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VeriSign, Inc. (NASDAQ:VRSN)

Q3 2006 Earnings Call

October 19, 2006 5:00 pm ET

Executives

Stratton Sclavos - Chairman, President, CEO

Dana Evan - EVP of Finance and Administration, CFO

Tom McCallum - IR

Analysts

Ed Maguire - Merrill Lynch

Todd Raker - Deutsche Bank

Sterling Auty - JP Morgan

Peter Kuper - Morgan Stanley

Rob Owens - Pacific Crest Securities

Phil Winslow - Credit Suisse

Walter Pritchard - Cowen

Sarah Friar - Goldman Sachs

Chris Hovis - Morgan Keegan

Laura Lederman - William Blair

Gregg Moskowitz - Susquehanna Financial Group

Shaul Eyal - CIBC World Markets

Kevin Buttigieg - A.G. Edwards

Katherine Egbert - Jefferies & Co.

Scott Sutherland - Wedbush Morgan Securities

Presentation

Operator

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

Tom McCallum

Thank you, operator. Good afternoon, everyone. Thank you for joining us for VeriSign's third quarter 2006 results call. I'm here today with Stratton Sclavos, Chairman and CEO of VeriSign; and Dana Evan, our CFO. In a moment, Stratton will review Q3, and he will provide some insights into the performance of our businesses. Dana will then follow with a preliminary non-GAAP discussion of our Q3 financial results.

Due to the previously announced internal review of VeriSign's historical stock option grants being conducted by our Board of Directors, VeriSign is not providing detailed GAAP or non-GAAP financials for the quarter ended September 30, 2006. The Board currently anticipates completing its investigation before the end of the year.

In addition, facts may come to light once the internal review is complete that may require us to change our accounting treatment of stock options granted in prior periods, which may have a material adverse effect on our results for those periods or other periods.

Dana will also present preliminary forward-looking non-GAAP financial guidance for Q4 and 2007. These forward-looking statements are subject to the risks and uncertainties described in our annual report and other reports filed with the SEC.

Following Dana's remarks, we will open up the call for your questions. We anticipate the call will end at approximately 3 pm.

With that, I would like to turn things over to Stratton.

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Stratton Sclavos

Thanks, Thomas and good afternoon, everyone. Let me add my welcome to all of you attending today's call. As our results for Q3 indicate, we saw overall performance that was in line with our expectations across our lines of business. Particular items of note were the continued strong results in the naming business and a second consecutive quarter of stability in the mobile content space. We also saw the decline that we had anticipated in the core telecom revenues due to industry consolidation.

In terms of strategic execution, Q3 was a very productive quarter, as we launched updates to many of our current product lines and introduced new offerings in digital content and security. We also completed the acquisition of GeoTrust and announced our intention to form a joint venture with News Corp to combine our direct-to-consumer mobile content businesses.

All in all, we are satisfied with our results for Q3, and are looking forward to incremental growth across the business in Q4. With that, let me dive into the third quarter highlights for the business units, and then say a few words about our outlook for the rest of the year.

Let's begin with the Communications Services Group. We currently report the CSG group revenues in two categories. The first is Communications and Commerce Services, and the second is Mobile and Broadband Content Services. The Communications and Commerce line of business includes our network connectivity, database, billing and messaging services. The Content line of business includes our B2C and B2B efforts for mobile and broadband content distribution.

For Q3, the Communications and Commerce line of business achieved $114 million in revenue, consistent with our expectations, given the decline we projected in legacy voice services, as industry consolidation continued in North America. Key drivers in the C&C business included continued growth in wireless billing and MetroPCS and [Leap] as well as strong performance year over year in messaging volumes, as international traffic and new services for Internet portals and commerce sites began to ramp. These gains were offset by the decline in connectivity and database revenues from AT&T and others.

In terms of business metrics, we delivered over 17 billion database queries in Q3, up 19% year over year. We also processed billing and payment services for approximately 9.3 million wireless users, up 29% year over year. The 10 billion SMS messages we helped deliver in the quarter represents more than a 100% increase from the year-ago period. Premium messaging and MMS volumes were up significantly as well.

As we have discussed before, the consolidation and pricing pressures in our domestic carrier base have impacted our legacy business over the last 12 months. To combat this reality, we have focused on expanding our Communications and Commerce footprint internationally. We believe we have made solid progress towards this goal this year, as new relationships in Korea, Singapore and China should provide incremental growth in network and messaging services as we look towards 2007.

In short, while volumes in the C&C business continue to grow at healthy rates, we expect revenues will be somewhat choppy over the next 12 to 18 months as we deal with the consolidation and pricing pressure inherent in the business.

That being said, we are executing to a plan that offsets the domestic declines with new revenues generated from international penetration, new products such as intelligent analytics and VoIP services and, importantly, the refresh of our pre- and post-paid billing systems, which are rolling out as we speak.

Now, let's move to the Content line of business. Overall, we achieved revenues of $89 million in the Content business during the quarter. Direct-to-consumer B2C revenues came in at $73 million, slightly ahead of our forecast, while B2B revenues came in at $16 million. With the successful completion of the m-Qube acquisition, as well as continuing momentum in our other B2B initiatives, we successfully established new relationships during the quarter with several television networks, branded media players and consumer product companies. We expect these relationships to begin to contribute to our results as early as this quarter.

One area of particular note is the interactive TV space. There are at least ten television shows on the new fall schedule that feature home audience participation through the use of premium text messaging and voting over mobile phones. VeriSign is operating the end-to-end solution for the vast majority of these shows, using technology and infrastructure brought to us with the m-Qube and 3united acquisitions. The executive producers of these shows tell us that they are intrigued by the possibilities that our interactive services allow them to increase live viewership, promote new products and generate incremental revenue.

