威瑞信 (VRSN) 2008 Q3 法說會逐字稿

Good day, and welcome to the VeriSign Incorporated third quarter 2008 earnings conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Ken Bond. Please go ahead, sir.

Thank you, Jennifer. Good afternoon, everyone. Thank you for joining us for VeriSign's third quarter 2008 earnings conference call.

I am Ken Bond, Vice President Investor Relations and Corporate Communications and I am here today with Jim Bidzos, Executive Chairman and Interim President and CEO of VeriSign, along with Brian Robins our acting Chief Financial Officer. A replay of this call will be available beginning at 5 p.m. Pacific time via telephone at 888-203-1112 or 719-457-0820 for international callers and will be available through November 12th. The passcode for both numbers is 3410716. The press release and financial information discussed on today's conference call is available on the investor relations website at investor.VeriSign.com, the Q3 2008 press release is also available on First Call, Market Wire, as well as our website. For those of you joining us via webcast, we also invite to you view the slide presentation which accompanies today's conference call. These same slides will be available for download from the website after the call.

Financial routes 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 the risks and uncertainties that we discuss in detail in our documents filed with the SEC. Specifically, the most recent report on form 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 the forward-looking statements. Additionally, financial results in today's press release and the matters we will be discussing today include non-GAAP measures used by VeriSign. Our non-GAAP income statement and a description of items excluded in our non-GAAP financial information is located on the VeriSign Investor Relations website as well. Also let me quickly mention that we expect to file our 10-Q no later than next Monday.

As a reminder, our analyst day originally scheduled for November 12th, has been deferred to 2009. In a moment Jim and Brian will provide some prepared remarks, and afterwards we'll open up the call to your questions. Unauthorized recording of this conference call is not permitted, and with that I would like to turn the call over to Jim. Jim?

Thanks, Ken. I am pleased to report that our core businesses had a very solid quarter in what are certainly extraordinary times. Like most, we never would have predicted the markets and our own stock would have turned down as much as they have. However, even with the heightened uncertainty around global market conditions I feel very good about our business which I will discuss in more detail later on the call: I would like to start with a brief overview of our financial results, which Brian will discuss later in greater detail, followed by a review of our business and operating results from the third quarter. From there, I would like to touch on areas we believe are particular interest to investors based on conversations we've had with shareholders, including how the current economic environment has the potential to impact our core businesses, an update on our divesture activities as well as our executive search currently under way. Brian will then discuss the financial results for the third quarter, and provide limited guidance before we move to the Q&A portion of the call.

I am pleased to report that our core businesses had a very solid quarter. Revenue for core businesses was $240 million, which was at the higher end of our revenue guidance of 236 to $241 million. We also saw continued improvement in our core operating margins which came in at 35.5%. Last November, we set the goal of improving our operating margins to 35% or higher by the end of the year. So we're very pleased to have achieved this goal a quarter ahead of schedule. Non-GAAP earnings per share was $0.25 and includes a $0.03 charge to EPS for a writedown related to investments affected by the Lehman Brothers bankruptcy. Excluding this charge, EPS would have been $0.28 compared with the consensus estimate of $0.26. Brian will discuss this further during his comments. Q3 was also a solid quarter for businesses we intend to divest, as these businesses delivered bottom line results as we expected, making for a solid quarter all around. I would like to thank all of our employees for their focus and continued commitment to VeriSign. While not technically a part of Q3 results, last month we closed the sale of our remaining 49% interest in the Jamba joint venture to News Corporation for approximately $200 million.

Moving now to a business review of our core businesses for the third quarter, I would like to start with naming. Our naming business continued to show good growth with the adjusted zone for registered names in dot-com and dot-net totaling 89.4 million names at the end of the quarter, an increase of 16% year-over-year. In total we processed 6.9 million new domain name registrations during the quarter, compared with 7.5 million names during the same quarter last year. The decline was largely expected, as new name registrations and renewals for online advertising were down sharply from year ago levels largely reflecting changes in Google's AdSense program. As a result, online advertising now represents 8% of the adjusted zone down from 9% last quarter. As a reminder, Google modified the smart pricing feature of its AdSense program in June, which impacted the profitability of web pages in the program. We now expect that the renewal rate for names related to online advertising will be lower well into 2009 as the impact of Google's program changes fully work through the adjusted zone. At the same time, we're also feeling the effects of lowering internet advertising spending in general, while the specific data points vary among research reports, the theme that internet advertising growth has slowed dramatically this year and will likely slow again next year is consistent, and this affects our naming business. As a result, the percentage of new name registrations represented by online advertising was 6% this quarter, down from 9% last quarter, and down from historical highs last year.

