威瑞信 (VRSN) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to the VeriSign Incorporated fourth quarter fiscal year 2008 earnings conference call. Today's call is being recorded. At this time for opening remarks, I would like to turn the call over to Ken Bond, Vice President of Investor Relations. Please go ahead, sir.

Thank you, operator. Good afternoon, everyone, and thanks for joining us for VeriSign's fourth quarter 2008 earnings conference call. I'm Ken Bond, Vice President with Investor Relations and Corporate Communications, and I'm here today with Jim Bidzos, Executive Chairman, Interim CEO of VeriSign along with President and Chief Operating Officer, Mark McLaughlin, and 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 888-676-8776 or 913-312-1457 for international callers and will be available through February 11. The pass code for both numbers is 6496729. The fourth quarter 2008 earnings press release is available on first call and market wire.

The press release and the financial information discussed on today's conference call and a reconciliation of our non-GAAP information to GAAP is available on the VeriSign investor relations website at investor.verisign.com. For those of you joining us via webcast, we invite to you 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 the risks and uncertainties that we disclose 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 from our non-GAAP financial information is located on the VeriSign investor relations website. Also, let me mention that we expect to file our 10-K no later than March 2. Our analyst day is now scheduled for May 14 and will be held here in Mountain View, California. We look forward to the event and hope to see many of then. In a moment, Jim, Mark and Brian will provide some prepared remarks and afterwards we'll open up the call to your questions. Unauthorized of this conference call is not permitted and, with that, I would like to turn the call over to Jim.

Thanks, Ken, and good afternoon to those of you joining us today. As many of you already know, Mark McLaughlin recently rejoined the Company and was named President and Chief Operating Officer. I'm very pleased to welcome Mark back on the Company as he and I have a great working relationship and his knowledge of the Company and our industry will allow him to hit the ground running like no one from the outside could. Mark, would you like to say a few words before we start?

Good afternoon, I want to say it's great to be back at Company. I've always known the Company has tremendous talent and business strength and I am excited to be back as part of the team to help take it to the next level. My transition into the Company has been smooth. I've worked with this team before and I understand where we're going with the Company having played a key role in the development of our strategy. Looking forward, Jim and I remain focused on protecting and growing our core businesses and divesting those businesses we discussed as being non-core. I'm committed to seeing this strategy through to success and I'm glad to be back as part of the team. With that, Jim, let me turn it back to you.

Again, welcome back. In what are truly extraordinary economic times I'm pleased to report that VeriSign delivered a very solid quarter that capped off a very solid year. For Q4 on a non-GAAP basis we delivered revenue of $245 million, earnings per share of $0.28 and we exited 2008 with operating margins slightly above 35%, and with nearly $800 million in cash. It's noteworthy that we also repurchased more of our shares in 2008 than we did in 2007 and we were buying during Q4. I believe these results demonstrate several things.

First, that our strategy of focusing on our core businesses is the right one. Divesting non-core businesses while protecting and growing our core businesses is the right thing for VeriSign to do.

Second, the financial results show that our business unit realignment has allowed us to identify inefficiencies and control costs despite our not having completed divestitures. We believe we have the financial focus and discipline to manage the businesses successfully including discontinued operations.

Third, these results show that while we didn't have as much success as we hoped for in selling non-core businesses, we still managed to have a stronger balance sheet that positions us to pursue opportunities in the downturn when many companies may struggle just to survive. Despite the weak economy and frozen credit markets, we still managed to sell 7 of 12 businesses as well as our interest in the Jamba! joint venture raising over $300 million in a recession long and deep enough to cause unemployment to dramatically rise and to have the government proposing and implementing very significant stimulus and bailout plans. I'm grateful to the VeriSign employees including those in discontinued operations who have worked hard and delivered for the Company.

Now, let's go in to a more detailed review of the quarter. Like many of you, we are increasingly realizing that the broader downturn is going to be deeper and longer than originally expected. More importantly, we are seeing definite signs that our core businesses are being effected as well. Last quarter we discussed how the macroeconomic environment could potentially effect us. This quarter, many of the possible effect we've discussed materialized, resulting in a slowing of our core businesses impacting our naming business in particular. I would like to start with a brief overview of our financial results, which Brian will discuss later in greater detail, followed by business and operating results for the fourth quarter. From there, I would like to touch on areas we believe are a particular interest to investors, based on conversations we had with shareholders, including how the weakening economic environment is impacting our core businesses and an update on our divesture activities.

Starting with the business review. I'm pleased to report that our core businesses had a solid quarter and I would like to again thank all of our employees for their continued focus and commitment to VeriSign. Revenue for core business was $245 million, which was at the higher end of our revenue guidance of $242 million to $247 million. Brian will discuss this in more detail, but there were a couple of items effecting core revenue this quarter in ways that we did not not anticipate. The net effect of these items is that core revenue was $1 million lower. Despite the revenue adjustment, non-GAAP core operating margins were 35.1% for the quarter, slightly above our guidance of 35%.

In November of 2007, we set the goal of improving our operating margins to 35% or higher by the end of 2008 and we're pleased to have achieved results in line this goal last quarter as well as this quarter. Non-GAAP earnings per share for the fourth quarter were $0.28, our press release will note that the GAAP tax provision is preliminary, which Brian will discuss later; however, this has no direct effect on the non-GAAP earnings per share of $0.28. Before moving to the business review, I would like to mention we're beginning to realign our three core businesses into two business units with SSL and IAS being consolidated into a newly formed business unit we will be calling Authentication Services. In addition to marketing and development synergies, we believe the realignment will provide an important benefit of allowing us to reduce a portion of the shared service cost prior to the completion of the divesture process.