Of course, the biggest news in the Content group during Q3 was the announcement in early September of our intention to form a joint venture with News Corp for direct-to-consumer mobile entertainment services. We believe the joint venture brings together the world's leading media and entertainment company with the most successful mobile content company. By combining Jamba!'s technology platform and international customer base with News Corp's brands, network assets and global reach, we believe we will have the world's first vertically-integrated mobile entertainment company.

As we announced previously, News Corp and Fox will have a 51% controlling stake in the venture, while VeriSign will provide connectivity and other services to the JV. The joint venture will also become the m-commerce platform for the very popular MySpace properties. VeriSign will continue to focus independently on B2B services for both mobile and broadband content distribution. The final agreements and regulatory approvals are expected to be complete by year end. Once consummated, VeriSign will no longer consolidate Jamba!'s revenues into our P&L. Dana will provide some more detailed financial guidance on how to model this for 2007 purposes in a few minutes.

All in all, we are excited about our partnership with News Corp, and believe the transaction is clearly in the best interest of our shareholders. With a clear and renewed focus on providing intelligent infrastructure solutions to B2B customers, we believe we have now assembled a comprehensive portfolio of content services that carriers, media companies, Internet portals and consumer products brands can leverage to accelerate their go-to-market plans for interactive mobile and broadband services. There's a lot more to come here as we head into next year and roll out several new offerings in the space.

So, in summing up the Communications Services Group for Q3, I think it is fair to say that our results came in as planned, and that we hope that the greatly expanded portfolio of new services will help balance the revenue distribution in CSG for 2007. We remain optimistic about the growth opportunities that exist across the business, including messaging, international signaling and content services.

Now, let's move to the Internet Services Group. The ISG Group contains our Information Services business and our Security Services business. VeriSign Information Services provides the global infrastructure that enables intelligent network interactions for naming, supply chain and real-time publishing applications. While we are very excited about the longer-term potential to build $100 million plus businesses in the supply chain and real-time publishing market, the main driver in VIS continues to be the naming business for .com and .net.

During the third quarter, we processed approximately 6.1 million new registrations for .com and .net domain names. We also saw another 7.9 million names renewed or extended, adding up to 14 million domain name transactions in the quarter, up 28% from the year-ago period. Renewal rates remain strong as well, coming in at 77% for the quarter. VeriSign's adjusted base of active names at the end of the period stood at 61.4 million, up 7% sequentially and 31% year over year.

Remarkably, our ATLAS infrastructure is now handling, on average, more than 20 billion DNS requests per day. That's 20 times the rate of just five years ago. We have also over-provisioned the ATLAS constellation in order to handle peak loads and Internet attacks that drive performance and stability requirements several orders of magnitude higher than these rates. After four years of proven performance, ATLAS is living up to its promise as the most technologically advanced and scalable real-time directory in the world.

Many of you have asked about the status of our new contract with ICANN. Just to recap the facts, VeriSign and ICANN have mutually signed a new agreement which extends our contract for operating .com through 2012, and provides for much clearer processes for new product introductions and contract renewals. It also settles all disputes between our respective organizations. That signed contract is now in the hands of the Department of Commerce for approval, and stipulated in their memorandum of understanding with ICANN, which was recently extended for another three years.

Just to be clear, as of today, neither VeriSign nor ICANN have been asked by the Department to make any changes to the signed agreement. We still believe the new agreement is in the best interest of the Internet community, ICANN and VeriSign, and continue to have constructive dialogue with the Department. That's really all the news there is at the moment. However, we do expect to have a decision soon.

Moving on to our intelligent supply chain services, we also saw continued momentum in the quarter, with several new ones for our RFID consulting services and our retail point-of-sale services. In fact, we signed two major infrastructure partners for point-of-sale demand data, including one of the top 10 retailers in the US.

There was good momentum on the real-time publishing front as well. We believe we are now handling over 80% of all global ping traffic at over 7 million feeds per day, up 40% quarter over quarter. We are also serving over 220 million aggregate news articles on a daily basis. Additionally, we are now harvesting news from over 26,000 sources and tracking over 11 million blogs and RSS feeds. As the real-time web continues to flourish, we will look to become the authoritative source of information for enterprises, web portals and media companies.

So overall, the VIS team is executing well on the naming front, and beginning to establish a blue-chip list of customers in the supply chain and real-time publishing businesses, including L'Oreal, Cephalon, Yamaha and Lucent.

Moving to our Security Services unit, we sold over 136,000 SSL certificates during the quarter, up 11% year over year. This brings the VeriSign active base to 536,000 units. With the completion of the GeoTrust acquisition, we now bring their 245,000 active units into the family, for a grand total of 781,000 SSL certificates in service around the globe.

As we said when we announced the acquisition, GeoTrust's channel-focused products and well-established reseller base extend our capabilities in coverage in the SSL space. With high assurance, or as they are now officially being called, extended validation certificates, coming with the launch of Vista next year, the SSL businesses is poised for strong growth in 2007.

On the enterprise side of Security, we're starting to see much broader industry segmentation in our sales efforts as risk management, compliance and business continuity become mainstream issues for corporations and government agencies. During the quarter, we had a broad base of customer wins for our managed security, unified authentication and fraud detection services. Notable contract awards included Honeywell, JP Morgan, HSBC, Wal-Mart, American Express, MasterCard and BlackRock.

In the public sector, we continue to see strong adoption by civilian and DoD agencies of our iDefense Security Intelligence Services, and we also secured a strategic win with the Department of Education for PKI and smart card management services in support of the HSPD-12 mandate. We would expect additional HSPD-12 opportunities to heat up as we head into 2007.

As we projected on last quarter's call, revenues in the overall Security Services businesses were up 5% sequentially. We did see some weakness in Japan and Europe, which is not all that surprising in the summer season, but we are closely monitoring both regions this quarter to determine if there are other trends emerging.

