Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Ken Bond - VP, IR & Corporate Communications

Jim Bidzos - EC and Interim President and CEO

Brian Robins - Acting CFO

Analysts

Todd Raker - Deutsche Bank

Phil Winslow - Credit Suisse

Garrett Becker - Merrill Lynch

Sarah Friar - Goldman Sachs

Rob Owens - Pacific Crest

Walter Pritchard - Cowen & Co

Steve Ashley - Robert W. Baird

Rob Sanderson - American Technology

Katherine Egbert - Jefferies

Shaul Eyal - Oppenheimer & Co

Scott Sutherland - Wedbush Morgan

VeriSign, Inc. (VRSN) Q3 2008 Earnings Call November 6, 2008 5:00 PM ET

Operator

Good day and welcome to this VeriSign Incorporated third quarter 2008 Earnings 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.

Ken Bond

Thank you, Jennifer. Good afternoon everyone and thank you for joining us for VeriSign’s third quarter 2008 earnings conference call. I am Ken Bond, Vice President, Investor Relations & 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 PM Pacific Time via telephone at 888-203-1112 or 719-457-0820 for international callers and will be available through November 12. The pass code 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 FirstCall, MarketWire, as well as our website.

For those of you joining us via webcast, we also invite you to view the slide presentation, which accompanies today’s conference call. These same slides will be available for download from our website after the call.

Financial results in today’s press release are unaudited and the matters we will be discussing today include forward-looking statements and as such are subject to 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. And 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 will open up the call to your questions. Unauthorized recording of this conference call is not permitted.

With that, I would like to turn the call over to Jim.

Jim Bidzos

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 that 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 for the third quarter. From there, I would like to touch on some areas that 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 and update on our divesture activities as well as our executive search currently underway. 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 improvements 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 three penny charge to EPS for a write-down 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.

And 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 and .com and. 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 working 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 see.

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 online advertising names as we expected. As registrars forecast that economic conditions will contribute to lower than expected growth rates coupled with continued weakness in online 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 online 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 our efforts to develop regions for growth potential in both .com and .net overtime.

While overall growth may be slowing, we note that the growth of the adjusted zone is consistent with all other TLD 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 underway in online 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 online advertising and the exit of a few large online advertisers some in response to industry litigation.

As a reminder, on October 1st registry fees for .com and .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 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% uptime 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 installed base for his quarter increased to 195,000 certificates compared with 156,000 last quarter and 957,000 the same quarter last year. We're very pleased that 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 certificate 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 revenues. While still a small portion of our SSL business, extended validation or EV certificate sales continued to be strong as we more than doubled the units sold a year ago and we remain the number one provider of EV certificate 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 the 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.

And it’s another example of how the weakening economy has the potential to affect our business. Should this trend continues, 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 trend continue?

Now I would like to share some 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 onetime password programs. While we're optimizing our market approach to reflect current economic conditions, we believe that are 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 and update on our divesture activities as well as our executive search currently underway. 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 along 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 risks 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 businesses, while exiting a number of good but non-strategic businesses.

We believe this strategy along with the focus on improving our capital structure will provide for better shareholder value overtime. Our core businesses are growing with revenue growth of 18% year-over-year this quarter. Operating margins are expanding in 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. We have 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 it 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, 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 maybe 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 has potential risks. As we have 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 risks 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 online 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.com and .net to international markets such as India, china and Latina America. Additionally 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 risks around the uptake 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 of credit is whether we're seeing any signs of cannibalization to our VeriSign branded certificate 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 VersiSign certificate 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 it also leave room for market share gains.

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 the 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 and 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 maybe able to complete a transaction on one of the major bundles this year, but our experience last quarter reminded us we are 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 is the right course of action. In these difficult times it would be easy for us to second guess ourselves, but when the going gets tough the tough keep going and we will keep going until we completed the restructuring we setout 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 quarter, we retained a search firm and I have 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 process. 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 are seeing 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 I, these core leaders and the 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 rightsizing our business once the divestures are complete. The importance of executing on planned investments in an expedient manner remains the 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 non-core businesses.

I would now like to turn the call over to Brian for a walkthrough of our financial results for the third quarter as well as guidance. Brian.

