing contribution from emerging services, as well as positive results from the restructuring, provide us with positive momentum going into Q4 as we approach 2008. We'll provide additional perspective on 2008 at our analyst's day on November 14, as our strategic business review will have significant impact on current revenue and earnings estimate. Let me pass it back to Bill for the

Thanks. As Bert just mentioned, we continue to see strength in our core businesses and we're also focusing on the development of several businesses, including content delivery, messaging, and Identity Protection. Over time we expect that our portfolio emerging businesses will evolve as we continually assess our opportunities in terms of our strategy, market position and our ability to win. From an internal management perspective we continue to work toward a higher-level of discipline in our business practices. Efforts are well under way on this front and our hiring of Grant Clark who I mentioned earlier is indicative of our commitment to improve performance over time. Our financial position is strong allowing us to invest in our core emerging businesses to maintain our growth, to expand our operational leverage and at the same time improve the efficiency of our capital structure.

On that note I would like to turn the discussion to areas that we believe are of particular interest based on conversations we've had with shareholders. These topics include status of our strategic business review and our capital structure. As a reminder we initiated a company-wide reorganization in January, this reorganization was not really a destination, as much as it was a first step in continual process of adjusting and refining our overall strategy to meet changing market conditions. And as stated before, I'm a big believer in focus. We simply must focus our resources on a more limited set of meaningful growth opportunities to improve our success rate as a company. And to that end we initiated a business review to understand and assess how each business fits in terms of our strategy, our market position, and our ability to win. This business review is now substantially complete and while we won't go into details in today's call we do intend to discuss this in further detail at our analysts day on November 14. We hope that you will be able to attend in person or via the webcast. The second area that I'd like to discuss is the capital structure. As we discussed earlier, we successfully completed our convertible debt offering raising 1.25 billion, and we used the large majority of the proceeds to repurchase shares. In fact, this quarter we repurchased over 31 million shares retiring approximately 13% of the total shares outstanding. Our balance sheet continues to be strong with cash and equivalence approaching 1.2 billion and of course we expect we'll continue to generate healthy cash flows.

In total we're in excellent position to continue to invest with greater discipline in our businesses, and to the extent that we do not see investment opportunities which made our risk adjustment return thresholds we will seek effective and efficient means of returning cash to our shareholders through initiatives like our share repurchase program. And we're not going to provide guidance on future share repurchases, but we do note that we still have approximately 985 million authorized for share repurchases and we continue to believe that our capital structure is an avenue to unlocking shareholder value over time.

So in summary, the third quarter was a solid quarter in terms of key financial metrics. We're pleased with the performance of our core businesses and their future prospects, the strength of our management team and the commitment of our tremendously talented employee base. Looking forward we expect strong organic revenue growth in our core businesses, partially offset by declines in our communication businesses, accompanied by margin expansion and earnings acceleration. I'd like to conclude my remarks by thanking our shareholders, business partners, our customers and our employees for their continued support. And with that we would like to open the call for your questions. Operator, may we have the first question, please.

(OPERATOR INSTRUCTIONS) . We'll go first to Rob Owens with

Couple of questions, first of all, could you give us a sense of what the attach rate is for EV certs right now and how we should think about that as we move forward and in light of that , at what point do we start to see ASPs start to swing the

Would you repeat the question. You broke up a bit and we didn't hear the first part.

Question was regarding EV certs, extended validation certificates and effectively what the tax rate looks like right now, what expectations might be how that drives overall ASPs going forward.

Hi, it is John Donovon. I'll take the question. Right now we have--we're seeing continued uptake, one of the things that we have done this year is that we've augmented the channels to ensure that that upsell goes much more smoothly. So we were very pleased with the take rate. We haven't established , yet, metrics which we think are going to be consistent and sustainable for you to measure that performance, but the metrics that we're using right now internally which are the root drivers of that, are up rather smartly this quarter. So I think we'll provide an analysts day a more detailed view of some of the metrics of measurement in that business, but from the standpoint of enterprise adoption we're very pleased with where that has

Okay. As we look at guidance for the fourth quarter, fairly flat sequentially, modest uptick, any sense of what comes out of ISC versus CSG, what kind of declines quarter-over-quarter you're expecting in CSG there.

We usually don't provide that level of detail, but in line with what we're seeing historically here.

All right. Great. Thanks.

Sarah Friar with Goldman-Sachs.

On that question around guidance, I mean, you are going--guiding that a little from where the Street was. Is there a concern in the non-core businesses, in the CSG area that you continue to see erosion because they've become effectively non-core? How are you effectively dealing with that?