Turning to traditional names, which now represent 92% of the adjusted zone -- new name registrations during the third quarter were approximately 6.4 million, 2% lower than the same quarter last year. We monitor registry activity on a continuous basis and the October registration activity for North America in particular has also been a little lower than what we would expect to have seen. On a net basis, we added 2.1 million names to the adjusted zone this quarter, including a net increase of 2.7 million traditional names and a decline of 600,000 on line advertising names as we expected. As registrars forecast that economic conditions will contribute to lower than expected growth rates, coupled with continued weakness in on line advertising, we are internally forecasting the adjusted zone will increase 1 to 2 million names during the fourth quarter. Even as we're seeing declines in on line advertising, and some signs of possible slowing in traditional names within North America, we're also seeing continued growth in international markets, markets where we focused efforts to develop regions for growth potential in both dot-com and dot-net over time. While overall growth may be slowing, we note that the growth of the adjusted zone is consistent with all other TLDs on a combined basis, excluding China, which is offering domain names at heavily subsidized prices.

The renewal rate for Q2 was 73%, down from 74% in Q1, due to the transition currently under way in on line advertising. While renewal rates are not fully determinable until 45 days after the end of the quarter, we believe the renewal rate for Q3 will be 1 to 2% lower, almost entirely attributable to the transition in on line advertising and the exit of a few large on line advertisers, some in response to industry litigation. As a reminder, on October 1st registry fees for dot-com and dot-net names increased by 7% and 10% respectively to $6.86 and $4.23 per year, which at these prices we believe continues to be an outstanding value.

Finally, our internet infrastructure continues to operate at ever increasing levels, and recently we saw peak loads of over 50 billion DNS requests per day, as our systems again demonstrated that VeriSign's capability of operating global networks at this scale and reliability remains unparalleled, due in large part to our continued investment in infrastructure such as project Titan. As a reminder, no one else has operated a global network infrastructure of this nature at this volume level with 100% up time over the last ten years, even as we remain the most attacked global network on the planet.

Moving to our security services, our second core franchise, SSL saw the install base tore this quarter increase to 1.095 million certificates, compared with 1.056 million last quarter and 957,000 the same quarter last year. We're very pleased this growth represents 4% sequential unit growth and 14% year-over-year growth in the base. Third quarter SSL revenue increased 12% year-over-year and the annualized average unit revenue. or AUR. for the installed base of VeriSign, GeoTrust and Thawte branded certificates was down slightly to $253 from $258 last quarter. The lower AUR reflects the continuation of product mix shifts, which we discussed last quarter as GeoTrust continues to grow faster than the overall portfolio.

Looking forward, we expect that Geotrust will continue to grow faster, meaning we expect to see further AUR declines as unit volumes grow faster than revenue. While still a small portion of our SSL business, extended validation or EV certificate sales continue to be strong as we more than doubled the units sold a year ago and we remain the number one provider of EV certificates with market share of over 75%. However, as discussed last quarter, we continue to see the effect of the economic slowdown on EV adoption as large scale customers again ordered less than what we expected. We will likely see the mainstream adoption of EV certificates pushed out until we see improvements in the broader economy. This quarter we also began to observe a subtle shift in buying patterns within some large scale customers, as we're seeing smaller but more frequent orders than we have in past periods. While this does not appear to have directly affected the overall usage of certificates, it does suggest that our customers are managing their certificate requirements carefully. It is another example of how the weakening economy has the potential to affect our business. Should this trend continue, the net effect is that some portion of certificate sales to these customers is being deferred, which could cause SSL revenue growth to be slightly lower than the double-digit revenue growth we discussed in the past. Again, should this this trend continue.

Now I would like to share comments on the progress of our identity and authentication services business. Within IAS, we have now distributed more than 2 million credentials as part of the VIP and one-time password programs. While we're optimizing our market approach to reflect current economic conditions, we believe many strengths provide the potential for IAS to become our third core franchise. I would now like to comment on some areas that we believe are of interest to investors, including how the current economic environment is affecting our core businesses, an update on our divesture activities, as well as our executive search currently under way. Over the last 90 days we have been observing the financial crisis as is unfolds and we're constantly assessing how VeriSign is being affected. I want to be clear and acknowledge the obvious. Our businesses, as long with virtually every business, is being affected by broader market conditions. The divesture sales process has been slowed, mainstream adoption of EV certificates has been pushed out, and we've seen some effects to our naming and SSL businesses which I will discuss in a moment.

In helping investors better understand how the changing markets could affect VeriSign, I would like to share some insight on what we see as being risks and opportunities. While we do not see each and every risk materializing into reality, we do recognize that given the current environment, investors want to understand the range of possibilities. Before discussing what we see as some of the general risks, I would like to comment on what we see as opportunities. Our strategy as we shared it with you in the past, remains unchanged as we're focusing the Company to grow our core businesses while exiting a number of good but nonstrategic businesses. We believe the strategy along with the focus on improving our capital structure will provide for better shareholder value over time. Our core businesses are growing, with revenue growth of 18% year-over-year this quarter. Operating margins are expanding and this quarter we achieved our year end target of a 35% operating margin a quarter ahead of schedule. The balance sheet is strong with over $650 million in cash and investments, plus another $200 million from the Jamba sale and a proven ability to generate positive cash flow with cash flow from operations of $115 million this quarter.

We recognize these are difficult times, and while many companies will struggle to weather the downturn, we expect to strengthen our competitive position. We will be aggressive and leverage our financial strength to compete vigorously in our core markets, and we expect we will make investments to stimulate growth in our core businesses and adjacencies. Let me be clear that I am not signaling a return of active M&A as a means to bring growth. Likewise, I am not suggesting these investments have any serious or detrimental effects to our commitment to improving operating margins. In the past we've discussed marginal investments to further grow in our core businesses and adjacencies. This is what I am talking about.

