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VeriSign, Inc. (VRSN)

Q4 2006 Earnings Call

January 31, 2006 5:00 pm ET

Executives

Ken Bond - IR

Stratton Sclavos - Chairman, President, CEO

Dana Evan - EVP, Finance and Administration, CFO

John Donovan - EVP, Global Sales and Consulting Services

Analysts

Todd Raker - Deutsche Bank

Ed Maguire - Merrill Lynch

Rob Owens - Pacific Crest Securities

Israel Hernandez - Lehman Brothers

Robert Breza - RBC Capital Markets

Derek Pingle - Goldman Sachs

Kevin Buttigieg - AG Edwards

Walter Pritchard - Cowen

Peter Kuper - Morgan Stanley

Phil Winslow - Credit Suisse

Gregg Moskowitz - Susquehanna Financial Group

Gene Munster - Piper Jaffray

Presentation

Operator

Good day, and welcome to the VeriSign, Incorporated Fourth Quarter Earnings Call. Today's call is being recorded. At this time, for opening remarks, I would like to turn the call over to Mr. Ken Bond. Please go ahead, sir.

Ken Bond

Thank you, operator. Good afternoon, everyone and thank you for joining us for VeriSign's fourth quarter 2006 earnings conference call. I'm here today with Stratton Sclavos, Chairman and CEO of VeriSign; and Dana Evan, our CFO. The Q4 of fiscal year 2006 press release is available on First Call Market Wire and on the VeriSign's website at www.verisign.com. Also at approximately 3 pm Pacific time, we will post slides to our website with additional information around our guidance comments today. A replay of this call will be available on your telephone at 888-203-1112 or 719-457-0820 for international callers. The pass code for both numbers is 257-2145.

Financial results in this press release are unaudited, and the matter we will be discussing today includes forward-looking statements and as such are subjected to the risk and uncertainties that we discuss in detail in our documents filed with the SEC. Specifically, the most recent report on Form 10K and 10Q and any applicable imminent, which identify important risk factors that could cause actual results to differ materially from those contained in forward-looking statements. Due to previously announced internal review of VeriSign's historical stock option grant being conducted by our Board of Directors, VeriSign is not providing detailed GAAP or non-GAAP financials for the quarter ended December 31, 2006.

Dan will provide additional details later in this call. In a moment Stratton will begin our fourth quarter review and he will provide some insight in to the performance of our businesses. Dana will then follow with the discussion of preliminary non-GAAP financial results for Q4.

Following Dana's remarks, we will open up the call for your questions. Unauthorized recording of this conference call is not permitted. We anticipate the call will end at appropriately 3 pm. With that, I would like to turn the call over to Stratton.

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Stratton Sclavos

Thanks Ken and good afternoon everyone. Let me add my welcome to all of you attending today's call. As our results for Q4 indicate, we saw overall performance for the company that was in line with our expectation. Particular items of note were the continued strong results in the naming business and good unit and subscriber growth in SSL and wireless billing respectively. This performance helped offset modest weakness at Jamba! and at VeriSign Japan. In terms of strategic execution, Q4 was by far the most productive quarter of the year as we executed on our companywide reorganization, acquired and integrated Income Wireless and its 350 employees, received approval of our new .com contract with ICANN and launched several new services including our intelligent content distribution network and our extended validation SSL certificate, and of course as we announced Justice Monday, we have now finalized our mobile content joint venture with news corporation. So as I said, it was a very busy quarter. I'm extremely thankful for the teamwork and commitment to execution that our people demonstrated during this time and believe that we have positioned the company to address the key opportunities in the market as we enter 2007.

I'll now quickly cover the Q4 and year-end business unit metrics before moving to a discussion of our 2007 strategy and goals. As a reminder, this will be the last time we report the metrics in the BU format. Let's begin with the Communications Services Group. We report the CSG group revenues in two categories. The first category is Communications and Commerce which includes our network, database, billing and messaging services. The second category is content which includes our B2C and B2B content services. The Communications and Commerce line of business achieved a $130 million in revenue during the quarter, down slightly from Q3 to $140 million and consistent with our expectation. A key driver in the legacy C&C business was a continued growth in wireless building at MetroPCS and Leap as we now support over $10.4 million wireless users with our billing and payment services, up 33% year-over-year and 5% sequentially. These gains were offset by the declining connectivity in database revenues from our traditional carrier base.