Before summing up the Internet Services Group, I wanted to point out an important partnership announcement we made last week with Symantec. The companies have agreed to work together to integrate the VeriSign Identity Protection technology and network services with Symantec's ubiquitous Norton Desktop. We hope to eventually reach Symantec's installed base of over 50 million Norton users with easy-to-use consumer authentication and fraud detection services that can help prevent identity theft and reinforce consumer confidence in online transactions.

VeriSign and Symantec each have strong consumer brand awareness in our respective markets. By supporting the VIP network, Symantec now joins eBay, PayPal, Yahoo! and Schwab in promoting VeriSign's vision for strong authentication for consumers. So the ISG group in total had solid performance in Q3, and its lines of business are all seeing good demand as we finish the year.

Now, let me say a few words about Q4 and some other items before turning it over to Dana. The continuing momentum in the Internet Services Group, coupled with our new services for both mobile and broadband content, provides some momentum as we head into the final quarter of the year. We would expect growth across both the Internet and Communications Services Groups for Q4, as strong domain name, SSL and mobile messaging demand continue.

Like many companies in our space, we have also begun our strategic planning for 2007. While we are many weeks away from completing that work, some basic themes for next year are clear. Customer intimacy, product synergy and margin expansion will drive our 2007 plan. Let me drill down on each point, starting with customer intimacy. After talking with many of our largest customers over the last six months, it is very clear that they want to do business with fewer vendors who understand their specific opportunities and challenges, and who can offer more strategic end-to-end capabilities. We plan to be one of those vendors.

In terms of product synergy, we now have more development and operation professionals within VeriSign than at any other time in our history. This organic capability to create intellectual property and deliver integrated services is a unique competitive advantage that we believe we can now exploit to bring new services to market more quickly.

Lastly, in terms of margin expansion, we believe the platforms, people and processes of the Company are now well-positioned to allow us to accelerate our operating leverage as service volumes grow.

From an external perspective, this means we plan to enter 2007 with a single global sales and services organization and a unified products group combining all our product marketing and development resources. We believe these changes, coupled with continued volume growth on our core platforms and the divestiture of a controlling stake in the Jamba! business, will allow us to drive the margin expansion we are after.

In short, we are focused on serving our customers better, driving more innovation with our people and accelerating our operating margin expansion.

Our planning work will continue through the rest of the quarter. Dana will give you a high-level view of our financial goals for 2007 in the moment, but we won't be in a position to answer more detailed questions until a later date. One announcement we can make is that, given the Jamba! divestiture and the move to a single products organization, Vernon Irvin has decided to pursue opportunities outside of VeriSign. He will be transitioning his responsibilities to Mark McLaughlin, the current head of VIS, over the next few weeks. The Board and I want to thank Vernon for his numerous contributions over the last few years, and wish him well in the future.

So with that, I want to thank you for your attention. Now, I will turn the call over to Dana.

Dana Evan

Thanks, Stratton, and thanks to all of you for joining us this afternoon. Before discussing VeriSign's performance in Q3, I would like to start with a quick recap of our internal review and analysis related to VeriSign's historical stock option grants. As you'll recall, this review was initiated by our Board of Directors and is ongoing. The Board currently anticipates completing this process before the end of the year. As such, we will not be providing full GAAP or non-GAAP results at this time. We will provide you with as much financial information as possible, including preliminary non-GAAP results and guidance.

Please note, though, that these are preliminary numbers, and represent what we believe the numbers would be without any impact or changes resulting from the stock option investigation. So, now, let's turn to the financial results for the quarter, starting with revenue.

On a consolidated basis, VeriSign reported third quarter revenue of $400 million. The revenue results are consistent with our previous guidance, and demonstrate the continued strength we have seen throughout the year in our ISG business as well as the stabilization we are now experiencing in the Jamba!/Jamster! B2C business.

Looking at the detailed revenue for the quarter broken down by reporting unit, the Internet Services Group grew 5% sequentially, delivering approximately $197 million of revenue or 49% of the total. We saw equally consistent growth from both the VIS and the VSS segment. The GeoTrust acquisition, which closed late in the corner, contributed less than $1 million of revenue.

The Communications Services Group reported $203 million of revenue for Q3. As a percent of total revenue, the Communications Services Group represented 51% in the quarter. Within the core Communications and Commerce line of business, revenues were $114 million and in line with our expectations.

The Mobile Content business, which includes Jamba!/Jamster! as well as our Mobile and Broadband Infrastructure Services, delivered revenues of $89 million. Jamba!/Jamster! represented $73 million of this number, which was slightly higher than our expectations for revenues, in the $70 million range. Moving to our international operations, the percentage of revenue driven from our international customers, affiliates and subsidiaries was 29% for Q3.

Preliminary non-GAAP gross margin came in better than the 63% range we had previously guided to, at 64.6%. This was mainly the result of better than expected revenues in the Content business, which in turn drove gross margins up a bit. Q3 operating expenses were in line with our expectations, driving a 20% operating margin for the quarter.

As it relates to headcount, we ended the quarter with approximately 4,860 employees, up from 4,640 in Q2. The majority of this increase came through the GeoTrust acquisition and hiring in our Operations and Infrastructure Group.

Preliminary non-GAAP earnings per share for Q3 were $0.24, in line with our expectations and consistent with our previous guidance for Q3. This earnings per share calculation uses a 30% tax rate and a diluted weighted average shares outstanding of approximately 247 million shares for Q3.

Moving on to the balance sheet and cash flow items, cash balances decreased by $26 million in the quarter, translating into cash equivalents and short-term investments totaling $709 million. Significant components contributing to cash balances at the end of the quarter included outflows related to the GeoTrust acquisition of $125 million and loan payments against the credit facility of $100 million, which occurred early in the quarter. These outflows were offset by increased borrowings in the credit facility, strong collection efforts and healthy operating cash flow.