Brian Robins

Thanks, Jim. And thanks to everyone for joining us this afternoon. Before we dig into the 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 to 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 postpaid billing businesses were moved into discontinued operations. As a result, only a couple of small businesses that 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 carve-out 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 audit 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. Growth 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 now 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 headcount reductions.

Additionally, equipment and software expenses were lower this quarter due to favorable contract renewals. As expected, we saw an increase in depreciation and operational expense associated with the startup of Delaware data center and leased expenses associated with the leaseback of buildings here on our Mountain View campus.

Below the operating income line, we incurred a non-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 used 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 the 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 our 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 Q1or roughly $79 million year-to-date. As we noted last quarter, in July we brought online the new data center in Delaware. Our ability to consistently generate solid operating cash flows resulted in our maintaining a strong balance sheet with ending cash, equivalents and restricted cash of over $654 million down approximately $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 the common shares outstanding by 30%.

Net DSO for the third quarter was 35 days, down from 41 days last quarter, as a result of the 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 headcount reductions and divestitures. As we've indicated previously, we would expect headcount to continue to decline with the sale of non-core businesses and further reductions in shared services headcount.

Moving now to guidance. This quarter, we will again provide guidance for our core businesses which are naming, SSL and IAS. And as a reminder, our guidance includes VeriSign Japan given its focus on SSL and IAS 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 towards 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 overhead and shared services costs.

We're being aggressive on a number of fronts with particular focus on our headcount, 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 headcount by 640 people and by continuing to aggressively manage headcount, we are in a position to align our cost outlook 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 our objective of improving operating margins overtime. Jim discussed the financial strength of VeriSign earlier, as here 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 now 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%. As discussed for sometime we expect that Q4 non-GAAP operating margin will be 35% or higher. We also expect that aggregate of items for the operating income line will be similar to this quarter's result 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 that 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 then we expect to repeat this performance in Q4. And we've already reduced the share count below 200 million shares as projected.

In total, we're pleased as we met are appeared to be on track to meet all the full year financial targets discussed last November. And 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. And it is not clear whether we'll see more. As a result, we believe that 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 expansions. We remain focused on executing our strategy, as we clearly see this is the key to further unlocking shareholder value longer term.

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

Question-and-Answer Session

Operator

(Operator Instructions) And we will take our first question from Todd Raker with Deutsche Bank.

Todd Raker - Deutsche Bank

Hi, how are you?

Jim Bidzos

Good, Todd. How are you?

Todd Raker - Deutsche Bank

Good. Two questions for you. One, if you could 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 that you could see net adds go below a million in a quarter in '09? Do you think that's a pretty good baseline given what you've seen here in the October month?

Brian Robins

Todd, 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. Overtime 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 the macro economy.

Ken Bond

Todd, it is Ken. I will jump in on that 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 kind of 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 and extrapolate; one data point does not make a trend. So this is some of the background behind why we've got that guidance range of $1 to $2 for next quarter. I think what we really need to do is just see a little bit more time unfold here try to get a sense here as to whether or not these macro effect is coming in or whether or not this is just a one quarter blip. Jim, any further?

Jim Bidzos

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.

So 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 that part of the business is nowhere near as volatile and it’s much more predictable and stable.

So, how those two wash out is really hard to predict. I think we need a little bit more data before we can say that. Obviously anything is possible, but I think once these advertising names wash out, the ability to forecast and predict the business will improve dramatically.

Todd Raker - Deutsche Bank

Okay. Thanks.

Operator

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

Phil Winslow - Credit Suisse

Hi. I want to focus on the expense front for a little bit, especially when you start to think about next year. You mentioned growth coming in a little bit 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?

Brian Robins

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, we make sure that we have revenue attainment before we actually spend the dollar.

So we're actually trending below on headcount now on wait and see mode on the macroeconomics and then as we invest in new projects, we'll do milestone based spending. So from a margin perspective, we recommitted to ending this year at 35% or higher and you can expect that or higher next year.

Phil Winslow - Credit Suisse

Great. Thanks.

Operator

And we’ll go next to Garrett Becker with Merrill Lynch.

Garrett Becker - Merrill Lynch

Hi. Thanks for taking the call. I just wonder if you can drill down a little bit into the operating margins. There is a number of moving parts in there. You had the lease expenses and the ICANN fees, 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?