In summary, what I am saying is that the strength of our balance sheet and consistent cash flow should allow us to continue investing in our core and adjacent markets, even where there may be no capital available. Not all companies are in the same position of strength, including some of our competitors, and are being forced to cut people and investments just to survive. As a result, we're in a position to do what others cannot do, especially should we see an extended downturn. Moving now to a discussion of areas which we see as potential risks, as we previously said, the weakening economy has impacted the divesture process as well as having some effect on EV adoption. With the further weakening of the economy, it should come as no surprise that we continue to feel these effects.

Looking further into our core businesses, we also see some risk that the growth of the traditional name portion of our naming business could flow. During the month of October, we observed some softness in new name registrations of traditional names in North America. While we're working this issue actively with registrars, we should be clear that this is only one month of activity for one region in which we operate our registry business. As discussed earlier, the on line advertising portion of the naming business, which accounts for 8% of the adjusted zone, is seeing pronounced weakness due in part to changes in Google's AdSense program and lower spending trends in internet advertising. Our naming business also has opportunities which we're continuing to develop, including the extension of dot-com and dot-net to international markets such as India, China, and Latin America. Additionally, over the next couple of quarters, we expect to bring to market new services which leverage our existing capabilities and experience.

Returning to our SSL business, the main effects of the economic slowdown is a slowing of EV adoption and more recently the emergence of a subtle shift in buying patterns with some large scale customers, which I mentioned earlier. While there is some risk around the up take of EV certificates, we believe that mainstream adoption is just a matter of time as customer feedback has been consistent and clear about the benefits of EV certificates. One area of risk that we believe is given too much credit is whether we're seeing any signs of cannibalization to our VeriSign branded certificates in light of the declining AUR. The reality is that we're seeing good unit growth across all brands, and the AUR decline is simply a matter of lower priced certificates selling faster than high-end certificates. Our market share with high-end VeriSign certificates is very strong, and growth here is a function of segment growth as well as our ability to up sell from Thawte and GeoTrust brands to VeriSign, more so than market share gains. Thawte and GeoTrust brands are targeted to mid and low end segments of the market, where our market share is not as strong, providing what we believe are good growth opportunities as these markets are growing faster than the high-end market and also leave room for market share gain.

Finally on SSL, we continue to see good growth opportunities for all certificate brands in international markets. Our IAS business is still in the early stages of growth, making it difficult to know what effects if any the economic environment is having on this business beyond general market trends. In summary, while it is difficult to know with certainty how the current deteriorating economic conditions will affect our core business on an absolute basis, I feel very good about the opportunities we have as well as our performance on a relative basis.

I would like to now turn to the current status of our divesture efforts. As we discussed last quarter, our divesture effort is the primary area where we're feeling the effects of the economic downturn. While there continues to be good interest in the remaining businesses being divested, the sale process is taking longer and proving to be more complicated than we originally anticipated. Consistent with comments from last quarter, buyers are taking more conservative postures and more recently credit market issues are impacting some deals making it difficult to bring deals to closure. The good news is that we have already sold five smaller businesses including content delivery services, retail data solutions, digital brand management services, self care and analytics, communications consulting, plus the remaining interest in the Jamba joint venture. Collectively, the net proceeds from these sales has been approximately $275 million.

While we have not yet sold any of the major bundles we are making progress in focusing the Company on our core businesses. There remains some possibility that we may be able to complete a transaction on one of the major bundles this year, but our experience last quarter reminded us that getting close to completion is not what matters. As a result, we continue to actively work with potential buyers and remain cautious in our expectations around timing. With that in mind, I would like to reaffirm for you all that our strategy to divest non-core businesses and focus on core businesses built on internet infrastructure services the right course of action. In these difficult times it would be easy for us to second guesses ourselves but when the going gets tough the tough keep going, and we will keep going until we completed the restructuring we set out to do including the divesture of all non-core businesses and reducing the shared services costs to fit the new smaller size of the company. As Brian will discuss later, our disciplined management of non-core businesses again led to solid operating performance. We will continue to maintain our disciplined management approach through the current transition and beyond.

Finally I would like to provide a quick update on the search for a permanent CEO. Since last we we retained a search firm and spoken with a number of candidates. In general we've been pleased with the quality of candidates. However, the search process has confirmed what we knew as we began the pros. The nature of our business requires a diverse set of skills as the naming and security businesses have striking differences between them. Additionally, the challenge in managing businesses on each side of the country has become even clearer.