As it relates to accounts receivable, net DSO for the third quarter was 50 days, down from the previous quarter's DSO of 52 days, due to the strong collections activity within the Communications Services Group. Total deferred revenue on the balance sheet was $590 million at the end of Q3, up $30 million from the previous quarter. While the GeoTrust acquisition added an additional $10 million in deferred revenues, core deferred revenue growth was solid, with a $20 million increase. This was driven primarily from strong bookings in the Security business and better-than-expected sales of new and renewed common net names.

Moving on to cash flow metrics, preliminary operating cash flow for Q3 came in consistent with our guidance at approximately $90 million, driven by strong net income and favorable balance sheet trends. Lastly, with Q3 capital expenditures of $36 million, free cash flow for the quarter was in the $50 million range before taking into account acquisitions. So, that concludes the financial review.

Let me now turn towards our outlook for Q4. As it relates to revenue guidance for the quarter, we anticipate revenues in the $415 million to $420 million range. This reflects the expectation that the Communications Services and Internet Services Groups each will represent approximately 50% of revenue in Q4. In the Communications Services Group, we are forecasting a modest uptick in the core Communications and Commerce revenue and sequential growth in the Content business, including Jamba!/Jamster!. This would represent the first sequential growth we have seen in this business over the last six quarters. This guidance also reflects the anticipation that the Internet Services Group experiences consistent growth in Q4.

Turning to margins for Q4, we would expect gross margins in the 64% range, and in terms of operating expenses, we will continue to execute our plans for investing in growth and next-generation services, while remaining focused on expense management in all areas across all businesses. This would suggest an operating margin for Q4 consistent with Q3, in the 20% range. I would also like to point out this margin guidance does include a full quarter's worth of expenses from the GeoTrust acquisition.

Taking into account our forecast for interest expense, which we net against our normal quarterly interest income, we would look for net other income of approximately $3 million in Q4. We are currently precluded from stock repurchases, due to our internal review of stock option practices. Therefore, we would forecast a diluted share account of approximately 247 million shares for the quarter.

Taking into account the revenue, margin and share count guidance that I just laid out, we would look for preliminary pro forma earnings per share in Q4 of $0.25 to $0.26 on an after-tax basis, using a 30% effective tax rate. This EPS guidance also reflects a full $0.01 worth of dilution in Q4 relating to the integration of the GeoTrust acquisition.

So, to sum it up, we were pleased with the financial results and business metrics delivered in this past quarter, and also with the continued execution on our strategic initiatives. As we head into Q4, we look for a strong finish to the year, driven by solid performance we expect from the Internet Services Group, continued growth in the Content business and modest growth in the core Communications and Commerce business.

Before we open up the call for questions, let's just talk briefly about a few items relating to 2007. As Stratton mentioned earlier, we are anticipating our joint venture with Fox/News Corp to close at the beginning of the new year. As a housekeeping matter, for those of you with 2007 financial models, we would recommend adjusting those models to reflect the concurrent divestiture of the Jamba!/Jamster! business and the formation of the new joint venture. VeriSign will hold a 49% minority ownership stake in this new JV. Therefore, in 2007, the Jamba!/Jamster! revenue will no longer be consolidated in our financials, nor will the related operating expenses and operating income be reflected in the P&L.

Our standalone internal Jamba! models for 2007 would have forecast approximately $300 million to $350 million in revenue and operating margins in the high teens to low 20% range. On a go-forward basis in 2007, we will begin reporting our 49% interest of the new JV's income as a component of the other income section on the P&L. After the JV closes and we complete the planning for the new entity, we will update guidance to reflect this 49% share of forecasted JV income.

So, as we think about the upcoming year and our business outlook for VeriSign, we would anticipate 2007 to be a year of solid growth in all financial areas: revenue, growth and operating margins and earnings. We would look for a year in which revenues are expected to grow by at least 15%, with margins continuing to expand on a quarterly basis over the course of the year. This should naturally drive an earnings growth rate that exceeds the anticipated revenue growth rate, consistent with our overarching financial strategy. We expect to be giving you a more detailed look at 2007 on the Q4 earnings call in January.

With that, I would like to open up the call for your questions. Operator, may we have first question, please?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ed Maguire - Merrill Lynch.

Ed Maguire - Merrill Lynch

Yes, good afternoon. Is there any way to quantify what the contribution from GeoTrust was in the quarter?

Dana Evan

It was less than $1 million and slightly dilutive to the EPS number.

Ed Maguire - Merrill Lynch

Okay. A question on the tax implications of the joint venture, Dana. Are you going to be reporting your interest actually post a different tax rate that would be applied to the JV?

Dana Evan

I think we're going to have to update you on that once we get the final definitive agreement closed with the JV.

Ed Maguire - Merrill Lynch

All right, no worries. That is all for me now, thanks.

Operator

(Operator Instructions) Your next question comes from Todd Raker - Deutsche Bank.

Todd Raker - Deutsche Bank

Just following up on Ed's question on GeoTrust, can you give us a feel for what you expect GeoTrust to do during the Q4 period?

Stratton Sclavos

It's probably going to be a few million dollars. I think you have to remember that's an SSL business like our own that had a high component of deferred revenue, the majority of which you have to write down as you bring it in. So it will do a few million dollars.

Todd Raker - Deutsche Bank

Back to this Jamba! discussion, Dana. If we look at the implications for gross margin in ‘07, would you expect gross margin to go up or down with Jamba! separated out?

Dana Evan

I think it's a little early to tell, because we're still doing our planning for the rest of the businesses, but I would not expect it to go down. If anything, it would be flat but with a slight uptick.