Moving now to our naming business, we saw growth of 12% year-over-year as we adjusted for registered names in dot-com and dot-net grew to 90.4 million names at end of the quarter. In total, we processed 6.3 million new domain name registrations during the quarter compared with 7.5 million names during Q4 2007. The decline in new name registrations was expected and reflects the continuation of weakness in names registered for the purpose of participating in online advertising networks as the earnings per click, or EPC, for domain name holders continues to weaken. As discussed in the past, we expect that online advertise along increasingly become a part of our naming business. Currently these names make up 7% of the adjusted zone. As a result, we plan to discontinue the reporting of metrics for online advertising after this quarter. As appropriate, we will continue to discuss meaningful events and trends with respect to online advertising or other relevant areas of the adjusted zone.

Last quarter, we noted seeing possible signs of softness in new name registration for traditional names. Unfortunately, the broader economic downturn has impacted traditional names as well and what we saw in October continued over the remainder of the fourth quarter. New name registrations for traditional names during the fourth quarter were approximately 5.9 million, 12% lower than the same quarter Q4 2007. On a net basis, we added 1 million names to the adjusted zone this quarter, including a net increase of 2 million traditional names, which now represents 93% of the adjusted zone and a decline of 1 million online advertising names as we expected. We expect that weakening economic conditions will contribute to slowing growth rates in 2009 for the total worldwide domain zone as well as for our dot-com and dot-net zones.

As a result, we're not providing formal guidance for the first quarter net edition to the adjusted zone except to say we're not forecasting a decline in the adjusted zone in Q1. Typically, Q1 is our strongest quarter for new name registration and we expect that this will be the case this year as well. However, given the composition of the expiring name base, we also expect that Q1 will also see the highest number of non-renewals. Our expectation is based on what we can observe and project about the current environment. Should there be significant changes in the broader market, our outlook could change as well. Even as we're seeing declines in online advertising and slowing in traditional names within North America, we're also seeing continued growth in international markets. Markets when we have focused efforts to develop regions for growth potential in both dot-com and dot-net over time.

While overall growth of the adjusted zone may be slowing, we note that the growth rate is similar to the growth rate of all other GTLDs on a combined basis. The renewal rate for Q3 rounded up to 72% but was down from 73% in Q2. While the Q3 renewal rate decline was most obviously effected by domain names registered for the purpose of monetizing online advertising traffic, the renewal rate for traditional names also came down in Q3. While renewal rates are not fully determinable until 45 days after the end of the quarter, we believe that for Q4 it may decline slightly more than 1% with a Q4 renewal rate rounding down to 70%.

Finally, our internet infrastructure continues to operate at peak loads of nearly 50 billion DNS requests per day as our systems again demonstrated that VeriSign's capability of being able to operate global networks at this scale and reliability remains unparalleled due in large part to our continued investment and infrastructure such as Project Titan. As a reminder, no one else has operated a global network infrastructure of this nature at this volume level or with 100% up time over the last 11 years even as we remain one of the most attacked global networks with the planet.

The SSL business saw the install base increase to 1,118,000 certificates compared with 1,095,000 last quarter and 987,000 in Q4 of '07. We're pleased as this growth represents 13% year-over-year growth in the base. Fourth quarter SSL revenue increased 9% year-over-year and the annualized average unit revenue, or AUR, for the installed base of VeriSign, GeoTrust and font branded certificates was $248, down from an adjusted AUR of $251 last quarter. As discussed in prior quarters, the lower AUR also reflects the continuation of product mix shifts as GeoTrust continues to grow faster than 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 market share leader for EV certificates. However, as discussed last quarter, we continue to see the effects of the economic slowdown on EV adoption as large-scale customers again ordered less than what we expected. As discussed last quarter, we expect that the mainstream adoption of EV certificates will be pushed out until we see improvements in the broader economy.

Last quarter we also discuss the shift in buying patterns by some large-scale customers to begin placing smaller but more frequent orders as customers are managing their certificate requirements carefully. Also, in our retail and channel business, which typically serve customers with less than five certificates, Q4 is typically a seasonally weak quarter. However, this Q4 was weaker than normal for the retail business as we saw a decrease in new certificate sales and delays in renewals. Our channel partners also saw the same economic challenges as did the overall SSL market. These examples make clear that the weakening economy is effecting our SSL business with the net effect being that some portion of certificate sales are not occurring or are being deferred and that our SSL revenue growth will be in the single digits.

I would like to now take a quick look back at last year as 2008 proves to be another eventful year for VeriSign and the broader markets. While '08 will be remembered as an extremely challenging year, we made good progress on our strategy of focusing the Company around our core businesses. Brian will discuss some of the financial metrics in more detail, but we're pleased with our receive growth and operating margin improvements.

Full year core revenue grew 20% year-over-year and operating margins exited the year above 35% even as we have additional divestitures and shared cost reductions to be completed. In an environment, which could be described as challenging at best, we were also able to sell seven non-core businesses and are remaining interest in the Jamba! joint venture since late 2008 netting proceeds of approximately $300 million. Through the sale of these non-core business, as well as disciplined operating management, our head count ended the year with nearly 1,000 fewer employees, or 23% lower than Q4 2007.

Finally, over the course of the year, we repurchased approximately 39 million shares of common stock, slightly more than the 38 million shares we purchased in 2007. To date, we've reduced the shares outstanding by more man 31% since the first half of 2007 when we resumed the share repurchase program. In summary, while 2008 was a challenging year, it also marked the year of very good progress for VeriSign.

I would now like to comment on some areas that we believe are of interest to investors including how the current economic environment is effecting our core businesses and an update on our divesture activities. Over the last 90 days we've been observing the spread of the financial crisis into the broader economy and we're constantly assessing how VeriSign is being effected. I want to be clear and acknowledge the obvious. Our business, along with virtually every other business, is being effected by broader market conditions. The divesture process has been slowed, mainstream adoption of EV certificates has been pushed out, and we've noticed effects to our naming of SSL businesses which I'll discuss in a moment.