As we started this process in August, we decided it was most important that we find the right candidate. We believe that given the complexity of our businesses, our priority is the right one. I am actively engaged in the management of our business and I am committed to staying here as long as it takes to find the right candidate. In light of the executive turnover we have seen over the last year I can appreciate the desire to see a new permanent CEO named. However, in addition to us waiting to find the right candidate, I think it is important to keep a couple of points in mind. First is that we're on our way to becoming a much smaller company. While we have seen a number of management departures over the last year, it has not been our intent to fill all those vacancies as they're not needed as part of the company's smaller footprint. Second is that the leadership of our three core businesses continues to be very capably managed by leaders who collectively have almost 30 years of experience with VeriSign and each having been here at least nine years. Between myself, these core leaders and remainder of our senior leadership team we continue to drive the company forward in the execution of our strategic plan. As we said before, 2008 is going to be a very interesting year with a lot of moving parts. Obviously with the markets as they are we're seeing the divesture timeline extended somewhat, but our belief that VeriSign will be a leaner, meaner, more profitable as well as better positioned company for future success remains unchanged.

We remain focused on protecting and growing our core businesses, executing on the sale of non-core businesses and right sizing our business once the divestures are complete. The importance of executing on planned investments in an expedient manner remains a top priority and we remind ourselves that while these events are important, the key to unlocking shareholder value will be driven by what happens in our core businesses more so than the timing or sales proceeds of thon core businesses. I would now like to turn the call over to Brian for a walk through of our financial results for the third quarter as well as guidance. Brian.

Thanks, Jim. Thanks to everyone for joining us this afternoon. Before we dig into results for the core businesses, I would like to provide a few comments on those businesses we intend to divest especially in light of the current macroeconomic environment. As Jim discussed, we remain committed to our strategy to focus the Company on internet infrastructure services and divest of non-core assets. However, as discussed last quarter it will take more time than we originally anticipated due in large part to the broader market conditions. Likewise, the completion of transition services will be further out than we originally anticipated. In the meantime, we continue to manage these businesses with great diligence under our divide and focus management strategy. While there has been some slowing in the non-core businesses, our disciplined management approach has led to the bottom line resulting being on track with plans.

From a reporting perspective, we continue to move those businesses we intend to divest into discontinued operations. This quarter the messaging and post paid billing businesses were moved into discontinued operations. As a result, only a couple of small businesses we intend to exit or divest now remain in continuing operations and in aggregate these businesses accounted for approximately 6 million in revenue this quarter. Last quarter we discussed our intention to obtain audit carveout financial statements for the enterprise security services and messaging bundles. In addition to the previously completed audit of the communications bundle. We have now completed the audit for enterprise security services, and we expect to have the messaging audited complete in the first quarter of 2009.

Moving now to a more detailed discussion of results for our core businesses. Q3 was another solid quarter. Revenue of our core businesses came in near the high-end of our guidance at 240 million up 3% sequentially and up 18% year-over-year. Core was largely driven by continued strength in our core businesses with naming up in excess of 20% year-over-year and SSL up 12% year-over-year.

Turning to operating margins, as we continue to exercise financial discipline in managing our business, we're seeing the operating margin improvements as reflected in non-GAAP core operating margins of 35.5% for the quarter, achieving our year end target of 35% or higher operating margins a quarter ahead of schedule. This represents an incremental improvement of 130 basis points from last quarter and improvement of 520 basis points from the first quarter. Non-GAAP cost of revenue and operating expense for the core business were 155 million, up slightly over 1 million on an absolute basis. We continue to grow revenue faster than expenses, and in this quarter we again benefited from lower labor costs. Both direct and contingent workforce consistent with the continuing trend of head counted reductions. Additionally, equipment and software expenses were lower this quarter due to favorable contract renewals. As expected, we saw an increase in competition and operational expense associated with the startup of Delaware data center and lease expenses associated with the leaseback of buildings here on our mountain view campus.

Below the operating income line we incurred a known GAAP loss of approximately $15 million which represents a significant increase over prior quarters. As Jim discussed earlier, we incurred a charge of approximately $8 million or $0.03 earnings per share due to the investments in the reserve money market funds whose net asset value fell below $1 per share due to Lehman Brothers holdings. The impairment charge represents less than 2% of VeriSign's cash and investments as of September 30th, 2008. While the ultimate amount of this loss may change, we currently expect to recover the very large majority of our investment in the reserve funds and we expect we will have more than sufficient liquidity to fund our operations in the near term.

Non-GAAP core net income for the third quarter was $48 million, resulting in non-GAAP earnings per share of $0.25. Excluding the impact from the charge to other income, we would have reported earnings per share for the third quarter of $0.28. This is $0.02 above consensus as a result of solid revenue growth and disciplined expense management. The diluted share count use in EPS calculations was 196 million shares down from approximately 203 million shares last quarter. The decline in shares is due to 4.9 million shares being repurchased with a remainder of shares being fewer common stock equivalents included in the diluted share count. Moving onto the cash flow and balance sheet items, both consolidated operating cash flow and free cash flow were strong this quarter coming in at $115 million and $96 million respectively. There were multiple drivers this quarter including continued strength in the core businesses and favorable working capital trends. Consolidated capital expenditures this quarter were $19 million as compared to 34 million in Q2 and 26 million in Q1. Roughly 79 million year-to-date. As we noted last quarter, in July we brought on line the new data center in Delaware.