Yes, this is John. What we have seen, obviously our lead indicators are the customer activity indicators, the RFPs that we see, we see the bookings that we get and the backlog and we watch that very closely not only by win rate and customers but look at it by product, as well. And we actually have been having very strong quarters throughout the last two quarters in the customer activity, in the bookings, in the communications. So I would say that in general our share and some of the more challenging businesses is going up and what we're dealing with is a backdrop against price declines. So I'm very thrilled at what the channel has been doing and the focus we've been able to maintain through this portfolio review, and I would say that those businesses, as we start to categorize them as non-core and manage them, that we'll find that '08--well, Q4 and '08 will be consistent with the guidance we've given you, and we're dealing with the underlying economics of price declines and volume. But I think the win rates are good and right now the pipeline is healthy.

That is good to hear. On a more positive note on the registry side. We have the price increase starting to kick in now. When can we see some additional services coming out of that registry business given that you can not do that on account of how the agreement is set up?

One of the things we're going to go through extensively at analysts day and Bill is a big proponent of, we talk about focus and discipline and we have done a great job of that over the last several quarters. Some is underserved in our dialog with you folks is just the innovation process itself. We've been using the same focus and discipline into building how we gate and hurdle things in the investment portfolio. So I would suspect that over the course of the next little while here as we talk about areas that we're we're going to invest and grow, that we will--you will see a very logical path and plan for growth in all of our core services, evolving the base product line, and also looking for adjacent markets that we can serve that have either similar go to market and technology, or potentially linked to the businesses that we're in today. So we don't have the answer to that, but we'll provide a lot of clarity on analysts day for the things we're doing there and I think that you'll see we have a lot of great opportunities presented by the business in both the SSL and the domain business, as well.

Great. Okay. We look forward to seeing you there. Thanks a lot.

Again, please press star-one to ask a question. Go next to Israel Hernandez of Lehman Brothers.

Hello, everyone. With respect to the ICD, you indicated that we're still in the nascent stages and this is going to require some time and some investment. Is that suggesting that perhaps ICDN might not be in VeriSign's long-term plans. Are you going to be committed to growing that business, or is it just may not be worth it?

Good question, Israel. Hope you're coming to analysts day, we'll spend a little time on that. We are constantly reassessing all of our investment areas. We're adding new ones, we're talking a hard look at fund as these markets develop. The screen really is the technology and our capabilities, the market size growth rate and economics that they deliver, and our ability to win and have a meaningful market piss and we're constantly looking at all of these opportunities against those screens.

Thanks. That sounds like a go.

We'll go next to Todd Raker with Deutsche Bank.

Hey, guys, two questions for you. First on the price increase for .com and .net, can you give us insight in terms of the current contract length around the domain name, and how you feel what your renewal cycle looks over the next I think it is 18 months for that to roll in. How should we be thinking about that? And from a pricing perspective, when would be the next opportunity you guys could take pricing up a second time?

I think I got part of that question in. I may have missed part. Can I start at the back and work forward? The current contract that we have goes through 2012 and allows for a total of four price increases of up to 7% each in the case of .com and they can be no more frequent than once a year. That was--that was the part I remember. Can you repeat the first part of the question?

What is the average contract length of a domain name today?

It is a little over a year. It is about 1.2 years is the average term.

Okay. And from a renewal perspective, is it pretty smooth over the four quarters, should we see seasonality at the end of the year?

I'm sorry we're just not hearing you.

From renewal hearing should we see seasonality over the end of the year or smooth over the four quarters.

Question of seasonality.

I think it is in a range of where it has been historically. We are still analyzing where the actual rate is for Q3. Our view is that it will be slightly lower than what it was in Q2 which turned out to be higher than our initial estimate.

The historical range on that has been 73 to 77. Second quarter was at the sort of the higher ends of the range and we expect it to drift back down towards the middle.

This is John, just to add, there is a seasonality of who is doing renewing, and those sorts of things. But also in the non-renewals you're dealing with business failures and pay per clicks and we had the price increase and the economics for the per per clicks of how you get on ROI on a name. We think Q3 was a little unusual in the things that we saw, but we don't see anything that would indicate that we'll be outside our traditional range owl though we believe Q3 will be on the lower end of that historical range.

And one quick follow-up on the SSL business. You mentioned VeriSign ASP was down but you cited two large enterprise transactions. If you had not had those two large deals would the ASP around the VeriSign cert have been down?

Yes, the ASP would have been slightly up at that point. If we had not had those two in.

Thanks, guys.

We'll go next to Peter Cooper with Morgan Stanley.

Great, guys. This may be too stupid of a question to answer here. I notice in your questions you said $220 million from stock option exercising. You bought a lot of stock. Given the ongoing stock option investigation lot of employees had pent up stock desire shall we say? Are you comfortable we're past the rush of stock selling on the insiders and you might see more normalized activity and hence your buy-back activity may be more normalized going forward.