In helping investors better understand how the changing markets could affect VeriSign, I would like to share in insight to 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 are the general risks, I would like to comment what we see as opportunities.

First, our strategy remains unchanged as we're focusing the company to grow our core businesses and we are exiting a number of good, but non-strategic businesses. We believe that our strategy, along with a focus on improving our capital structure, will provide for better shareholder value over time. Our core businesses are continuing to grow with revenue growth of 16% year-over-year this quarter. Operating margins improved dramatically during 2008 to current levels above 35%. The balance sheet is strong with nearly $800 million in cash at the end of '08. We have a proven ability to generate positive cash flow with cash flow from operations of approximately $115 million this quarter. And we remain committed to shareholder value having repurchased more shares in '08 than we did in '07.

We recognize these are difficult times, and while many companies will struggle to weather the downturn, we expect to strengthen our competitive expedition. We will be aggressive and we will leverage our financial strength to compete vigorously in core markets, particularly those markets where IT spending maybe declining in 2009. We also expect that we will make investments to simulate growth in our core businesses and adjacent markets. Let me be clear this I'm not signaling a return of active M&A as a means to bring growth. Likewise, I'm not suggesting these investments have any serious or detrimental effects to our commitment to improving operating margins. In the past we have discussed "marginal investments" and to further growth in our core businesses. This is what I'm talking about.

In summary, we continue to believe that strength of our balance sheet and consistent cash flow should allow us to continue investing in our core and adjacent markets. Not all companies are in the same position of strength, including some of our competitors, and they're being forced to cut people and investments just to survive. As a result, we believe 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 have previously said, the weakening economy continues to effect 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 in to our core businesses during the fourth quarter, we also saw some effects to the traditional named portion of our naming business as mentioned earlier. Also, the online advertising portion of the naming business, which accounts for 7% of the adjusted zone, is seeing pronounced weakness due in part to weakening EPC trends, including Google's AdSense program change 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 market such as India, China and Latin America. Returning to our SSL business, the main effects of the economic slowdown -- slowing of EV adoption and shift in buying patterns by large customers which I discussed earlier. While there is some risk around the uptake of EV certificates, we 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 kinds of cannibalization to our VeriSign branded certificates in light of the declining AUR. We addressed this directly. Currently, we're not seeing any signs signs of cannibalization. We continue to see a strong growth at the low end of the market. GeoTrust growth, in particular, has been very strong. However, GeoTrust units are sold at lower price points and this has the effect of causing the AURs to decline.

We continue to see installed base growth in all brands with GeoTrust growing the fastest and VeriSign the slowest. Because of our market share leadership at the high end of the market, our unit growth at the high end is somewhat bounded by the overall segment growth. In the mid and low-end segment where our market share is not as strong, we see good growth opportunities as these markets are growing faster than the high-end market and also leaves room for market share gain.

In sum, these factors suggest we will likely see continued AUR declines; however, we expect to see continued growth stemming from organic unit growth and growth opportunities for all certificate brands in international markets. In summary, while it's difficult to know with certainty how the current deteriorating economic conditions will affect our core businesses on an absolute basis, I feel very good about the opportunities we have as well as our performance on a relative basis. Before discussing our ongoing divesture efforts, I'd like to briefly comment on our recently announced arrangement agreement to acquire Certicom. As the situation is still evolving, there isn't anything we can say other than to acknowledge that we're aware of Certicom's determination that [Rim's] offer is a superior proposal. At this time we are considering what actions, if any, we might take, for today we'll have no comments this matter.

We remain committed to the strategy of focusing the Company on our core business including the divesture of 12 non-core businesses which we began in late 2007. As in past quarters, we continue to feel the effects of the economy on a divesture effort. 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 as buyers are taking more conservative postures. Credit issues are making it difficult to bring deals to closure. The good news is that we have now sold seven smaller business plus the remaining interest of the Jamba! joint venture. Since our last earnings conference call, we've sold three additional businesses including post paid billing, communications consulting, and the three united portion of the messaging business.

In aggregate, since beginning the process late in '07, we've now received net proceeds of approximately $300 million from these sales and the sale of our interest in the Jamba! joint venture. At this time we have five businesses remaining for sale, including communications, enterprise security, messaging, and two small businesses, one of which we expect will close shortly. While it's certainly a challenging market in which the cell business we've continue to actively work with potential buyers. With that in mind, Mark and I would like to reaffirm for you all our belief that our strategy to divest non-core businesses and focus on core businesses built on internet infrastructure service is the right course of action. We will keep going until we've completed all of the restructuring we set out to do, including the divesture of all of the non-core businesses and reducing shared services cost 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. As we said most of last year, 2008 was going to be a very interesting year with a lot of moving parts. This is certainly proven to be true, even in ways we could not have predicted. While we may not achieved all of our goals in 2008, I'm extremely proud of our employees who made every effort possible so that were were able to make the good progress that we have.

Looking ahead in to 2009, we're realistic about the challenges that lie ahead and we have no illusions. We expect the coming year will bring an extended and deepening downturn. We expect that 2009 will bring new surprises just as 2008 did, and we're preparing for the challenge year ahead. We'll continue to focus as we protect and grow our core businesses, work diligently towards the sale of non-core businesses, right size our business once the divestitures are complete, and we have the right people in place to do all of these things. I would now like to turn the call over to Brian who will discuss the financial results for the fourth quarter and provide limited guidance before we move to the Q&A portion of the call. Brian.