Brian Robins

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. And 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 to $2 million at quarter and you can expect that on an ongoing basis. Additionally, we reported last quarter that we sold two buildings here in the Mountain View campus and 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 the ICANN fees have gone up slightly. So, there are 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.

Garrett Becker - Merrill Lynch

Okay. Thanks.

Operator

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

Sarah Friar - 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 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 up into more than mid-teens. I would love to get a little bit more color about how you're thinking about that.

Jim Bidzos

Hi, Sarah. 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 unparallel 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 of that 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 the sprinkle growth into those core businesses that we want to do because they're so profitable.

So, it’s until all of that comes together, a month's worth of data is just isn't enough for us to feel comfortable giving you anything more. It’s essentially be a projection even based on the assumption that the economic conditions continue just as they are.

Brian Robins

And Sara just to add a little bit of color on that, however, given the environment we had a choice either to provide some element of discussion or just stay quiet on this. We felt that given the circumstance and the environment it would be more appropriate for just to give you a little bit of color, it is a wide range.

We recognized that and that's reflective of the environment. But again the bracketing here is just so that people don't get nervous and start calling for things to be maybe lower than they really should be. Last quarter as an example we talked about domain name growth and we thought that, that might be in the same range or a little bit lower.

We want to make sure by bracketing domain name growth this quarter we said $1 to $2 million we don't want people running after it for example saying that the domain name growth might be only a half a million names.

Sarah Friar - Goldman Sachs

Got it. Okay. That makes sense. And then, when you look out into '09 from a margin perspective clearly you're seeing expansion. How much of that is, you actually able to kind of almost frontline costs keep taking heads out of the organization and so on versus getting the fact that you will see double digit growth, you will get some leverage of the top-line. Is it 50/50? I'm trying to get a sense for a slower growth. How much more margin we would still get versus higher growth?

Brian Robins

This is Brian. 50/50 is a good split. There is a number of things that you will do take costs out of the business. As we alluded to in the past as we complete the 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, we will also provide increased margin

Sarah Friar - Goldman Sachs

That’s very helpful. Thanks a lot.

Operator

And our next question comes from Rob Owens with Pacific Crest.

Rob Owens - Pacific Crest

Good afternoon, everyone. As you talk about the advertising related names washing out over 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? Should you see half or little less than half of the names of the 8%?

Jim Bidzos

Yeah. This is Jim. So, first of all, at the time that Google made their change in June, the effects were almost immediate. They started to roll in July. We started to feel them then. But basically pushing that out twelve months, I think the answer to your question is that the later is more true that we should start to see a more advertising name free adjusted zone towards the later 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 that we do which we think are fairly comprehensive and accurate at this point we have identified about $8 million names that 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.

Rob Owens - Pacific Crest

Great. So, most of those names are one year in duration to begin with?

Jim Bidzos

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

Brian Robins

That's correct.

Rob Owens - Pacific Crest

Right.

Jim Bidzos

Thanks, Rob. Anything else?

Rob Owens - Pacific Crest

Nope. Thank you.

Jim Bidzos

Okay.

Operator

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

Walter Pritchard - 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?

Jim Bidzos

Well, I will give you maybe a more detailed answer to that question that you maybe look for. It was a little bit easy at first. We had some initial candidates and then it slowed down as the economic impact was felt. I think people settled in and said, "well, I need to see what happens and where things go".

And 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 much easier.

Walter Pritchard - Cowen & Co

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

Jim Bidzos

Well, we mentioned that we expect the renewal rate to come down a point or two.

Walter Pritchard - Cowen & Co

But that sounds like it is related to advertising, right?

Jim Bidzos

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

Walter Pritchard - Cowen & Co

Thanks a lot.

Operator

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

Steve Ashley - Robert W. Baird

A couple of 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?

Jim Bidzos

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

Steve Ashley - Robert W. Baird

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

Brian Robins

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

Steve Ashley - Robert W. Baird

Thank you.

Operator

And our next question comes from Rob Sanderson with American Technology.

Rob Sanderson - 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 that we repurchased in October after the close of the quarter and another 1.4 from the ASR. First, did I get that right and if so what was the average price on that?