We had pent up demand. We were locked up 15 months. The stock price moved over 100% in that time period so there was definitely a big push there. We expect it to go back to a normalized rate at this pointer. We also have a catch-up with our employee stock purchase program, as well. So we expect the--those numbers to level off as we go forward. And we do expect to continue to buy stock regardless.

Okay. And that 95 million that is the purchase repurchase authorization remaining, is there an expiration on that?

There is not.

Thanks a lot.

Once again, please press star-one to ask a question. We'll go next to Katherine Egbert of Jefferies & Company.

Quick clarification, on outlook for Q4, does it include the loss of any lines of business for any revenue?

What do you mean by loss of--

Does it include anything you plan to divest?

No, we're giving you a number as is today without divestiture numbers.

Question for Bill, how are you doing versus you initially bought on kind of the strategic rationale of the company, especially along the fact there has been so many changes in the personnel? Do you feel like you're in track.

I feel we're ahead of track. When I came on board the team did a fair amount of the work already. They were ready. They have turned to the task well. I actually think we're a little ahead of where I expected to be. I don't think I had a particular time line in mind. You might note we accomplished a number of things. We completed the option review. We got our books and records up to date. We reopened our stock system. We did the share repurchase. We have added some staff members. We've completed substantially completed the strategic review of the business portfolio and now we're going into the action mode there. And we've continued to operate the company pretty much on track for the first three quarters of this year, so I'm pretty pleased with what we've accomplished. I will tell you that we got a lot of people working very hard, but I think very effectively, and very dedicated and committed staff and team and overall talent base within the company, so if you're asking how I feel, I'm actually pleased with where we are.

Okay. And then last one just quickly. How much leverage are you comfortable with?

We've really not talked about an optimal capital structure, or those type things, but we would just note we have a strong balance sheet, we have very good stable predictable cash flows, we have good businesses that, you know, have a lot of visibility in them. So a company like that should be able to carry a reasonable amount of leverage and services without, you know, running into problems.

And we also have 500 million line of credit that is on tap at this time.

Okay. Thank you.

Yes.

We'll go next to Phil Winslow from Credit Suisse.

Hi, guys, I wander to talk about deferred revenue quickly and what your expectations are for next quarter, and then when you do look longer term when you start to bake in the effect of the price increase but also do you see improvement in trends of ASPs of the certs, just how should we think about deferred revenue not just this quarter but potentially next year?

We think the deferred revenue will grow the way it has over the last couple quarters. Q1 is usually a strong quarter for our Registry business. So that will be, again, continued, but probably not as to the magnitude that it has been in the past as the new names have been running all year round a record at this point. So we do think that the price increase will kick in to the deferred revenue base here late in the fourth quarter and then going into the first half of next year before we see meaningful results on the revenue end but we're pretty confident the deferred revenue is going to continue to grow.

Great. Thanks, guys.

We'll go next to Walter Pritchard of Cohen and company.

Just one level of additional detail you can give us around professional services head counter. You talked about the head count being down. Could you quantify that for us year-over-year, I guess year-over-year is most meaningful in terms of how many it is down?

Yes, without talking about the specific numbers, let me tell you what the Charter Professional Services was for this year and that was to, you know, in addition to the professional services which enable some of the coms business, we have Professional Services which are in integral part of sales in the security side of the business, the MSS portfolio. So we rechartered them this year to move the big needle of the company looking for larger sales and increasing the average deal size that we had in those businesses. We've done a good job of doing that. Our average deal size is up both in the pipeline and in the things that we have booked. And we're starting to get out of some of the service offering areas which are pure Professional Services because the blended margins will obviously not be that acceptable. So the moving the big needle is the--is the objective that we have. So we'll continue to have Professional Services as the tail on the dog, and I think right now we've recalibrated that portfolio to be in line where we think it can make a bigger difference. So I think we're on track for what it's designed to do and we're on track with aligning it to the performance of the businesses that it is supporting. But I would expect that going forward that we will probably reduce the total numbers that we have in there, consistent with the portfolio moves that we make.

Got you. And is that part of the guidance for Q4? Is that something that is a longer term move into 2008 and beyond?

That is a longer-term move into 2008.

Okay. Last question around the executive changes. Who's--is there a plan to bring somebody else in external to fill in some of the product marketing and customer services roles that Mark McLaughlin had or are you filling them around with internal personnel.

There is no plan to bring in any additional executives in that area, one or more. We've got a good team here. John Donovan is stepping up to some broader responsibilities. Several other members of the team are accepting some additional responsibilities. We have a pretty good team here.

Once again, press star and one to ask a question. We'll go next to Scott Kessler of research.