Thanks, Jim, and Welcome back, Mark, and thanks to everyone for joining us this afternoon. Before discussing our results for the fourth quarter, I would like to take this opportunity to highlight some of our accomplishments in 2008. For the year, core revenue was $936 million, up 20% from 2007. Non-GAAP core operating margin for the full year was 33.6% and we exited the year above 35% as we previously guided. Non-GAAP core earnings per share for the year was $0.96. Cash flow from operations was approximately $475 million and solid throughout the year.

As Jim mentioned earlier, since late 2007, we have now sold 7 of 12 non-core businesses as well as our interest in the Jamba! joint venture generating approximately $300 million in proceeds and, finally, we repurchased approximately 39 million shares of common stock in 2008, even more than we repurchased in 2007. Since resuming our share repurchase efforts in 2007, we've now reduced the common shares outstanding by 31%. At this juncture we now moved all of the businesses that we tend to divest into discontinued operations. Our prepaid billing business is now the only business remaining in non-core continuing operations and, as previously indicated, we expect this will be wound down in 2009.

On a housekeeping note we have not fully completed the tax provision process and, as a result, our GAAP tax provision for the fourth quarter and full year is still preliminary and, therefore, GAAP net income and GAAP earnings per share are also preliminary. Our final tax prosecute visit, GAAP net income and GAAP earnings per share will be updated in our annual report on Form 10-K and may differ materially from the amounts indicated in the press release. Also, we had a couple of issues effecting our core revenue this quarter as well as prior periods. The first issue related to revenue recognition for domain names and SSL certificate for the first month of new units. Historically, we recognize a full month of revenue, irrespective of which day in the month the name was registered. We've now adopted a mid month convention and applied it retrospectively resulting in adjustment for both Q4 and prior periods.

The second issue related to receive recognition for SSL certificate renewals where we were previously recognized in revenue upon the execution of the extension agreement instead of upon the commencement of renewal periods. As a result, adjusted entries were made for both Q4 and prior periods. In sum, these two issues resulted in Q4 revenue being reduced by slightly more than $1 million and the full year effect was a reduction of approximately $5.7 million in revenue. Both issues effect multi-year periods and, as a result, prior year revenue amounts will also be adjusted downward. A full disclosure of prior period adjustments will be made in our 10-K. Cumulatively, the balance sheet effect is a $41 million increase to deferred revenue at December 31, 2008.

Turning now to the fourth quarter. Given the context of the greater macroeconomic environment and its impact on our business, as Jim discussed earlier, I'm pleased to report we had a solid quarter due in part to continued discipline expense management. As a result, we were able to achieve our operating margin milestone without completing the divesture process and in spite of the declining market conditions.

Moving now to more detailed discussion of our result for our core business. Revenue for our core business came in near the high end of our guidance at $245 million, up 3% sequentially and up 16% year-over-year in spite of the revenue adjustment discussed earlier. Growth was largely driven by performance in naming, which was up 23% year-over-year. SSL and IAS were up 19% and 14% year-over-year respectively.

Turning to operating margins. As noted previously, we exited Q4 with a non-GAAP core operating margin above 35%, in line with our guidance. Below the operating income line, we incurred a non-GAAP loss of approximately $8 million, slightly more a net loss than we expected due to lower interest income. Non-GAAP core net income for the fourth quarter was $54 million resulting in non-GAAP earnings per share of $0.28. The diluted share count used an EPS calculations was 194 million shares, down from approximately 196 million shares last quarter due primarily to the share repurchases of approximately 2.6 million shares.

Moving on to the cash flow and balance sheet items. Both consolidated operating cash flow and free cash flow were strong this quarter, coming in at approximately $115 million and approximately $90 million respectively. There were multiple drivers this quarter, including continued strength in our core businesses and favorable working capital trends. Consolidated capital expenditures this quarter were $25 million as we continued to work on primarily core projects, including the hardening and expansion of our data center facilities.

Our ability to consistently generate solid operating cash flows resulted in our maintaining a strong balance sheet with ending cash and cash equivalents of $791 million, up approximately $137 million from last quarter due largely to proceeds received from the divestitures, including our interest in the Jamba! joint venture. Please note that it's end of 2008 approximately $150 million of funds held by the reserve and discussed last quarter were reclassified other current assets this quarter and are not currently included in our cash and cash equivalents. Of this $150 million, we received approximately $86 million subsequent to the end of the quarter. In Q4, we repurchased approximately 2.6 million shares for $50 million. Over the course of 2008, we repurchased approximately 39 million shares for an aggregate value of $1.3 billion. Our 2008 share repurchases exceeded those of 2007 and since resuming our share repurchases program in the first half of 2007, we have reduced the common shares outstanding by 31%.

Net DSO for the fourth quarter was 35 days, consistent with last quarter. Deferred revenue from continuing operations ended the quarter at $845 million, up $8 million or 1% from last quarter. We ended the quarter with approximately 3300 employees, down 350 from last quarter largely due to planned head count reductions and divestitures. As previously discussed, we would expect head count to continue to decline with sale of non-core businesses and further reductions in shared services head count.

In summary, we're pleased with our results given a challenging economic environment. Revenue, non-GAAP operating margins, and EPS were all above or in-line with consensus street estimates and, as well we'll discuss in a moment, our outlook is something we believe most companies would be hard-pressed to deliver on in 2009. Double digit revenue growth in non-GAAP operating margins in excess of 35%. 2009 will be challenging but we're continuing to exercise financial and operational discipline to deliver results.

Moving now to guidance. This quarter we will again provide guidance for our core businesses, which are naming an authentication. Authentication is SSL and IAS as we align to a 2 BU structure and, as a reminder, our guidance includes VeriSign Japan given its focus on authentication services. Consistent with prior quarters, we are providing guidance one quarter at a time given the uncertainties with regard to the timing of the remaining divestitures. That being said, last quarter we provide a high level guidance around 2009 revenue growth suggesting we would see double digit revenue growth. Based on market conditions, as we discussed, we now expect the 2009 growth will be at low end of the prior range.