Jim Bidzos

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 then we had an additional $1.4 million shares from the ASR. The price on that was--

Brian Robins

34.91

Jim Bidzos

The average price on that was 34.91.

Rob Sanderson - American Technology

Thanks. And then 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?

Brian Robins

Yeah. Just quickly correct, it’s $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.

Rob Sanderson - American Technology

Right. So 850 plus 150 in ops, but what is the right cash balance to carry given the current environment?

Brian Robins

That’s a great question. I think you see a lot of companies going right now viewing cash as king just because the liquidity crisis out there and folks are being a little bit 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 and 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.

Rob Sanderson - American Technology

Great. Thank you, gentlemen.

Operator

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

Katherine Egbert - Jefferies

Hi. When do you expect to have a new CEO? You previous said by the end of the year. It sounds like it may take longer now. Could you give any new information there?

Jim Bidzos

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

Katherine Egbert - Jefferies

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

Brian Robins

Accounts payable?

Katherine Egbert - Jefferies

Yes.

Brian Robins

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

Katherine Egbert - Jefferies

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

Brian Robins

Okay. So, let’s go now and I’ll pull that up and then get back to you later on the call.

Katherine Egbert - Jefferies

Okay. Thanks.

Operator

And we'll go next to Shaul Eyal with Oppenheimer & Co.

Shaul Eyal - Oppenheimer & Co

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

Jim Bidzos

This is Jim. No, that's not the case. There aren't competing properties; that isn't the issue. 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 can give 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. And it’s 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 that we've done is focused on buyers who do not need financing, where it was possible for to us do that. No competitive issues.

Shaul Eyal - Oppenheimer & Co

And that's quite helpful. And maybe one more general question already two years into contract with ICANN since extended back I believe in November '06. What is the next time or with respect to the process that you go back to ICANN and start the renegotiation process?

Jim Bidzos

Well the contract for .com renews in 2012. So, there are performance criteria that we meet of course and we are meeting, and we do have a presumptive right of renewals. But that's four years from now.

Shaul Eyal - Oppenheimer & Co

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

Jim Bidzos

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

Shaul Eyal - Oppenheimer & Co

Okay. Fair enough. Thank you very much.

Operator

And our last question will come from Scott Sutherland with Wedbush Morgan.

Scott Sutherland - Wedbush Morgan

Great. Thank you. Good afternoon.

Jim Bidzos

Hi, Scott.

Scott Sutherland - Wedbush Morgan

A couple questions here. First of all I'm trying to understand a little better the margins and the potential and the 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?

Jim Bidzos

That's a good question. We reorganized our headcount this year to be more direct towards the product. So, we could actually have more accountability and transparency within the business. And so it’s changing overtime, you're starting to see that come out.

We're able to achieve our 35% exit rate a quarter earlier and you are actually seeing that earlier in time. We haven't committed to 2009 operating margin at this point. But we do have great visibility into the expense and with slightly lower revenue growth for next year, we'll be able to maintain and expand those margins.

Scott Sutherland - Wedbush Morgan

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

Jim Bidzos

Correct.

Scott Sutherland - Wedbush Morgan

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

Jim Bidzos

Well, 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, all be at a smaller number. Those growth rates are much higher than the North American growth rates.

Scott Sutherland - Wedbush Morgan

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

Jim Bidzos

Well, I can give you a brief update. This is Jim. You may have seen an article in the online Wall Street journal yesterday that talked about this. And this just shows you how complicated the process is. 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 and their efforts to protect their intellectual property.

So, they gave some very good examples about Marriott as the 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. And the article concluded that .com was the powerful brand and probably would continue into the future that way.

Scott Sutherland - Wedbush Morgan

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

Jim Bidzos

None that we can measure.

Scott Sutherland - Wedbush Morgan

Okay. Great. Thank you.

Operator

And 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.

Ken Bond

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 5th, at 2 PM 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 that in light of regulation FD, VeriSign plans to retain its longstanding policy to not comment on the financial guidance during the quarter unless it is done through public disclosure.

Please call the Investor Relations department with any follow-up questions from this call. We thank you for your participation and continued support. This concludes the call. Thank you and good evening.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: VeriSign, Inc. Q3 2008 Earnings Call Transcript
This Transcript
All Transcripts