Our ability to consistently generate solid operating cash flows resulted in our maintaining a strong bam sheet with ending cash, equivalents and restricted cash of over $654 million, down approximately 14 million $14 million from last quarter. The decline in cash was due in part to the share repurchases of $120 million. Also, early in the quarter we repurchased approximately 3.5 million shares, additionally as the ASR was completed in July we also received an additional 1.4 million shares as part of the final settlement. In total since resuming the share repurchases, we have repurchased nearly 74 million shares and reduced a common shares outstanding by 30%. Net DSO for the third quarter was 35 days, down from 41 days last quarter as a result of increased collections from certain telecommunications customers. Deferred revenue ended the quarter at $798 million, up 17 million or 2% from last quarter. The growth in deferred revenue stemming from our core services continues to be strong. We saw year-over-year growth of 18%.

We ended the quarter with approximately 3,650 employees, down 150 from last quarter largely due to planned head count reductions and divestitures. As we've indicated previously, we would expect head count to continue to decline with the sale of non-core businesses and further reductions and shared services head counted. Moving now to guidance. This quarter we will again provide guidance for our core businesses which are naming, SSL and IAS. As a reminder, our guidance includes VeriSign's opinion given its focus on SSL and S services. However, before providing guidance for Q4, I would like to share with you how we're managing our business in these challenging economic times. While the final outcome of the current economic environment is beyond our control, there are several actions we have and will continue to take toward the goal of continuing the expansion of our operating margins.

As a part of the restructuring of the company, we've already taken steps to reduce over head in shared services costs. We're being aggressive on a number of fronts with typical focus on our head count which is at the core is the single largest cost factor in running the Company. Since the beginning of the year we've already reduced head count by 640 people and by continuing to aggressively manage head count we earned a position to align our cost envelope with revenue projections. Likewise, we're able to take similar actions around project expenses given us a good degree of confidence in our ability to meet or objective of improving operating margins over time. Jim discussed the financial strengths of VeriSign earlier, as where the strengths matter most as we work to make the investments we need to further future growth yet still meet near term objectives.

Moving to guidance for the fourth quarter. For Q4 we expect revenue for the core businesses will be in the range of 242 to $247 million reflecting year-over-year growth of 14 to 16%. Adds discussed for some time we expect Q4 non-GAAP operating margin will be 35% or higher. We also expect aggregate of items for the operating income line will be similar to this quarter's results excluding the $8 million charge discussed earlier due to continued expectations that interest income will be lower this year on both lower cash balances and interest rates. Finally, we now expect the fourth quarter fully diluted share count will be approximately 196 million shares. Looking further into our Q4 guidance, we expect we will meet our full year revenue guidance calling for growth of 18 to 20%. This quarter we've already met guidance calling for 2008 exit rate operating margins of 35% or higher than we expect to repeat this performance in Q4. We've already reduced the share count below 200 million shares as projected.

In total, we're pleased as we met our appeared to be on track to meet all the full year financial targets discussed last November. We're achieving these results in the midst of a weakening economy and without the benefit of having a completed for sale of any of the major bundles. We remain committed to the sale of the non-core businesses and we look forward to the time where we will see the benefits of these sales in our operating results. As a reminder, our normal practice is to provide guidance one quarter at a time. However, given the macroeconomic uncertainties and heightened investor concerns, we think it makes sense for us to provide some initial comments to bracket revenue growth for 2009, In general, we feel good about our business. We also recognize that we've already seen some effect to our business from the weakening economy as discussed earlier. It is not clear whether we'll see more. As a result, we believe the 2009 revenue growth will be lower than this year but still in double-digit range. In summary, we're very pleased with our business execution in the third quarter, particularly as it relates to revenue growth from the core business, as well as non-GAAP operating margin expansion. We remain focused on executing our strategy as we clearly see that this is the key to further unlocking shareholder value, longer term.

We'd now like to open the call for your questions. Operator?

We'll take our first question from Todd Raker with Deutsche Bank.

Hey, guys, how are you?

Good, Todd. How are you?

Good. Two questions for you. One, if you guys could just talk about your appetite for stock buyback with the stock here versus conservatism in the markets we face, and then secondly on the DNS side with the pretty broad guidance range hereof 1 to 2 million net adds this quarter, if we look into '09, what's the likelihood you could see net adds go below a million a quarter in '09? Do you think that's a good baseline based on what you've seen in the October month?

This is Brian. I will take the buyback. As you know, we currently have $1 billion authorized. Also the process of buying back shares can be limited when we're in possession of material nonpublic information, so, for example, we had the Jamba JV last quarter which is a good example. Over time we're extremely committed to improving our capital structure, and we're taking a conservative view to cash management in light of the liquidity crisis now in the macro economy.

Todd, it is Ken. I will jump in on the second part of that question talking about the possibility of 1 million names or lower going. To be really honest with you that's really hard for us to call. What we really want to do here in this call was give you a good view of what we're seeing not only for Q3 but you heard some of the comments that Jim and Brian made about the early part of the quarter, specifically October. Seeing a little bit of softness there in North America specifically. We want to be very careful here to not try to extrapolate that one data point does not make a trend, so this is hence some of the background behind why we've got the guide answers range at 1 to 2 for next quarter. I think what we really need it do is see a little bit more time unfold here and get a sense whether or not the macro effect is coming in or whether or not this is just a one-quarter blip. Jim, anything further?