Before providing detailed guidance for the first quarter, I would like to call out an important change to our non-GAAP reporting as beginning in Q1 we intend to reduce the list of items excluded from our non-GAAP financial information. As an example, previously, we would exclude gains and losses from derivatives and equity investments. Going forward, these gains or losses will be included in our non-GAAP results. We're making these changes in an effort to improve the quality of our earnings but we also recognize that these changes could cause some confusion when comparing results from year to year. As a result, the GAAP and non-GAAP reconciliations included in our investor relations website will reflect adjusted non-GAAP results for prior periods to reflect these changes. Over the course of 2008, these changes impacted non-GAAP earnings per share by $0.04 higher. However, the results did vary quarter to quarter. This change won't materially impact our results going forward.

Moving now to more detailed guidance for the first quarter of 2009. For Q1 we expect revenue for the core businesses will be in the range of $246 million to $251 million or flat to up to 2% sequentially. We expect that Q1 non-GAAP operating margin will be approximately 35%. We also expect the aggregate of items below the operating income line will continue to be similar to this quarter's results. We now expect that the first quarter fully diluted share count will be approximately 194 million shares.

Finally, we would expect non-GAAP earnings per share to be consistent with this quarter. In summary, we are pleased with our performance in the fourth quarter and fiscal year 2008 and entering into 2009 we remain focused on executing our strategy as we clearly see this a key to further unlocking shareholder value longer term. We now would like to open up the call for your questions. Operator.

(Operator Instructions). We'll go first to Todd Raker with Deutsche Bank.

Two questions. First on the DNS side of the business, as we anniversary the Google AdSense changes, should we expect some of the drag in the online advertising business to lift?

Let me -- Todd, it's Jim. Let me reiterate what we told you before that hasn't changed. So basically when the changes in the Google AdSense program were made initiated, essentially at the beginning of July in 2008, we estimated that the number of so-called advertising names in the zone were about 8 million and we estimated that roughly half of those, about 4 million, would essentially be washed out by that program. Based on the methods that we use to identify those advertising names in the zone, we stand by those numbers. We did say and we still believe that -- well, first of all we know that the non-renewals of those names as they get flushed over the system over a fourth quarter period is lumpy. It's not smooth and that Q1 is probably going to be the lowest of four quarters with respect to those names. So, we're still tracking that. There are other variables obviously that affect the zone in normal names as well but for advertising names specifically, the advertising names that we believe were effected by the Google AdSense program that's the way it still looks to us.

And my second question, in terms of operating margins you guys showed very nice improvement last year even without divesting any of the larger businesses. With the 35% plus guidance this year you're basically modeling flat operating margins. Should we assume that shared services or margin improvement is totally dependent now on the divestitures or is there an opportunity here to take the core business to a more profitable level without the divestitures?

Todd, this is Jim again. I'll let Brian give you a more detailed answer, but let me give you an overview higher level answer. One of the things that we did around the third quarter of last year we sort of realigned along business unit. There's many benefits associated with that realignment as opposed to a restructuring. It's a realignment and some of the benefits besides giving a getting (inaudible) in the core businesses is that it allowed us to to begin identifying those shared services costs that are uniquely associated with one of the business units and move them in. Specifically, we did that so we could, in fact, get ahead get ahead of it prior to completing the divestiture process. So the big picture is that I think we did some things that positioned us to identify and start optimizing shared services prior to actually getting the divestitures complete. There's a lot of other heavy lifting that goes on in our financial planning I'll let Brian talk about.

That's right, Jim. Hey, Todd, this is Brian. As Jim alluded to, we did do a divide and focus strategy where we broke out the divest business and been operating them on a stand-alone basis. That enabled us to hit our operating margin a quarter early despite not completing the divestitures. As we gave you updated guidance for the end of the year at the lower part of the range we aren't reducing our margin profile so we're continuing to take cost of out of the business to hit that. On the shared services side, the remaining cost that we talked about last time that will be [reached] once the divestitures are completed are mostly in the data center, but most of the various costs around the Company you're alluding to we've aggressively taken those out over the last couple quarters.

Why when we see operating margins improve as pricing rolls in to the DNS side of the business?

Why wouldn't you see operating margins improve, you see pricing roll into the DNS?

Yes, as the price increases actually start flowing through the P&L, why don't you margins start to expand?

You actually have a mix on revenue because you have revenue shifting down and then we're also investing heavily in to our infrastructure and the security of the business, and so you know that we invested a lot of money into Titan, we have a new data center rolling on. Last time I talked about our (inaudible) that's going up. There's a lot of one-time fees that we didn't have in 2008 that we're going to have in 2009. In order to achieve those margins, we're continuing to take cost out of the business to stay at 35%.

Okay. Thanks, guys.

Thank you, we'll go next to Sterling Auty with J.P. Morgan.

Thanks. I just wanted to clarify your comment about the 2009 growth and updating what you said quarter. I think last quarter you said growth in '09 would be less than '08 but still be double digits. Is that what you're still saying or you're just saying that it's closer to the low end of the double digit, meaning closer to the 10% than something higher?

I think we're saying both the things you just said.

That's correct, Sterling.

Okay. On the gross margins in the quarter, looking at the gross margins both sequentially and the trend line, was there impact there because of the AUR in SSL or just give us more color as to what happened in the gross margins for the quarter?