While volumes in the legacy business continue to grow, we do expect revenues to be somewhat choppy over the next 12 months as we deal with the consolidation and pricing pressure inherent in these lines of business. As we’ve said before, we are executing to plan that offsets the domestic declines with revenues generated from international penetration, continued growth in billing services with our key customers, and cost optimization on our legacy platform.

We did see strong growth in messaging services during the quarter as we delivered over $13 billion SMS messages, up a 140% from the year ago period and 20% sequentially. Premium messaging and MMS volumes in the quarter were up 50% year-over-year to $88 million messages as we provided the interactive voting services for several of the fall TV shows including Deal or No Deal. For future reference, all messaging services have now been combined with the B2B content platform in order to offer end-to-end solutions for our media and entertainment industry customers.

Now, let's move to the Content line of business. Overall, we achieved revenues of $90 million in the Content business during the quarter. Jamba! revenues came in $72 million while B2B content revenues totaled $80 million. We also had a major announcement during the quarter with the introduction of our Intelligent Content Distribution Network or ICDN. The ICDN is designed to support the delivery of all forms of content including longer format high definition video and high fidelity audio. The service combines advance video streaming capability with our proprietary Kontiki peer-to-peer technology and our globally deployed secure infrastructure to provide for the highly efficient and economical delivery of rich media content.

With the market for Internet-based video-on-demand beginning to emerge, we're targeting our ICDN services at both traditional and new media and entertainment companies, as well as large distributed enterprises. Current customers for the ICDN and/or the Kontiki peer-to-peer system include BBC, BSkyB, Channel 4, AOL, [Axiom] Pictures, Coco Cola and GM. At the recent consumer electronic show, we also announced the strategic technology partnership with Adobe to utilize their Flash streaming servers within our ICDN and to integrate our peer-to-peer technologies in future versions of their media products. Our simple goal is to establish a ubiquitous platform for legitimate peer-assisted delivery of professional and user-generated content. I will talk more about this as we discuss our 2007 strategy.

So in summing up the Communications Services Group for Q4, I think it's fair to say that our results came in as planned and that we hope that greatly expanded portfolio of new services will help balance the revenue distribution in CSG in 2007. We remained optimistic about the growth opportunities that exist across the business including messaging, content services, and international signaling.

Let's now move to the Internet Services Group. The ISG group contains our information and Security Services businesses. During the fourth quarter, we processed approximately 6.2 million new registrations for .com and .net domain name. We also saw another 9 million names renewed or extended, adding up to 15.2 million domain name transactions in the quarter, up 30% from the year ago period. Renewal rates remained strong as well coming in it 77% for the quarter. VeriSign's adjusted base of active names at the end of the period stood at 65 million, up 6% sequentially and 30% year-over-year. Remarkably, our ATLAS infrastructure is now handling an average of 25 billion DNS requests per day. As expected, we also received Department of Commerce approval for our new .com contract with ICANN. Just to recap the facts, VeriSign and ICANN signed a new agreement which extends our contract for operating .com through 2012 and provides for much clearer processes for new product introductions, pricing changes and contract renewals. It also settles all disputes between our respective organization. Obviously, we are very pleased to have this contract process behind us and look forward to working with ICANN to maintain and improve the security and stability of the Internet addressing system.

We also continue to make progress in our real time publishing and supply chain business. Notable contract wins in the quarter came from Unilever, Shell, Kimberly Clark, Wyeth, and Johnson & Johnson.

Moving to our Security Services Business, we sold over 221,000 SSL certificates during the quarter. This brings our combined VeriSign active base to 807,000 units including all VeriSign, GeoTrust and Thawte Branded certificates. We were also the first company to introduce and issue extended validation or EV certificates that support new security features in Microsoft's Vista and IE7 products. Today, over 300 leading online retailers and financial service companies have upgraded to our EV certificates. The motto for ecommerce in 2007 is, green means go on the Internet.

On the enterprise side of security, we are starting to see much broader industry segmentation in our sales effort as risk management, compliance and business continuity become mainstream issues for corporations and government agencies. In fact, Q4 represented a record booking quarter in our enterprise sales team. Notable customer wins in the quarter included new or renewed contract with Merrill Lynch, US Bank, City Group, Verizon, Wal-Mart, Intuit, and Boeing. The ISG group in total had solid performance in Q4 and its lines of business are all seeing good demand as we enter 2007.