Hi, Todd, it is Jim. I would add to that there is a couple of different moving parts here. One is of course the advertising names, which we know are being essentially flushed out of the system which will take a few more quarters. We can expect to see some advertising name decline. The small decline, the 2% decline that we had in the so-called normal names is much smaller, and I think that business is obviously nowhere near, that part of the business is nowhere near volatile, and much more predictable and stable. So how those two wash out is really hard hard to predict. I think we need more data before we can say that. Obviously anything is possible, but I think once these advertising names wash out, actually the ability to forecast and predict the business will improve dramatically.

Thanks, guys.

We'll take our next question from Phil Winslow with Credit Suisse.

Hi, guys. Just want to focus on the expense front for a little bit, especially when you started to think about next year. You mentioned growth coming in it'll a slower than this year, but how should we think about operating expenses in light of just the macro uncertainty, especially as you do just continue to grow the high profit margin businesses?

Hi, this is Brian. On the expense side as I alluded to in my prepared comments, we have the ability to control our expenses, and what we've done internally is make sure we have revenue attainment before we actually spend the dollar, so we're actually trending below head count now on wait and see mode on the macroeconomic, and as we invest in new projects, we'll do milestone based spending. From a margin perspective and then this year 35% or higher and you can expect that or higher next year.

Great. Thanks, guys.

Next to Garrett Bekker with Merrill Lynch.

Hi. Thanks for taking the call. Just wonder if you can drill down a little bit into the operating margins, there's a number of moving parts in there. You had the least expenses and the icon fees, just wondering if you can give us a little bit more color on how you got to that and how we should think about that going forward?

This is Brian. Similar to the prior comment, we've been able to achieve the 35% operating margins a quarter early, and that was really when we originally planned that, the assumption was that we would have some of the divestitures completed by now. So the divide and focus strategy that we put in place about three quarters ago has really been paying dividends. Each of the individual businesses has been performing at or better than planned, and we've been able to extract more costs out of the business quicker than we originally anticipated. As I also discussed in my prepared comments, there was a couple things that came on line this quarter that were new expenses that weren't in prior quarters. One is the Delaware Data Center came on line, and that was an increase of approximately 1.5 o $2 million a quarter, and you can expect that on an ongoing basis. Additionally, we reported last quarter that we sold two buildings in the Mountain View cam campus, so we have about $1 million quarterly increase for the sale of those buildings because we did a two and a half year leaseback. Also last call I mentioned that had the ICANN fees have gone up slightly. There is a number of new fees coming on line, but we're managing the variable costs to really deliver the margins that we delivered this quarter.

Thanks.

We'll take our next question from Sarah Friar with Goldman Sachs.

Thanks for taking my question. Can I come back to the guidance because it still leaves a lot of room for us to go off and interpret differently for 2009, so you say growing double-digits but less than what you grew this year. That would still be a range from 10 to 18. Could you help put your arms around a little bit if the environment stays like October, so call that kind of the kind of base case or perhaps base to worst case, is that 10% type growth, and then if we start to see some improvements, that's where we would get into the mid-teens, I would just love to get more color about how you're thinking about that.

Hi, Sara. This is Jim. Let me take a shot at it. First of all, October I think is not enough data for a number of reasons. You have to realize and I think you do realize there are a lot of different factors at work here, a lot of parallel major influences. Even if we assume that the economic slowdown sort of stayed at the rate that it is at, it really depends on a number of other factors besides that. For example, advertising names play a very, very large role in this. The impact that far we can't quite see yet. The financial sector is a very, very large part of the market for our certificate business.

How they continue to do will make a very large difference in how that particular business performs. Last quarter I talked at great length about these marginal investments that we were going to make in the core and core adjacencies. We have made those. We continue to make them, and we expect that they're going to help us to continue as we talked about last quarter to add to sprinkle growth into those core businesses that we want to do because they're so profitable. It is until all of that comes together, a month's worth of data just isn't enough for us to feel comfortable giving you anything more to essentially be a projection even based on the assumption that the economic conditions continue just as they are.

Sara, just add a little bit of color on that, however, given the environment we had a choice either to provide some element of discussion or stay quiet on this. We felt given the circumstance is environment it would be more appropriate for just to give you a little color, it is a wide range. We recognize that, and that's reflective of the environment. Again, the bracketing here is just so that people don't get nervous and start calling for things to be lower than they really should be. Last quarter as an example we talked about domain name growth and thought that might be the same range or lower. We want to make sure by bracketing domain name growth this quarter we said 1 to 2 million and we don't want people running off for example, saying domain name growth might be only a half a million names.

Makes sense. When you look into '09 from a margin perspective clearly you're seeing expansion. How much of that are you able to almost front line costs, keep taking heads out of the organization and so on versus getting the fact that you will see double-digit growth, get leverage of the top line, is it kind of 50/50 or trying to get a sense for a slower growth how much more margin we would still get versus higher growth.