Todd Raker - Deutsche Bank

Okay. Any thoughts in terms of potential impact for CapEx as we look at 2007?

Dana Evan

The CapEx that we spent on the Jamba! business is relatively small, so it shouldn't really have much effect.

Stratton Sclavos

I think Todd, just on the margin question, on the operating margin side, it's likely to push margins up.

Todd Raker - Deutsche Bank

Right. But on gross margins, you think it is relatively stable with where we are now?

Stratton Sclavos

Right.

Todd Raker - Deutsche Bank

Thanks, guys.

Operator

Your next question comes from Sterling Auty – JP Morgan.

Sterling Auty - JP Morgan

Thanks. Within the ISG Group, can you give us a sense of the split between the VeriSign Information Systems and the Security part of the business for the quarter?

Stratton Sclavos

We don't break those out, Sterling. I think both of them saw good growth, 5% plus in both cases. So they are growing more or less at the same rate, but obviously the naming business is throwing a lot more into deferred.

Sterling Auty - JP Morgan

Is there any color you can give us in terms of the costs that are associated with the option investigation?

Dana Evan

Yes. So, that was several million dollars in the quarter.

Sterling Auty - JP Morgan

Should that be about the same for the fourth quarter, then?

Dana Evan

Yes. It could be a little bit more.

Sterling Auty - JP Morgan

Okay, great. Thanks, guys.

Operator

(Operator Instructions) Your next question comes from Peter Kuper - Morgan Stanley.

Peter Kuper - Morgan Stanley

Great, thanks very much. Stratton and/or Dana, on the ISG, given the breakout for Q4 guidance, that would suggest yet another quarter of 20% plus growth. I know you don't want to break out certain things, Stratton, but is it possible to get a little more color on some of the drivers for next quarter and beyond? You talked a little bit about some authentication motivations there. Is eBay doing well? Or any kind of color we talked about before, just give us a little more clarity on where the growth is coming from.

Stratton Sclavos

Sure. Well, let's start on the naming side of the business. We're just continuing to see very strong volumes. The last four weeks have been highest volume rates of similar period all year. Obviously, the renewal rate kicked up a point again in that business during Q3. So we are continuing to see very, very strong performance. It's pretty clear that the overall business in naming will be more than 30% up this year.

I think in the supply chain and real-time websites, still small businesses, but in some cases we're seeing 40% and 50% growth rates year over year on a quarterly basis from what those same businesses would have done last year. So they are not big businesses, but as we had talked about earlier this year, we do see them as emerging businesses starting to hit their revenue ramps.

As we look to security, Peter, obviously SSL, especially with the contribution of GeoTrust, is going to continue to be the leading product in our Security space. But we did, with the Symantec announcement, I think nail another strong relationship there in terms of making the OTP and authentication technology of VeriSign Identity Protection ubiquitous.

eBay is, in fact, rolling out its pilot in the fourth quarter here and I have seen plans for them for worldwide rollouts beginning in Q1 of next year. So, good progress there. As I've talked about before, that's a very complex integration challenge, because they are trying to do it the throughout the entire set of eBay and Paypal properties. So, the fact that it's taking a long time is not to be unexpected. We are pretty excited about their rollout plans and the different types of authentication form factors they are looking to put into the marketplaces in 2007.

Peter Kuper - Morgan Stanley

Okay. And it sounds like stability on CSG now is kind of a re-tweaking of the lineup; we are getting away from compression problems, or pricing pressure, rather. Is that stability there? Is that a good go-forward thought process?

Stratton Sclavos

That's the right thought process. That's our goal, is to replace what is the low-margin eroding businesses with higher-margin revenue-producing businesses for the carriers, and for other now expanded customer sets that we can target, such as media companies and portals. So I think the transition is underway, and we're starting to see those newer businesses ramp. We're hoping, obviously, to balance that out on the other side.

Peter Kuper - Morgan Stanley

Great, thank you.

Operator

Your next question comes from Rob Owens - Pacific Crest Securities.

Rob Owens - Pacific Crest Securities

Good afternoon, guys. Could you maybe give us a little bit of an update or some color on what average pricing looks like for GeoTrust?

Stratton Sclavos

I do not have the GeoTrust -- good question, Rob. I don't actually have that data at hand. Our average prices on the VeriSign stuff went up significantly, about 6% quarter over quarter, over $460 a retail unit. But I don't have the same data yet for GeoTrust. We will certainly provide that as we get to next quarter.

Rob Owens - Pacific Crest Securities

Then maybe an update on the VIP program. I know Symantec's joining the list of vendors, but when should we see rollout there? When should we see at least user accounts that you guys can talk about?

Stratton Sclavos

Well, we are signing several enterprise customers per quarter right now, some multi-thousand unit deals in Europe, some multi-thousand unit deals in Asia, and a few here in the US as well. So we're starting to see the traction on the enterprise side. The big consumer deployments are really staked to the eBay/Paypal rollout, which, as I said a bit earlier, pilots are starting this quarter with them and global rollouts for them beginning in Q1.

Rob Owens - Pacific Crest Securities

Great. Thanks, Stratton.

Operator

Your next question comes from Phil Winslow - Credit Suisse.

Phil Winslow - Credit Suisse

Hi guys. Just a couple of questions on the GeoTrust side. How much deferred revenue did you have to write down on the quarter?

Dana Evan

We had to write down about 60% of what their balances were as we brought it over onto our books.

Phil Winslow - Credit Suisse

Great. Also, when you think about just the contribution then in 2007 to your guidance, you talked about 15% overall. How much are you thinking GeoTrust is as part of that?

Stratton Sclavos

It's a relatively small number on our base of overall revenues. I'm not sure we factored that in at any meaningful rate.