So in summing up 2006, I would say, will be remembered as an exciting transformational year for our company. First and foremost, we invested in and developed several new technology and infrastructure platform in support of the emerging trends in the marketplace. These included our VeriSign identity protection network launched in February with endorsement from PayPal, eBay, and Yahoo! We also acquired two wireless infrastructure platforms and combined them with our own to create a comprehensive state of solutions for carriers, media companies and enterprises. And the acquisition of Kontiki formed the foundation of our ICDN platform for rich media distribution. Of course, the divestiture of our controlling interest in Jamba!, which did in fact closed earlier today, provides a partnership with the world leading media and entertainment company for direct consumer content offerings while freeing VeriSign to focus on its core mission of delivering digital infrastructure services in the middle of the network.

And, finally, we are convinced that the acquisition of inCode and its 350 consultants along with our reorganization into a single sales and services group will allow us to better serve our customer base going forward.

So that brings us to our outlook and strategy for 2007 and beyond. To put everything in context, let me start by saying that we believe the any URA has arrived. The any URA is characterized by consumer demand for anytime, anywhere, any device access to information, entertainment, and community. With over one billion Internet users and two billion wireless users on a global basis, we're seeing the world's interactions going increasingly digital. We believe it’s a complete transformation of the way we think about communication, commerce, and content, and that we're just at the beginning of this tectonic shift.

VeriSign simple mission is to provide the digital infrastructure that enables and protects the world's interactions in any URA. Sitting in the middle of the network, we can help our customers more quickly and economically deliver end-to-end solutions that have the necessary scale, trust and intelligence. So, we start 2007 with two core franchises that are healthy, growing, and relied upon on a daily basis by the Internet population at large. These of course are DNS and SSL businesses. We would expect both to grow at approximately 20% plus rates this year. We're also expecting our new platform initiatives in 2006, namely of VeriSign identity protection network, our end-to-end mobile services platform, and our intelligent content distribution network to begin to establish leadership positions in their respective market as the demand for greater identity protection and on- demand content delivery increases.

Additionally, we'll continue to judiciously grow and expand our offerings in real-time publishing, managed security, and supply chain services to meet the needs of our existing customers and financial services, healthcare, public sector and retail. We believe we have the technology, the infrastructure, and the people to make this happen.

Our new organization structure has been designed with three objectives in mind deeper customers relationship, faster product innovation, and better financial results. On the customers' front, we believe our new combined sales and consulting services organizations under the leadership of John Donovan, who position us as a top leader in end-to-end supplier for our key customers around the world. Our main goals are to execute on the obvious cross-sell and white space opportunities in our major accounts while also positioning our capabilities to provide comprehensive solutions for new initiatives that our customers are pursuing. Early feedback from the field would seem to validate that we are on the right track.

In terms of faster innovation, we now have more development and operations professionals within VeriSign than in any other time in our history. We believe the newly combined products organization under the leadership of Mark McLaughlin gives us the organic capability to create significant new intellectual property and to bring highly integrated services to market much more quickly.

And lastly, while we still need to make additional investments in our global infrastructure to meet volume, reliability and security requirements, we do believe that 2007 will be a year where we significantly increase our operating leverage across the company. As Dana will detail in a moment, we plan to increase operating margins throughout 2007 within an exit rate goal of no less than 25% as we finish Q4.

In summary, 2007 is shaping up to be an exciting year for VeriSign and with several for catalysts slated for 2008, we will work diligently to continue this momentum. With that, I want to thank you for your attention and now, I'll 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 financial results, I would like to start with a quick update regarding our Board of Directors internal review of VeriSign's historical stock option grant. As you'll recall, in November, we publicly announced that the Board had reached the conclusion that our historical financial statement would be require restatement. This restatement will affect the years and interim period from 2002 to 2005, as well as the first quarter of 2006 and will drive additional non-cash stock-based compensation expense related to past stock grant. At the time of the announcement, we estimated that these non-cash charges would not exceed $250 million. As of this month, the Board's review has now been completed. This review did not find any intentional wrong doing by any current member of the senior management team. The restatement process is currently underway and we would expect to file our restated financial statement as soon as practically possible, but within the SEC 10-K filing guideline.

Additionally, at this point of time, we expect the non-cash charges for this restatement to be substantially less than the $250 million previously disclosed. In light of these activities, 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 result 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 and the complete restatement.