Great question, Sterling. This is Brian. We had a short-term SOW where we actually incurred $4 million of cost of revenue greater than previous quarters which actually impacted our gross margins. Additionally, the data center coming online increased it by about $1 million and then there was some FX exchange relative on to our VeriSign's Japan subsidiary.

Okay. And then last question, I wasn't clear. Jim, is you're talking about the divestitures, I just want to make sure I understand. As you think about the three bundles that were there and looking at the announcement from today on the 3united, are you now saying that you're willing to break up those bundles to get the divestitures done and behind you rather than kind of doing the three big bundle-type of sale strategy that you had before?

Well, Sterling, I wouldn't go as far as to say it was our intention to demonstrate or send a message that we're willing to do that. I think it does say, however, that we are willing to be flexible. We are very determined. I'm personally very focused as is Mark, as is Brian on getting the divestitures done. If it makes sense and it doesn't effect the integrity of the bundle, in fact as Mark was involved in designing it as was myself and some other folks about a year and a half ago. That was a carefully-designed bundle to maintain a certain amount of integrity and sort of sensible approach to the market. To the extent it doesn't negatively impact that design I think we would be willing to do some of those thing in order to move these businesses and associated expense.

I think, Sterling, this is Brian, I think on top of that it just shows the commitment to our strategy to move forward with the divestitures.

All right, great, thank you.

Thank you, we'll go next to Phil Winslow with Credit Suisse.

Hi, guys. Just wanted to touch on the SSL business. I think you mentioned that you could potentially see revenue get into the single digit range. Just wondering if you could discuss what are your expectations is for growth in that base but then also ASPs going forward.

Let me tell you -- in the same quarter last year we were talking about 13% unit growth and 9% revenue growth. So in a sense our revenue growth is single digits technically. I think we're seeing in that business pretty much what we described. We're not really reading anything more into the numbers. We are the largest market shareholder in the high end. We are the largest is owner of revenue in that market. The room that we have to grow is in the lower end of the market and we see that with the much higher growth rate associated with GeoTrust certificates. So I think for that reason as we continue to gain market share at low end I think you can expect to see the AURs drop. We're talking about barely over 1% as, for example, a drop of $251 to $248 this quarter. Pretty consistent with, I believe, a $3 drop that we had in the prior quarter.

So those numbers to us are not surprising at all. They're entirely consistent with what see when we put the individual growth rates of the various brands under a magnifying glass. So we see the market growing and I think it's generally the macroeconomic conditions that are causing people to sort of be more careful, more growth on the low end, a little bit of slowing of EV adoption. I think there's really not much more to it then those things that we observe.

It's Ken, I just add one other thing on that high end part of the range that we have such a strong market leadership position there that we're somewhat constrained in that our growth there is somewhat a function of the segment growth itself.

And also just very quickly on the renewal rates obviously discussed them being negatively impacted by the online ad driven but also just macro. In the previous cycle it got down in to the 50s and even at one point touching the 40s. What is different about the cycle than last and what would you expect renewal rates to bottom out at?

Yes, hi. This is Mark. I don't think we see anything near what we saw in the downturn when I think you are referring to when the bubble burst and primarily the reason for that is back then what we saw is business models in the domain name business that weren't baked at all. There was a tremendous amount of names given away for free by registrars that went into the base with some wild attempts at monetization. When that didn't play out they deleted them wholesale. Those sorts of programs haven't existed for years here so I don't think we would go anywhere near that at all.

If I can just add too we mentioned renewal rates basically going from 72% to 70% rounded. I think it would be fair to point tout if we just take the number of one digit to the right of the decimal point, 72% was 71.6% rounded up and 70% was 70.4% rounded down. If the difference appears to be two full percentage points it's actually 1.2.

Great, thanks.

Thank you, next we'll go to Sarah Friar with Goldman Sachs.

Good afternoon, everyone. Just a question on the slowing in the new name ads. How does that impact your decision on price increases? Do you think with the current tough time that we're in there's less demand?

Hi, Sarah. This is Mark. I'll take that one. Good to talk to you again. The-- so we view these things as just completely separate, they are not related. So from a price increase standpoint, as you know, we have the right to raise prices under the the contract and we take a look at that on a one-at-a-time basis at the appropriate time and we take into account the market conditions around that, primarily related to whether those price increases would have a negative impact on our business either from number of names coming into the system or for other reasons that broader in the community. We'll take a look at that one at a time and as far as the impact from that, we hadn't seen an impact in the past from a price increase standpoint in the number of new units coming in. Not sure if that would change.

Sure. Makes sense. Good to have you back as well. Just on the gross margin side, benefits and comment on that one offer kind of temporary impact of $4 million. Does that fade next quarter so we go back to gross margins that are something more like78% or does it effectively impact through 2009? Kind of fades through the year?

It was a three-quarter project that started in 3Q, 4Q was the highest and it will roll off in Q1. When we gave our guidance before it was baked into our numbers and as we gave our guidance it's baked into our 1Q numbers as well.

So that 35% operating margin effectively probably still has a hit of maybe 100 [bips] on the gross margin side. Is that the right way to think about it?

That would be correct.

Great, thanks very much.

Next we'll go to Rob Owens with Pacific Crest Security.

Good afternoon, everyone. On the SSL side of the business, can you give us a sense of what the renewal rate or how that's been tracking?

Yes, this is Mark, hey, Rob. On the renewal rate side of business we're seeing a slow down in renewals as we would see in our naming business, but I think that's no different from the total market we're living in right now.

Any sense of what the magnitude is, Mark, or just where you guys are?

In the 50% kind of range. In the 50% to 60% kind of range.

Is what the renewal rate is? And what's the average life you're seeing right now and how does that compare to the couple of quarters?

Hasn't changed so much on the average life certificates, right in the range of 16 months. It moves a little, fraction of the month, but right around 16.