Phil Winslow - Credit Suisse

When you also look at the margin structure of GeoTrust, as you start to earn back that deferred revenue, how should we think of that versus your, just the core search business?

Stratton Sclavos

Well, I think the combination of the two businesses is the way to think about it. It's likely that as that deferred starts coming back in, we gain efficiencies and economies of scale of delivery. You're going to see margins expand in the SSL business in ‘07 probably at a faster rate than they have in the last three to five years.

Phil Winslow - Credit Suisse

Great. Thanks, guys.

Operator

Your next question comes from Walter Pritchard - Cowen.

Walter Pritchard - Cowen

A couple of questions, one around the reorganization that you mentioned. It didn't sound like there was any headcount reductions or anything on that end. I just wanted to confirm that, as part of that plan.

Stratton Sclavos

We are just in the early days of going through the ‘07 plan. So, as we talked about, we're going to go to a single distribution group. We're going to go to a single products group, single operations team. We're doing all the planning for that right now. So in reorienting the Company that way, we will probably have some redundant resources in some areas, and we will have other areas that will need new resources. So it's too early to tell, but certainly we always keep an eye on trying to be efficient. Hopefully, there will be some economies of scale in this as well.

Walter Pritchard - Cowen

As a follow-up on Dana's comment around the next year's plan on Jamba! $300 million to $350 million. You are doing roughly $70 million, $73 million a quarter. Was that $300 million to $350 million just you, or does that include anything that Fox is contributing into that venture? If not, could you just comment on the overall revenue picture of that joint venture?

Stratton Sclavos

That would have been our standalone revenue assumptions going into next year, from basically somewhere between zero to 20% growth, based on what we're seeing. Obviously, with the business having stabilized now and a little growth even expected this quarter, we probably would have projected some growth there and, as Dana said, margins in the high teens to low 20's.

That says nothing about what the joint venture program will be, as we put that together because you are bringing in their assets, and that team will then be responsible for building the revenue plan. So it's just too early to tell, and it's not appropriate for VeriSign to comment on what the revenue plan will be for that.

Walter Pritchard - Cowen

Okay, thanks a lot.

Operator

Your next question comes from Sarah Friar - Goldman Sachs.

Sarah Friar - Goldman Sachs

Good afternoon. Stratton, since you were just touching on News Corp, can you talk a little bit about the other opportunities that it will bring to VeriSign, with the infrastructure that you are left behind with?

Stratton Sclavos

Well, sure. Certainly for the joint venture, we are going to be providing connectivity services and other application services. So there is a services agreement between the organizations where VeriSign will continue to benefit in that way.

Then there will be a, for lack of a better term, there will be a champion or two on the Fox side who will be the VeriSign champions within the organization to introduce us into some of their other 60 business units. Everything from Fox Interactive, which owns the broadband relationships and the broader MySpace properties, as well as some of their international operations such as STAR, operating in both China and India.

So, I am very excited about both the services agreement for the joint venture, but more broadly getting, hopefully a seat at the table and a right of first look at many other opportunities within Fox and News Corp.

Sarah Friar - Goldman Sachs

Got it. Just a couple quick other things. On GeoTrust, just to come back to it briefly, is the goal there, as you go to market, GeoTrust tended to be a lower-priced competitor. Over time, will you try to effectively have a single VeriSign brand, or will it be like the Thawte acquisition where you very much keep separate brand names to effectively segment the market?

Stratton Sclavos

I think it's a great question, just a little too early for us to tell. As we went through the Thawte acquisition, it became clear that keeping the brand separate was the right thing to do. So as we bring GeoTrust in and begin to market, and as we launch new services next year for things like extended validation search, we will probably refine the brand strategy, but I don't know whether that will mean fewer or more at this point. We're going to watch it pretty closely and try to see what different price segments in the market are we looking for.

Sarah Friar - Goldman Sachs

Okay, and then just one final quick one. Thank you for the color you gave on the .com renewal. Given that it's gone to the Department of Commerce, obviously there's been Senate hearings on it. Do you feel less positive on the ability to sign the contract, or do you still feel just as confident as you did when you first signed it with ICANN? I know that's hard to gauge, but obviously there has been a lot of chatter that the Senate hearings were a little bit more negative tone, and so I just wondered what your take was on that.

Stratton Sclavos

I think the simple thing is I feel as confident as I have from the day we signed it that will get approved, because it's the right thing for the Internet community and for ICANN and for us. I think that the Department generally agrees with that, and that's why we haven't been asked to change anything in the contract.

I think the longer this time period waits, you're likely to have folks who are willing to say and do anything, lobbying certain folks to try to get their positions across. But I don't think those people have much standing in the community, and I don't think they are necessarily being viewed as unbiased in their criticism. So we're very confident it will get signed. We just continue to wait for that.

Operator

Your next question comes from Chris Hovis - Morgan Keegan.

Chris Hovis - Morgan Keegan

A quick question for you to make sure I understood a comment you made about realigning the sales force into a single unified group. Could you talk a little bit more about the rationale underlying that? Specifically, if I look at your disparate set of offerings, you're offering to a fairly diverse customer base with different needs. Where do you see the synergies there, and how will the sales force be structured or layered out?

Stratton Sclavos

All great questions, Chris. First of all just to set the context, today, each of the business units has its own sales force. They go to market separately. We try to do some cross-selling, although there's no real incentives within the teams, nor are any of the particular reps targeted at cross-selling.

As we go to a single distribution force, basically, the sales representative and account executives will, in fact, be responsible for all the revenue done at a given customer site, and then there will be sales specialists that represent different product lines to help them get over the goal line on any of these products.

I guess fundamentally, what we have done over the last few years is we have gone and talked to, really, our top customers. These are the folks who generate $100 million of revenues a year with us, like the AT&T's of the world; to folks who are kind of on the Internet site of the shop, doing anywhere from $1 million to $5 million with us, like the Yahoo!'s and the Google's and the eBay's and the rest.