So, now let's turn to the financial results for the quarter and the year. Our results for the fourth quarter, cap off what was a solid year for VeriSign. During 2006, we delivered revenue of nearly $1.6 billion. Year-over-year, we certainly saw the effect of the challenges we faced during 2006 in our Jamba! business were quarterly and annual revenue were significantly lower than the prior year. Excluding Jamba! however, most of our core business grew steadily and at healthy rate throughout the year, particularly our naming, security, and messaging businesses. In addition to generating solid financial result, we also maintained a strong balance sheet throughout the year ending 2006 with cash balances approaching $750 million. This was after we made significant investments in operations and infrastructure. We purchased over $6 million shares of VeriSign stock and executed strategic acquisition to support future growth areas, such as digital media delivery, mobile media management, after sale market expansion and the building out of a world class professional services organization to better serve our customers.

So, now let's dive into the financial results for the fourth quarter. We ended the year with Q4 delivering revenues of $430 million, slightly below our previous guidance due in part to weaker than expected results from our Jamba! business and some delayed customers acceptances we experienced in the mobile services business over the holiday season. That being said, we continue to see sequential growth in all areas of our business during the quarter with the exception of the core Communications Services which were down marginally.

As we turn to revenue by reporting unit, I would like to point out that this will be the last time we will be reporting revenue under these segments, which reflect our historic business unit based organizational structure. So looking at revenue under these reporting units, the Internet Services Group grew 4% sequentially and 21% year-over-year. Sequential growth drew approximately $205 million of revenue in Q4, or 50% of total revenue, and was fueled by continued strength in domain name sales and solid traction in our Security Services business. The Communications Services Group grew approximately 2% sequentially and reported revenue of $208 million, representing the other 50% of revenue for Q4.

Within our core Communications and Commerce business, revenues were $113 million for the quarter, down $1 million from last quarter due to weakness in our Communications business, where we didn’t see the volume of business in Asia turn up as quickly as we had expected.

Our Content Services business which includes Jamba!/Jamster! as well as our digital content services reported 90 million of revenue. Jamba! contributed $72 million of that and was down 4% sequentially, which was below our expectation for sequential growth.

Geographically, the percentage of revenue from our international customers' affiliates and subsidiaries was 29% for Q4 consistent with Q3. For the year, international revenue represented 30% of total revenue. Preliminary non-GAAP gross margin improved from last quarter and was slightly higher than guidance at 65%. Q4 operating expenses were in line with expectations, driving a 20% operating margin for the quarter.

As it relates to headcount, we ended the quarter with approximately 5330 employees, up from 4860 in Q3. The majority of this increase came through the inCode Wireless acquisition completed in November.

Moving now to the balance sheet and cash flow items. Cash equivalents in short-term investments at the end of Q4 were approximately $750 million. Cash balances were up 6% from Q3 and reflects strong cash flows in the quarter fueled in part by increased year end collection effort, particularly in the Communication Services Group. From the balance sheet perspective, we were pleased to end the year with these healthy cash balances, particularly after deploying approximately $135 million of cash for the repurchase of VeriSign's shares during the first half of 2006 and putting approximately $650 million to work for the strategic acquisitions you saw us execute throughout the course of the year. The strong collection, I just mentioned also, had the benefit of driving Q4 net DSOs down 2 days from the previous quarter to 48 days.

Total deferred revenue at the end of Q4 was $614 million, up $23 million from the previous quarter. The increase here was driven primarily by continued strong sales of new and renewed .com and .net name and solid bookings in our security business. For the year, deferred revenue grew over a $100 million.

Lastly, our capital expenditures for fourth quarter were approximately $40 million, bringing us to total capital expenditures for the year of a $142 million. These capital expenditures broke down approximately as follows; 44% in Communication Services Group, 21% in Internet Services, and 35% for corporate infrastructure purposes.