Thanks a lot. I think most of my questions have been asked and answered but were you repeat the specifics about the executives, we'll have diminished roles in the company or leaving the company?

No one is having a diminished role. Bob Korzeniewski who has been heading up our strategic development area for I guess since about 2000, and prior to that, was with Network Solutions and before that with SAIC, has been desirous of slowing down for quite some time now. We've continued to encourage him to stay on board and it has come to the point where he would like to spend a little more time on personal and charitable philanthropic activities. In conjunction with being able to bring Kevin Werner aboard, Korzo will be slowing down, he'll still be with us on a part-time-time basis and we're looking forward to receiving contributions from Korzo. We mentioned mark was leaving for personal reasons. We're sorry to see Mark was leaving for personnel reasons, we are sorry to se Mark go, but we respect his desire to spend some more time with his family and to evaluate other opportunities that may come his way. Other than that, I would say that we've had people step up to additional responsibilities, including John, that I just mentioned, and there really aren't any other changes of significance. We've had some internal promotions. If you go back to shortly after I joined, Bert Clement, our Chief Financial Officer is an internal promotion and Marie Law our head of HR is an internal promotion. And so we've had a few things like that. But we've not, there is--there really hasn't been that much movement.

All right. Thanks. My second question, involves--I guess this is kind of been touched upon but I wanted to explore it a little bit more. I was surprised, frankly, when I saw the news you guys were doing a debt offering and accelerated repurchase largely because you already had a pretty strong cash position at that point. Especially given the status of the credit markets, I'm wondering kind of what contributed to that activity. Obviously, we all know that you were forestaller from repurchasing stock for extended period of time. But if you look at the outstanding shares say in Q2 versus this quarter I think as was alluded to, it actually went up. Obviously you're guiding for notable decline but I wonder is it just a notion that you want to do deploy your cash and didn't see any other internal or acquisition opportunities? Thanks a lot.

This is Bill, let me take a shot at that. If Bert wants to jump in, he can. Several questions I think embedded maybe part of your question is why didn't we use existing cash versus the debt offering. We thought it was a unique window in the market in the structure of the particular transaction that we used is very, very efficient. It is very low-cost capital. The net-net of that transaction was to materially lower our weighted average cost of capital. That was part of that. We used substantially all of the proceeds for repurchase that we made in conjunction with the transaction or co-linked says that we fixed the price at which we would pay the shares. So there was a decent arbitrash there. We do still have, as noted, excess cash.

We have borrowing power and have great cash flows and so that should be taken as a signal that we will continue to take that money and either invest internally in new product development and so forth or make acquisitions, if we can find meaningful acquisitions that fit our strategy, and we can--we can be assured we'll get a good risk adjusted return on them. And that that cash or cash flow left over after that we intend to continued to deploy methods to return that to our shareholders does that cover your question?

I guess I was wondering, I think it was touched upon but you saw sequential outstanding shares.

Let me touch that one, too. The third quarter is net share issuance. That's the time of the year doing our equity round, large number of employees participate in equity programs, both non-qualified stock options as well as RSUs, and so in the third quarter there is a fair amount of issuance typically in connection with that and then we also this particular third quarter had the factor that Bert already mentioned and that was having been sort of out of business, if you will, for 15 months. There was this backlog of employee stock option exercises and ESPP catch-up and so forth.

So that would have happened, whether we bought stock back or not. In the third quarter. Really the repurchase just helped minimize that and you'll see us return to being a net purchaser, I believe, on shares--or you'll see shares outstanding going down quarter to quarter from this point forward.

Okay. Thank you.

Take our last question from Shaul Eyal of CIBC World Markets..

One quick question on the ISP front. The growth that you have seen in the addition in new URL and website, can you quantify for us, kind of from a geographic perspective, where it is coming from mainly?

Yes, well, I mean, there are a number of geographies that are doing well, but if you look at the international expansion we have right now, it is growing faster than the overall rate in China and Germany. Our two areas right now where we're getting substantial growth.

Got it. Thank you very much.

We have no additional questions at the time. I'd like to turn the call back over to Mr. Ken Bond for any further remarks.

Than you, Operator. We anticipate that our next quarterly conference call, which will reflect fourth quarter 2007 results will be held on Thursday, January 31, at 2:00 p.m. Pacific time, 5:00 p.m. Eastern time. Final confirmation of this date will be provided the first business day after the close of the quarter on January 1. I would also like to remind that in light of Regulation FD, VeriSign plans to retain its long standing policy to not comment on its financial guidance during the quarter unless it is done through a public disclosure. Please call the Investor Relations department line with any follow-up questions following this call. Thank you for your participation and continued support. This concludes our call, thank you and good evening.

This concludes today's conference. We thank everyone for their participation and you may now disconnect your lines.