This is Brian. 50/50 is a good split. There is a number of things to do to take costs out of the business. As we alluded to in the past as we complete divestitures due to accounting standards, there are some costs that are shared currently today that will go away, and as we continue to look to streamline the smaller footprint of the company. Also, as you alluded to the revenue growth will also provide increased margin so is very helpful. Thanks a lot.

Our next question comes from Rob Owens with Pacific Crest.

Good afternoon, everyone. As you talk about these advertising related names washing out never the next year, is it going to take all of 2009 or should we see a more pure base in the back half of 2009 and that being said, what are your thoughts on retention? Half, less than half of the names of the 8%?

This is Jim. First of all, at the time that Google made their change in June, the effects were almost immediate. They started to roll in in July. We started to feel them then. Basically pushing that out twelve months, I think the answer to your question is that the latter is more true, that we should start to see a more advertising name free adjusted zone towards the latter half of 2009. We won't have to wait until the end of the calendar year in order to see how that shakes out. Based on some analytics we do which we think are fairly comprehensive and accurate at this point we identified about 8 million names we think are advertising names. Last quarter when we talked to you we made what we thought was a conservative estimate that roughly half of those names, 4 million, would wash through the system over the following four quarters, putting us roughly just past the midpoint of next year, and we haven't changed our thinking on that.

Most of those names were one year in duration to begin with?

As the nonperforming names, essentially the changes in the AdSense program incentivized the domainers to basically remove the nonperforming name from their portfolio which translates into don't renew them and so it will take roughly four quarters to wash all of them out.

That's correct.

Right.

Thanks, Rob. Anything else?

Nope. Thank you.

We'll go next to Walter Pritchard with Cowen & Co.

Two questions. One, just on the CEO search, Jim, are you finding it easier or harder versus three months ago just given the environment to attract the kind of candidate you're looking for?

I will give you maybe a more detailed answer to that question that you maybe looked for. It was a little bit easy at first. We had initial candidates, and then it slowed down as the economic impact was felt, I think people basically settled in and said I need to see what happens and where things go. I suspect that as it does settle down and if it is a prolonged downturn, people will come to understand that, and I think that VeriSign is a company with a very, very strong balance sheet, good strong core businesses will be a very attractive place for the very best candidate, so kind of slowed down a little bit, but I expect it to get easier.

On the naming side of the business, you mentioned you're seeing some starting softness in the new names on the core side. Are you seeing any change in the renewal rate of those core dot-com, dot-net names?

We mentioned we expect the renewal rate to come down a point or two.

That sounds like it is related to advertising, right?

I think that's the majority of the impact. We have to remember, too, the change in new names for the so-called normal names is nowhere near as dramatic as it is for advertising. Given what we see in advertising, I think you can see the changes in the renewal rates should be very small.

Thanks a lot.

We'll take our next question from Steve Ashley with Robert W. Baird.

A couple questions. First of all, Brian, at the end of the year you were hoping to realize about $40 million of shared service expense benefit. Was all of that realized in the third quarter or is there still some incremental element of that $40 million to still be realized in the fourth quarter?

Most of that was, we've been realizing that quarterly and taking it out on quarterly basis, and we will continue to remove shared services costs throughout the year. As I said in my prepared remarks, we're down over 500 head count for the year, and as we continue to sell off businesses and consolidate the shared services, we'll continue to extract that out.

Okay. Can you tell us what the revenue was from the discontinued operations in the period?

Yes. So the core operations was $240 million. The continuing operations that was in the core was $6 million. The discontinued operations, let me pull it up real quickly.

Our next question is from Rob Sanderson with American Technology.

Hi, thank you, I guess we will have to get back to the answer on the other one there, but my question was stock repurchase, Brian, I think you mentioned 3.5 are repurchased in October after the close of the quarter and another 1.4 from the ASR. First, did I get that right and what was the average price on that?

That is correct. Before I answer that, the $143 million was from discontinued operations, Steve, we got cut off. So you are correct, 3.5 million was from the share repurchase, and we had an additional 1.4 million shares from the ASR. The price on that was -- the average price was 34.91.

Thanks, and I think you mentioned your appetite and the balance was increased cash discipline given the current environment. I think 650 million on the balance sheet and generated about 150 from operations in the quarter. Would you see any reason why you would want to carry a greater cash balance than you have now or what are we talking about with respect to cash discipline here?

Just to quickly correct, $650 million in cash now plus the $200 million that we received from Jamba and it was actually 115 million in cash flow for the quarter.

Right, so 850 plus 150 in ops, but what's the right cash balance to carry given the current environment?

I think you see a lot of companies going to cash is king because the liquidity crisis is out there and folks are being more conservative. I think I would probably turn back to our business model. We accrete a lot of cash on a daily, weekly, monthly, and yearly basis, so there is not a need to carry that much cash. When we look to deploy our cash, first and foremost, we look to do it on a risk adjusted basis as Jim said, and investing back into our core products and leveraging the vast infrastructure that we currently have today. As we have done in the past, and we continue to evaluate returning cash to shareholders as well through stock repurchases.

Great. Thank you, gentlemen.

We'll take our next question from Katherine Egbert with Jefferies.