Great, thank you.

Thank you, we'll take our next question from Walter Pritchard with Cowen and Company.

Hi, guys. This is [Ken Long] for Walter. Kind of back on the SSL with AUR going down, is there anything outside of mix that's driving that down, perhaps some pricing pressure from your customers?

This is Jim. No, not that we can see at all. In fact, if you look across the brand there's actually growth in each of the components at each segment of the market. It's literally just simply the fact that GeoTrust component is growing much faster than the others so there's not a slowdown anywhere and, again, the low end is where we don't have the strong market share that we have in the high end. So there is some competitive pressure out there. The segments are growing and GeoTrust is growing faster. That, I believe, is the sole reason that we can identify that the AUR's decline at roughly 1% per quarter that we've seen the last couple of quarters.

I guess with the low end being sort of the fastest growing sector, you got guys like [Go Daddy] out there selling them for pretty cheap. Is there anything you're doing to get a bigger share of the market?

We continue to compete with the brands in the lower market as well. We have our [flanker] brands out there doing very, very well even on a relative basis to lower end brands in the market.

I have seen some surveys that say the market, the low end of the market is growing faster and the competitors are gaining, but I think some of those surveys you have to be careful about some of the data that comes out of the them. Most of them look at public facing certificates not certificates behind the fire wall. There's a huge difference there.

Yes, of course. Great, thanks, guys.

Thank you.

(Operator Instructions). We'll go next to Steve Ashley with Robert W. Baird.

On the domain name side I would like to get color on your decision to no longer break out the online names. It seem that you benefit by segregating it. You can see your traditional business grow maybe 16% in units in this recent quarter if you would just take the drag off. Just wondering what some of the thinking is behind that.

Just as a percentage -- this is Mark. As a percentage of the base looking at about 7% today and that will be be certainly sub 5% we believe by mid year and lower after that. So just -- it's just not as significant portion of the business. If that changed, we would be back to talking about it, but there's really no reason to do it with those kinds of numbers.

Brian, a couple of questions for you. Cash flow from operations has been running about $100 million a quarter. Is that still a reasonable expectation for us in 2009, and can you offer any insight into what capital expenditures might be in 2009? Thanks.

This is Brian. Cash flow from operations, $100 million a little north of $100 million I would say. From a capital perspective, what we said before, still consistent about 8% to 10% of revenue.

Thank you.

Thank you, we'll go next to Katherine Egbert with Jefferies.

Good afternoon. You gave some color on domain name growth for March. How can you be sure that won't be down, that domain names won't be down quarter on quarter. What gives you that comfort?

It's Mark. A mix of things. The base itself is generally consist of two things. One is the number of new names coming in to the system and the second is the renewal rate of the names in the system itself. So when we look at the analysis on both of those from a new name perspective, what our data would show us with Q1 being the strongest quarter generally in the year plus the renewal rates given what we said earlier in the 70% plus minus 2 percent points on high side of that you take the mix of that math and it looks like the base would not be going backwards.

Okay, fair enough and then did on the divestitures, I mean are there any financing issues or lack of interest because it seems like if there aren't and you said in the past that hasn't been the case, isn't it just a question of you guys accepting a lower price and just kind of being done with it?

Well that certainly is a component. I don't think it's quite as simple as you make it out. We've had strategic buyers for whom the businesses make a lot of sense. In one case, in the case of one bundle we have a buyer engaged. The sole issue there is financing. There's been progress at a snail's pace and I think that's simply a function of the economy. Credit markets are frozen and it's really, really difficult. Very few deals are getting done. That's one example. In other cases we have buyers. We are engaged. This are some discussions about price. Let me put it this way, if price were the only issue, I think we would have sold these businesses by now. We are moving slower. We're revisiting the process of the strategy of how we're approaching selling the divest business and we're exploring some new ideas, but our commitment to move the businesses out hasn't changed and I'm reaffirming that commitment now that we will sell those businesses.

Okay, thanks, Jim.

Sure.

Thank you, we'll go next to [Garrett Becker] at Banc of America Merrill Lynch.

Hi, good afternoon. Jim, you had talked about some new services in the past around the DNS business, so just wondering if you could give us an update on the status of those and where you're at with that?

Sure, we actually rolled out in to beta something called VIDN. This is something we talked about several times that is of particular interest to large organizations, registrars, others who occupy certain niches in the operation of the internet. This is where essentially we can use the expertise that we've developed in understanding how attacks are mounted against our network to share that expertise and provide that capability to other who operate in an environment where up time is important. Obviously financial institutions and other folks who provide online services. So there's, I think, a very good example.

We talked also about data analytics. That's something we're looking at and working on. Part of the benefit of having Mark come back after having been at the Company for a while is a lot of those projects that didn't get funded because resources were going more towards acquisitions at the time, we are reviewing a number of those and have opportunities we're looking at. We continue to invest in Project Titan as well obviously. Points of VIDN is something out the door now in beta physically at customers. Very good response. Totally new offering. Simply a result of the fact that a lot of what VeriSign does can't be supported by off-the-shelf products for enterprise and we have to develop it ourselves and that, of course, creates opportunities that we can leverage and that's the best example I can give you.

That's helpful. Maybe one follow-up on the SSL side as well. Apparently there was a security issue related to the MD5 hashing algorithm on the rapid SSL search. Maybe you could speak to that a little bit and did that have any impact to the SSL business in 4Q?