Let me now spend a couple of minutes updating you on some of the Q4 and post-quarter development starting with the companywide reorganization we’ve undertaken to streamline our operations and better leverage VeriSign's broad services portfolio across industries and customer group. As Stratton discussed earlier, we have reorganized the company into a new functional organization, replacing the previous business unit structure with a new combined worldwide sales and services team and an integrated product organization. As a result of the reorganization, we would expect to run a onetime restructuring this quarter, incurring charges at the end of Q1 in a range of at least $35 to $45 million. This charge is comprised of approximately $15 million for workforce-related charges, $10 to $15 million for facilities-related charges, and $10 to $15 million for hardware-and software-related charges. Approximately, $20 to $25 million of these amounts are expected to be cash charges. We would expect to recognize this restructuring over the course of the next four quarters and would anticipate seeing material positive effects of such beginning in Q2, and building incrementally throughout the year as some of these initiatives are longer lead item.

As part of the restructuring, we would expect to exit approximately350 employees by the end of Q1. Prior to any additional strategic investment initiative and once the restructuring is fully realized, we anticipate annualized run rate savings in the $50 million range. As we move to complete our formal restructuring plans by the end of this quarter, we will update you in Q2 as to the full impact of our restructuring plan and the related savings for the rest of the year and beyond.

I will discuss the financial impact for the restructuring more in a moment when we discuss guidance. Additionally, as I mentioned before and as a result of the reorganization in Q2, we will be revising how we discuss our business externally. We will describe these changes in more details during our Q1 2007 Earnings Call. Another key event during the fourth quarter was our acquisition of inCode Wireless. As a result of this acquisition, we recognized approximately $5 million in revenue and a slight operating loss in Q4. The inCode acquisition brought approximately 350 new employees to our VeriSign workforce. As Stratton mentioned, inCode is a strategic services organization and as such, it comes to a different financial models than traditional VeriSign businesses. Revenues are recognized as completed and delivered and growth in operating margins are substantially lower, but not atypical for a services business. We expect the acquisition to be a penny dilutive in Q1, but breakeven for the remainder of the year.

And lastly, as Stratton mentioned earlier, we closed our joint venture transaction with News Corporation today. We discussed this in detail on our special call this past Monday, but I will touch on it again as part of our guidance.

So, let me now turn towards our future outlook as we begin fiscal 2007. Looking at the full year, we would expect organic top-line growth to be consistent with our prior guidance calling for revenue growth of 15%. Additionally, revenue will reflect a full year of the inCode business and one month of Jamba!, leading to an expectation for approximately $1.55 billion of revenue over the course of the year.

As you saw, we exited fiscal 2006 with operating margins of 20%. Entering 2007, we expect operating margins will tick down a bit in Q1, as we transition to the Jamba! joint venture and integrate inCode Wireless into our business. We do fully expect though to see operating margins expanding significantly throughout the year and reaching the lower end of our long-term operating margin goal of 25% to 30%, as we exit 2007. The revenue and margin guidance I just laid out would be expected to drive earnings growth in excess of 25% with non-GAAP earnings per share guidance in the $1.06 to $1.07 range. This 25% plus growth target reflects the earnings growth as compared to 2006 non-GAAP earnings per share, which as you know we are not able to provide today less the 51% share of Jamba!. I'd like to point out that this guidance does not reflect the full benefit of potential savings, which we believe should be realized as the restructuring efforts continue. We do believe it is prudent to be conservative in our initial guidance for 2007, but that being said as we complete the effort on our restructuring plan and look to incur the restructuring charge at the end of this quarter, we think it is reasonable to expect an additional $0.03 to $0.04 of earnings that’s potential to be driven off from the restructuring benefit.

Now drilling down a bit into the current Q1 period, we anticipate we will drive revenue of approximately $380 million. This includes $22 million in revenue for the January month of Jamba! result and approximately $10 million in revenue for inCode. As a basis of pro forma comparison, Q4 revenue excluding Jamba! was $341 million. This guidance reflects organic revenue growth of approximately 3% to 4% driven mostly by all areas of our business.

Turning to margins for Q1, we would expect gross margins will decline to approximately 62%. This would suggest a decrease of approximately 300 basis points. Let me take a minute to walk you through the three primary reasons for this change going forward. First, as a Professional Services business, inCode gross margin is significantly below the VeriSign gross margin range. Therefore, as we integrate inCode into our business, we would expect on an ongoing basis the gross margins will be lower by approximately 150 basis points. Second, as we discussed on our call earlier this week, gross margins for Jamba! has been in excess of 70%. As a result, the disposition of the Jamba! business will result in an additional decline in gross margins of approximately 150 basis point. The 100 basis point decline in Q1 reflects the exclusion of Jamba! from operating results for the full two months. Third, as a part of the terms of our new contract with ICANN, which was approved by the Department of Commerce in November, we will pay an additional $10 million in fees to ICANN on an annualized basis. This will further reduce gross margin by approximately 70 basis point. In total, we would expect these three items will reduce gross margins in the aggregate by approximately 3% during Q1.