We asked them, who are your best vendors, and how do they serve you, and what do you like about it, and compare that to VeriSign and what could we be doing better? The reality is they are all coming back saying, look, the biggest thing VeriSign is challenged with is making sure we understand all the different things we could buy from you and work with you on.

So, you say that we are different segments, but the reality is enterprises are now looking for wireless services. Oracle has just embedded our technology in the database, so they can send SMS alerts. We have got media companies looking to do interactive marketing on broadband and mobile, not just carriers. We have got carriers now looking to try to do enterprise security services.

So at the end of the day, the portfolio is finally coming together in such a way that we think we can represent it to the customer set in a cohesive way, and create account executives that are really understanding the customer sets of problems and then applying the VeriSign portfolio to its best use.

So, yes, there are in some cases different buyers. But in many respects, customers have come back and told us, look, we want to work with you guys as a strategic vendor, and we would like to see the whole portfolio and show you all of our priorities for a year, not just keep it stovepiped.

So, a long-winded answer to say we're pretty confident this is what the customer set is looking for.

Chris Hovis - Morgan Keegan

No, great color, thanks for that.

Operator

Your next question comes from Sterling Auty - JP Morgan.

Sterling Auty - JP Morgan

Two follow-ups. Stratton, you mentioned the revenue ramp you are starting to see in some of the small but growing businesses, like e-pedigree, real-time publishing, maybe even the RFID. But can you talk about the investment that's needed to get it through that ramp? In other words, I'm sure you are in a net investment rather than a net profit situation. But when do we see the crossover point for those businesses?

Stratton Sclavos

Very fair question, although I would tell you we're almost at that point. Those businesses are in investment mode today, but they are measured in single-digit millions in terms of negative margin today, on a quarterly basis. So we are approaching and ramping through the breakeven point with all of those businesses, in particular, supply chain services and the real-time web stuff.

Sterling Auty - JP Morgan

Then, can you give a little color on the B2B part of Mobile Content? Talk to us a little bit about what your experience so far now with the first full quarter of m-Qube, maybe some of the other side. Is it ramping as you thought it would? You talked about some of the agreements. How does that flow through to revenue as we move into the fourth quarter in ‘07?

Stratton Sclavos

Also a fair question. What you have to, I think, realize is we have gone from about a couple dozen people focused on B2B to over 700 focused on it in less than two quarters. So, there's a dramatic amount of internal work going on around integration and product roadmap, consolidation and centers of excellence development.

So, a lot of the work so far, as we expected it would be, has been internally focused on getting all the product roadmaps together. I think we've just come through a set of planning exercises with those teams, where we actually are getting pretty excited about where we're headed and which groups are going to develop which pieces of the platforms.

As you saw at CTIA, we rolled out kind of the portfolio there with something we call application services, portal services, mobile delivery and broadband delivery services. So we have the four layers now. Those architectures are set and being built out. So, I would say we have achieved on the internal side what we were hoping to achieve in getting those 700 folks focused on only building one type of product for each of those areas, and now, as we get through here into Q4, starting to ramp some of these new programs.

So, for example, the participatory TV or the interactive TV voting really has gone from nowhere, and bulk SMS message delivery for things like American Idol last year to where now we're looking at premium message delivery across eight or more shows, and seeing volumes ramp on a night-by-night basis on some of those networks. So, some of these things are starting to really kick in. I would say that is consistent with our expectation there.

Connecting into Verizon Wireless and getting other content providers through that has continued to be a slow road. We continue to work with them and the particular vendors to make sure they are bringing their content up on the platform. But we will continue to see that, I think, go slowly through the rest of this year and probably start ramping a little bit more in 2007.

Chris Hovis - Morgan Keegan

Great, thank you.

Operator

Your next question comes from Laura Lederman - William Blair.

Laura Lederman - William Blair

Just a few quick questions. Is there any risk of a potential sales disruption as you shift to a single organization in the short term? That is question one.

Question two, Can you talk a little bit about acquisition futures, how acquisitive you plan to be, what type of areas you would be looking in? I would assume they would be small, but if you could just talk about that a little bit. Thank you.

Stratton Sclavos

Good question on sales disruption, obviously one of the key things we have been looking at. So, that particular area has had a team focused on it for about the last six weeks. Our goal is to hit January 1 with a single team, all the comp plans out and the sales conference heading in the first few weeks of January, where they will be training on the different product portfolios and the reps. So, I think we're going to do all of the process-oriented things you would do. Obviously, you don't want to lose the sales force's momentum and kind of focus as they head into the new year. So, we're trying to make sure we have got all the tools and all the management, motivational tools together just to make that happen.

I guess one thing I would say, a little different than other companies, is because so much of our revenue comes from recurring services, what we really are focused on in the sales force every quarter is new bookings, not revenues, right? Because revenues are generally flowing through from business booked or already collected from previous quarters.

So, we do have a bit of a benefit there but it's unlikely we're going to come off that tracks on the revenue side because of this. But bookings are just as important to us, because that's the leading indicator of revenues for the future. So we want to make sure we do it right.

Laura Lederman - William Blair

And then acquisitions?

Stratton Sclavos

Sure. We have been busy all year long integrating the different sets of acquisitions, especially on the mobile side. We are not, I wouldn't say, very active right now in the marketplace around these new ideas because, as I said, I think we have now got an R&D capability and an operations capability well in excess of anything we have ever had. So, we're pretty focused right now on organic development. We really don't have any particular areas of interest at the moment that we are feeling like we need to pursue.

Laura Lederman - William Blair

Thank you.

Operator

Your next question comes from Gregg Moskowitz - Susquehanna Financial Group.