Just a quick question. When do you expect to have a new CEO? You previously said by the end of the year. Sounds like it may take longer now. Can you give any new bogey there.

We were hopeful we could do it by the end of the year. We didn't commit to do that. Doesn't look like we're going to get there. I am not going to make a predictions, but we're working on it.

Okay. Brian, looks like payables and accrued expenses were way down in the quarter. How much was payables down during the quarter? .

Accounts payable?

Yes.

Is that in the press release? I am just curious, Catherine. I apologize for asking. Seems so obvious we don't have that right here.

It is combined payables and accrued expenses. I am wondering what the payables piece, how much that is down, if it was significant impact on the cash flow.

I will pull that up and get back to you later on the call.

Thanks.

We'll go next to Shaul Eyal with Oppenheimer and Company.

Good afternoon. Thank you for taking my question. Two quick questions. On the restructuring process, if you can provide us with slightly more color, apparently what appears to be more of a market rate now, do you find that for some of the assets you're trying to sell there is a number of competing properties out there that can kind of any way make your life a little more problematic in trying to sell those? Is that the case or just capital markets conditions?

This is Jim. No, that's not the case actually. There aren't competing properties. That isn't the issue. If as we mentioned, we did sell five smaller businesses and we sold our share in the Jamba joint venture, but of the remaining bundles that we have, I mean, I can giver you a little bit of detail there. We have one bundle that we think we're essentially at the end of the process. The issue there is credit. This is a buyer who requires financing. It is essentially the price of money today, the interest rates that are the difference and when that deal gets done. The other two are in negotiations with buyers. As far as I know, there are no competing properties that those buyers are looking at and those buyers don't need to finance their purchases, so we've done many different things. We didn't get into all of the detail, but obviously one of the things we've done is focus on buyers who could do not need financing where it was possible for to us do that. No competitive issue.

That's quite helpful. One more general question, already two years years into contract with ICANN since it was extended back I believe in November '06. What is the next time or with respect to the process that you guys go back to ICANN and kind of started the renegotiation process?

Well, the contract for. come renews in 2012. There are performance criteria that we meet of course, and we are meeting, and we do have a presumptive renewal, and that's four years from now.

I imagine renegotiations probably start ahead of that, is it a year, eighteen months, or --

I think last year the process began in under a year prior to the actual renewal.

Fair enough. Thank you very much.

Our last question will come from Scott Sutherland with Wedbush Morgan.

Great. Thank you. Good afternoon.

Hey, Scott.

A couple questions here. First of all, try and understand a little better the margins and the potential and operating margins. Have you given a thought of how many basis points the shared costs are currently pressuring margins, another way of asking is if all the discontinued ops were out of the business, how much margin improvement do you think would happen just from shared costs?

That's a good question. We reorganized this to be more direct towards product to have more transparency within the business, so it is changing over time, and you're starting to see that come out. We're able to achieve the 35% exit rate a quarter earlier and actually seeing that earlier in time. We haven't committed to 2009 operating margin at this point. We do have great visibility into the expense, and slightly lower revenue growth for next year, we'll be able to maintain and expand those margins.

Okay. So you're committing to expand the margins to some degree next year?

Correct.

A couple more questions. Can you give the base domain names international or the growth rates you're seeing international, just a small base and seeing good growth and are you putting more resources towards that?

We are. We actually see international as one of our strong growth areas. We've been doing some campaigns down in Brazil, we see India and China as other areas. Albeit a smaller number. Those growth rates are much higher than the North American growth rates.

Okay. Last question I had is any update on the impact or the opportunities in the new TLDs?

I can give you a brief update. This is Jim. You may have seen an article in the on line Wall Street Journal yesterday that talked about this. This just shows you how complicated the process is. Basically there seems to be according to this article some pushback from intellectual property holders who are very concerned about the added expense that unlimited GTLDs might cause for them in their efforts to protected their intellectual property. It gave some very good examples about Marriott as a hotel maybe getting Marriott .hotel, Marriott.vacation, et cetera, but if you have to go out and essentially protect your IP in a vast wilderness of unlimited GTLDs, that would impose a very high cost for you to do that, a very large investment for which there is no guaranteed return. The article concluded that dot-com was the powerful brand and probably would continue into the future that way.

Just a follow-up on that. Is that causing any slowdown in people doing current dot-com and dot-net sign ups or is that having no impact there?

None that we can measure.

Great. Thank you.

That does conclude the question and answer session today. At this time, Mr. Bond, I will turn the conference back over to you for any additional or closing comments.

Thank you, Jennifer. We anticipate that our next quarterly conference call will reflect our fourth quarter 2008 results and will be held on Thursday, February 5, at 2 p.m. Pacific time. Final confirmation of the date will be provided on January 2nd, the first business day after the close of quarter. I would also like to remind you in light of regulation FD, VeriSign plans to retain its longstanding policy to not comment on financial guidance during the quarter unless it is done through public disclosure. Please call the Investor Relations department with any follow-up question from this call. We thank you for your participation and continued support. This concludes the call. Thank you, and good evening.

Ladies and gentlemen, this does conclude today's presentation. We thank you for your participation, you may now disconnect.