In terms of operating expenses, we will continue to execute on our strategic plans, investing for growth and next generation services while remaining focused on disciplined expense management in all areas across the company. As such, we would expect an operating margin for Q1 in the 19% range, reflecting the impact of the lower growth margins I just discussed. As discussed earlier this week, VeriSign's 49% minority interest will be reported in the financial statements as other income. For Q1, we would expect that other income will include an additional $1 to $2 million for VeriSign's portion of the joint ventures operations for the months of February and March. As mentioned earlier, operating results from Jamba! for the month of January will be included in our Q1 financial statement as the joint venture officially commences on February 1st.

As you know, we're currently precluded from stock repurchases due to our internal review of stock option practices and our current restatement effort. We would, however, anticipate a full resumption of our share repurchase program late in Q1 or early Q2. However, given the timing of these events, we expect this activity will have little-to-no effect on diluted shares for Q1, and we would expect that the share count for the quarter would be flat to slightly up from the 248 million in Q4.

Taking into account, the revenue, margin and other income in share count guidance I just laid out, we would expect preliminary pro forma earnings per share in Q1 of approximately $0.22 on an after-tax basis, using a 30% effective tax rate.

Additionally, as we said on Monday's call, the Jamba! joint venture delivers other income to us that is already taxed and thus should not be taxed again when applying the VeriSign pro forma rate to our income before taxes. Please note that this non-GAAP earnings per share guidance reflects a full penny's worth of dilution in Q1, stemming from the inCode Wireless acquisition. Also as the point of reference and comparison, Jamba! would have contributed approximately $0.03 to our Q4 EPS.

So to sum it all up, we are pleased with what we have accomplished during 2006. Our continued execution on strategic initiatives, the growth we delivered in our core businesses, and the investments we made in new strategic areas. As we enter 2007, we are optimistic about our new opportunities, the momentum we are seeing our core businesses and the resulting growth trajectories we anticipate for revenues, margins, and earnings. We continue to believe our strong financial position allows us to focus on profitable investment, expanding operational leverage, and delivering increased shareholder value.

And with that, I'd like to open this call for your questions. Operator, may we have the first question please?

Question-and-Answer Session

Operator

(Operator Instructions). We will go first to Todd Raker, Deutsche Bank.

Todd Raker - Deutsche Bank

Hey guys. Two questions; first, Stratton, can you just give some insight in terms of the EV search and how we should be thinking about the uptake of those on the base and the potential economic impact, especially kind of in the back half of the year? And then, secondly very similarly can you give us your most current thinking on .com price increase?

Stratton Sclavos

Todd, I missed the first part – the first question, what was that?

Todd Raker - Deutsche Bank

Yeah, extended validation search, how you see uptake, any early expectations in terms of how you think the base will play out over the course of the year?

Stratton Sclavos

Yeah. Certainly, we're pleased with what we are seeing right now, which there is some pent up demand. Obviously, a lot of retailers and financial service firms who wanted to be able to display that green address bar early on in this is launch year. So, right now about we will issue release I think on Monday of the 300 customers that have chosen to move over. Our goals are relatively modest early in the year since we don’t really know what the penetration rate of Vista and IEE7 will be. I think, we’d like to see at least 5% of the VeriSign retail search heading toward the EV up-sell in the second half of the year and maybe 10% of our larger enterprise customers that include most of the large financial service firms of that we’ve already sold one firm over 2000 of them as they look to expand where they use us to sell within their property. So, I think early returns are good, a little bit of honeymoon period because of the pent up demand and obviously with Vista's launch just today, we will need to see what the adoption rate looks like, but so far so good.

As relate to .com, I think our expectation is that we'll have some action here in the first-half of the year. I don’t want to be anymore specific than that as we're still working all the plans around that. As you know, that action will be precipitated with a notice period that takes a full six months. So, it is likely that the -- any benefit from a potential price action would really start to flow through no earlier than Q4 -- Q1 of next year.

Todd Raker - Deutsche Bank

Okay. Then, just one follow-up, we've kind of been limbo here in terms of the reporting structure going forward, any sense for how you're thinking about when we rebuild our models here, how we should be thinking about the business?