Gregg Moskowitz - Susquehanna Financial Group

Thanks. Since this was the first full quarter with m-Qube, I am wondering if you can provide what the revenue contribution was for Q3? Then, looking at the $16 million for B2B as a whole, how did that compare with your internal expectations?

Dana Evan

The revenue contribution was about $9 million in the quarter from m-Qube.

Gregg Moskowitz - Susquehanna Financial Group

And the $16 million overall, Dana? Was that about what you were expecting?

Dana Evan

It was a little bit light, but some of that came from Europe, which we were kind of thinking might happen, given the summertime.

Gregg Moskowitz - Susquehanna Financial Group

Also, in terms of your strategic objectives for ‘07, you talked about accelerating operating margin expansion. I just wanted to confirm, is this acceleration above and beyond any margin benefit that you would get from the Jamba!/News Corp transaction?

Stratton Sclavos

Yes, it is.

Dana Evan

Definitely.

Gregg Moskowitz - Susquehanna Financial Group

Great, thank you.

Operator

Your next question comes from Shaul Eyal - CIBC World Markets.

Shaul Eyal - CIBC World Markets

Thank you and good afternoon. A quick question back to the domain name business, what about the international contribution? Does that continue to be strong? I don't know if you can break out, in terms of the numbers, that specific business.

Stratton Sclavos

I think we're still seeing about a quarter of the business coming from international, which is as strong as it has been. That has been one of the key drivers over the last few years of the resurgent growth.

Shaul Eyal - CIBC World Markets

Have you seen any seasonality on that front?

Stratton Sclavos

Yes. Right now, these volumes are so high, I think any seasonality is getting masked right now.

Shaul Eyal - CIBC World Markets

Got it. Thank you very much.

Operator

Your next question comes from Kevin Buttigieg - A.G. Edwards.

Kevin Buttigieg - A.G. Edwards

Thank you. Just looking at the Jamba! joint venture for next year, obviously you would lose the operating income from your income statement. That would be offset by the share in the joint venture's net income that you would be reporting on your minority interest on the income statement now. It sounds like it could be dilutive to earnings, depending upon what numbers there are though, of course, it sounds like it's the right strategic move for you to make. Are there other financial aspects to that transaction that we should be aware of?

Stratton Sclavos

I think and Dana can comment as well, that obviously there's $188 million when we close the transaction that will come onto our books. Likely uses of that are either interest income or share buybacks. I think, on the other side of it, there's just literally the opportunity then to provide services to the joint venture. You will see revenue contribution on the B2B side for VeriSign from that. But as we said, a little too early to tell exactly how to model that.

Kevin Buttigieg - A.G. Edwards

Okay. So, that would flow on your top line of the income statement, those additional services?

Stratton Sclavos

That's correct.

Kevin Buttigieg - A.G. Edwards

Do you plan to restate the historical financial results to exclude Jamba! from it, from a top and bottom line basis, or will it just be reported on a going-forward basis as a joint venture?

Dana Evan

The transaction doesn't qualify for discontinued operations accounting treatment, so we won't be restating.

Kevin Buttigieg - A.G. Edwards

Thank you.

Operator

Your next question comes from Katherine Egbert - Jefferies & Co.

Katherine Egbert - Jefferies & Co.

I have one quick question about the options inquiry. It looks pretty clearly in your press release that you're still in the investigative phase. I'm wondering why, if that's true, you can't put out full financials? Does it mean that there's something in the investigation already that is going to compel you to restate?

Stratton Sclavos

No, it doesn't mean that. It means that, on advice of counsel, we can't put out full statements because if we would have to change them, therefore we wouldn't be able to certify to investors they would be able to rely on those financials. So at this point, that's the advice of counsel. But, as Dana was saying, we are giving you preliminary results, which, if the investigation goes through and there is no restatement, these results would have been the results we would achieve.

Katherine Egbert - Jefferies & Co.

Thank you.

Operator

Your final question comes from Scott Sutherland - Wedbush Morgan Securities.

Scott Sutherland - Wedbush Morgan Securities

Just two final questions. First, on GeoTrust, what was the run rate before you acquired them on a quarterly basis?

Stratton Sclavos

You know, that's a good question. Are you talking about revenue run rate?

Scott Sutherland - Wedbush Morgan Securities

Yes, revenue run rate, just what to build back up to, to get to the deferred back.

Stratton Sclavos

I think it was less than $4 million, $3 million to $4 million a quarter. But it had been growing obviously, over the course of the last few years. But again, it's a hard thing to, I think, model back, Scott. Because remember, most of the revenue in a given quarter from them was coming off the balance sheet from deferred. It's a little hard to go do and backwards-engineer that.

Scott Sutherland - Wedbush Morgan Securities

Second question, just trying to get a little more clarity on this JV modeling. Are you guiding to try to make a stab at the minority interest contribution? Because we're going to definitely take the revenue and the operating income off, so that's going to take your earnings down. So is that what you are recommending for ‘07, is kind of guesstimate based on operating margin that the JV will have and your ownership, what the minority benefit will be?

Stratton Sclavos

I think that's a reasonable assumption to put into a first model around that, is assuming it's that stand-alone model and the 49% of the income coming back. Again, that is not the JV's approved plan. That plan has not been developed or certified yet by either News Corp or VeriSign. So I just will caution everybody on that, but we're just trying to give you a roadmap as to what it would have been, stand-alone.

Scott Sutherland - Wedbush Morgan Securities

I appreciate it, thank you.

Operator

That does conclude the question-and-answer session, Mr. McCallum. I'll turn the conference back over to you for any additional or closing remarks.

Tom McCallum

Great. Thank you, everyone for your time today. As always, we look forward to talking to you and answering any additional questions you may have. Thank you and good evening.

Operator

That does conclude today's conference call. Once again, we thank you for your participation.

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