Going backward, the answer is no. It didn't have any impact on the business. It was not unknown and anticipated. We actually were well on top of that. For those out there who don't know, MD 5 is a component algorithm that is part of the algorithm suite that's employed to produce a thing called a digital signature. All of these algorithms were developed primarily by RSA, a company I ran in the 80s and 90s, and we knew that MD 5 was basically getting long in the tooth. We were well into a process of basically updating the systems and moving beyond it and so we were actually on top of when the researchers who we know very well and know exactly what they were doing, they basically -- they exploited one small weakness and basically developed a way by which they could sort of crack one digital signature by getting a huge computing resource to work for several months all at once. And so long before this was ever turned into anything that could be exploited, we essentially rendered the issue moot by replacing the systems in the field. We were ahead of that one.

Okay. What is the process for customers who had some of those certificates to maybe switch over?

We issued new certificates to them.

Okay. Thanks very much.

Sure.

Thank you, we'll take our next question from Rob Sanderson with Broadpoint.

Yes, thank you. Lots of the questions have been answered. Thanks for that. One question that we haven't talked about is your appetite for share repurchase. I think you left the last quarter around 950 million remaining on an authorization, picked up a couple of million here this quarter but what are the current thinking on share repurchase given the gloomy macro sort of environment that you're describing?

I think like everybody else we're taking a cautious view. We think that our balance sheet is one of our great assets, as I mentioned in the prepared remarks earlier. I think it's just one of our great strengths that while some companies, many companies are struggling to survive, taking desperate measures in order to do that. They have no capital in which to grow or invest and we have quite a bit of it. So certainly in a market condition where cash is king, we want to be cautious about that but I also want to underscore our commitment to returning shareholder value in the way that makes the most sense. I think as you pointed out, the fact that we were buying back in Q4 I think speaks volumes about senate. I don't know what the statistics are but I would venture to guess that not too many companies were buying their shares back in Q4 so we're still committed to returning shareholder value in the best way. Just given the environment, we sort of are more cautious and certainly want to make sure that's the best use of our cash.

Is it fair to think that as you progress through the year and at some point hopefully we start to see a light at end of the tunnel. Can we expect you to start becoming more aggressive? If you could sort of frame the shape of macro recovery.

I don't think I want to speculate about what we'll do when and if things sort of turn better this year, certainly the forecast I've seen and the comments I've seen from economists seem to indicate that most people, the consensus seems to be that we haven't hit the bottom yet and we're not likely to get our way out of this this year, but I would love to be wrong about that, but I don't want to speculate what we'll do differently. We're certainly well positioned. We did end the year with $800 million in cash. We actually crossed over $1 billion recently.

I think that sort of strength in the balance sheet is a tremendous asset, especially as I said if this downturn becomes an extended one, if this continues well into 2010, I think that that cash is going to be a powerful, powerful asset, a powerful weapon for us. We can continue to invest in growth, we can continue to pursue these new opportunities in the core, core adjacencies. We don't have to raise a penny to do it. We can do pretty much everything we wanted to do that we set out to do. We talked about achieving operating margin goals. We have been able to do without completing the divestitures. I'm just reluctant to say what we would do if everything turned around and we sold the divest companies and we were in a different position. Certainly we would have a wonderful range of options to chose from then but we aren't without options today.

Thank you very much.

Thank you, and we'll take our final question from Fred Ziegel with Mackinac Research.

Hi, everybody. Jim, I guess a framework question around the PKI WiMAX opportunity. How do you think about that or how should we think about that? I know it's obviously a very early on market, but what do you think the opportunity is there?

I'm glad you asked that question. I'm actually excited and proud of the fact that we were selected to provide CA services to that community. Long ago when this Company was founded, the idea, the vision was to build a company that provided trusted third party services that, as people started to set up networks, intranets ad hoc networks, specialized networks, public networks where security would be crucially important and here wireless obviously is an excellent example of that that they would basically come to the logical choice which is a trusted third party who's existence depends on its ability to successfully operate a CA in a very trusted, capable way and I think our long history of having done that for 14 years, of having operated the security infrastructure for e-commerce, for example, very successfully is probably something that weighed very heavily in their decision to do it.

I hope this is a beginning of other operations and other projects that start to secure the broad public network. The internet, its component and parts of it and when those people realize that they need certificate services and need certificate authority to provide them, that's what they're here for. So I'm really encouraged and excited about it.

So in terms of WiMAX specifically, would you be partnering with people like Clear Wire and the device guys or is it something that a WiMAX customer would load separately and I guess a second question is to the extent that there's an Obama broadband initiative -- how do you think you play in that?

Well, maybe I can just offer up and a short example. So back in the 90s, in the early 90s, around 1994 and 1994 we worked with a number of set-top manufacturers to develop a start or so-called key management. They wanted to secure the content that they delivered. In fact, a lot of people have a set-top box on top of their TV today that allows them to receive content and other the services that secured. It protects everyone. It protects the content providers. It protects the service provider.

In a very similar way WiMAX, that was a model for WiMAX so the user doesn't see it. It's really transparent. Security succeeds when it's transparent, absolutely secure and the user doesn't even see the cost. It's built into the system they're receiving, so I think of that as a model. And, again, I think of VeriSign as the company that has the means. The network, the experience, the trust as a third party to these various vendors. So WiMAX is just an example of a standard that develops that requires the use of encryption. You have got to manage keys and trust and integrity in the network and we're just basically a service provider who is sort of invisible to the end user, but we provide a critical component. It couldn't work without somebody playing that role.

Thank you and with that I would like to tournament program back over to Mr. Ken Bond for any additional or closing comments.

Thank you, operator. We anticipate that our next quarterly conference call, which will reflect our first quarter 2009 results, will be held on Thursday, May 7 at 2:00 p.m. pacific time. We expect to provide final confirmation of this indicate on April 1, the first business day after the close of the quarter. I would also like to remind you 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 with any followup questions. Thank you for your apartment passenger and continued support, and this concludes our call. Thank you and good evening.

That does conclude today's conference. You may disconnect your lines at this time.