Stratton Sclavos

Well, fair question, and I think Dana, and Ken, and the team will certainly be reaching out over the next few weeks to talk with folks and get some input. I think, one way we're thinking about it at least is kind of a legacy voice services in one potential bucket and all the IP-based services, both for Internet as well as wireless data in another. So, we're really trying to separate, if you will, the traditional voice or legacy voice from what I would believe are more the next generation IP-based services that kind of play to the strategy we talked about.

Stratton Sclavos

Okay. Thanks a lot.

Operator

We'll have our next question from Ed Maguire, Merrill Lynch.

Ed Maguire - Merrill Lynch

Yes, good afternoon. Do you have any update on when you might expect to renew the .net agreement?

Stratton Sclavos

Well, .net was renewed, Ed, earlier, I want to think towards the end of '05 I believe, or '06. So, we have -- or the beginning of '06. So that I believe is on a 4-year clock of its own and it has automatic renewal provisions in it. Similar, but actually even a little better than .com. That contract also came -- the new contract there also came with the ability to raise prices by up to 10% a year, I believe. So in essence that’s already locked and loaded as well.

Ed Maguire - Merrill Lynch

Okay. And the timing of those increases would be synchronized with .com?

Stratton Sclavos

We were able to raise prices in .net as of January 1, 2007. So that clock is ticking as well. Again, we are in the final process of really determining the strategy there, but it's likely that would happen simultaneously.

Ed Maguire - Merrill Lynch

Okay. And any granularity you can provide around the new sales organization in terms of comp? How you're structuring any overlay teams and whether the sales people have their -- headquarters are fully organized at this point?

Stratton Sclavos

Yes. As it turns out, we have a special guest, John Donovan in the room. So, I'll let John talk a little bit about the structure of the teams and maybe what we did at the sales conference a week or so ago.

John Donovan

Great, thanks Stratton. Just very briefly, we -- in our sales coverage model, one of the things that’s been a big benefit of the reorganization is the opportunity to not only eliminate overlap at customers, which can be confusing for our customers, but also the opportunity to ensure that we remove the white space, as Stratton mentioned, in our coverage model.

Stratton Sclavos

Can you hear, John?

John Donovan

I can, yes. Thank you.

Stratton Sclavos

And so, in our coverage model, we have a much more coder base based system, where its not only an expectation, it’s a requirement for, to really make your coders to go out and represent the full breadth of what the VeriSign portfolio of products would be into those customers. So, we've put a lot more leverage into the system higher expectations for the sales teams, and then we're going to provide them with the tools and education that they need to provide a much greater breadth and just very, very quickly, we're organizing with certain strategic accounts and deploying ourselves a lot more aggressively against our larger relationships and we're deploying -- where we're not deploying by named account, we still will have a geographic coverage model, but we will be far more efficient in all of the metrics that you would use whether that’s bookings per head, revenue per head and then obviously the expense to deliver both those bookings and the revenue.

Ed Maguire - Merrill Lynch

Thank you.

Operator

We will have our next question from Rob Owens, Pacific Crest Securities.

Rob Owens - Pacific Crest Securities

Yeah, good afternoon. Relative to the inCode contribution in the quarter, where was it in revenue and did it dilute Q4 results?

Dana Evan

It was $5 million of revenue, and there was a slight loss, but it was less than $1 million in the quarter because that was the short period.

Rob Owens - Pacific Crest Securities

Okay. And relative to that historical view Dana, where did you put that, was that in B2B section of content?

Dana Evan

That’s right, in CSG.

Rob Owens - Pacific Crest Securities

And then regarding the recent AT&T-BellSouth merger, can you give us a little color. Do you have much exposure there in terms of your database business or anything else?

Stratton Sclavos

Hold on Rob, I want to go back -- I am not sure when you said we put it into B2B content.

Dana Evan

[Not as yet].

Stratton Sclavos

No, no. That’s what he said; it's not in B2B content.

Rob Owens - Pacific Crest Securities

Okay.

Stratton Sclavos

Right, it's in the overall CSG number.

Rob Owens - Pacific Crest Securities

It's in the overall CSG. So, that would be down in the quarter?

Stratton Sclavos

We're looking at each other. I actually believe that through -- sorry. I think that’s right. We will confirm that for you.

Rob Owens - Pacific Crest Securities

Okay, great.

Stratton Sclavos

Go ahead with the other question.

Rob Owens - Pacific Crest Securities

AT&T-BellSouth exposure?

Stratton Sclavos

Yeah. A little bit on signaling, right? And that will hit here as we expected in Q1 and in Q2, which is why the guidance in the legacy stuff is very modest. However, BellSouth being one of the more aggressive providers of data services, one of the more aggressive providers looking at on-demand video and one of the more aggressive providers in small and medium size businesses, Network Services and Security Services. We actually are looking at that as a positive for us in terms of aggressive things that we can work on with AT&T, which is the largest name to count in John strategic account model. So, between BellSouth coming in and now a single decision process around Cingular, we're pretty excited about the overall new AT&T structure and our touch points within it.

Rob Owens - Pacific Crest Securities

Great. Thanks.

Operator

We'll go next to Israel Hernandez, Lehman Brothers.

Israel Hernandez - Lehman Brothers

Good afternoon everyone. Question on buybacks, once the restatement is completed, do you have any plans on the accelerating the buyback above and beyond what you're expecting to do with the Jamba! proceeds?

Stratton Sclavos

I think, as you saw in 2005, we have been pretty aggressive with our buyback programs. Then the Board in fact authorizing new $1 billion program last year, so I think you'll see us be aggressive including using those proceeds and continuing to use additional cash flow -- free cash flow to be pretty aggressive there, certainly around these price point.

Israel Hernandez - Lehman Brothers

Great, thanks. And I'm not sure if I heard this on the call or not. But did you give a cash flow from operations number? And what should our expectations be at high level in terms of cash flow growth in 2007?

Dana Evan

No, because the cash flow statement will be impacted by many accounts they are part of the restatement, we are not able to actually report back to you, and thus we haven’t actually given guidance on it for the '07 year either.

Israel Hernandez - Lehman Brothers

Okay. Thank you.

Operator

We'll have our next question from Robert Breza, RBC Capital Markets.

Robert Breza - RBC Capital Markets

Hi, good afternoon. One housekeeping items, Dana. Could you talk about the CapEx plan for 2007?

Dana Evan

Right. So, we typically talk about CapEx for the company at about 10% to 12% of revenue, and we would expect for our core business, the CapEx again in '07 would be in the $160 - $165 million range. We are in the process of building out a new data center that Stratton talked about, on the last call, and that will add about another 30 million to that number just as a one-time expense in 2007.

Robert Breza - RBC Capital Markets

Great, thank you. One follow-up question for you Stratton. You talked in your prepared remarks about Japan having some weakness and not getting the customers kind of turned on. Can you kind of just give us little more color there and maybe your outlook for that geographies specifically for '07?

Stratton Sclavos

Yeah, I think '06 was a mixed year for Japan. We obviously had some FX issues there, but in addition the business did not perform up to plan. Most of that was centered around the SiteRock acquisition, that they had done in 2005 which was the small security operations and monitoring business that did not live up to its plans for certain reasons kind of unique to the Japanese market. The team have kind of factored that in as we go into ’07, believe we’ve got that well in hand and restructured and reorganized as well and then we -- moving forward on the more traditional VeriSign businesses in Japan, pretty excited about the security operations we’ve in fact just signed the largest token customer ever is actually coming out of Japan and we’ll be announcing that shortly who that is but that’s were north of a million tokens to be deployed over the course of the next couple of years. So, the security business seems firm, and John and the team are looking at, using the same organizational model in Japan as we go forward. So, they will be bringing more of the VeriSign products to bear so, I think '07 will be a decent recovery year in Japan, and we will set them up for good growth in '08 and '09.

Robert Breza - RBC Capital Markets

Great. Just one last follow-up Dana did inCode have any effect on deferred revenue in the quarter?

Dana Evan

No, it did not. And let me follow-up to Rob's previous question the $208 million for communication services that I talked about, actually the $5 million of inCode was not and either the 113 of core nor the 90 of content. It's an add-on to that. So, it's separate from those two buckets that we normally talked to you about.

Robert Breza - RBC Capital Markets

Thank you.

Operator

We will go next to Sarah Friar, Goldman Sachs.

Derek Pingle - Goldman Sachs

Hi thank you. This is [Derek Pingle] on behalf of Sarah. Real quick on the options issue, its completed the Board review, but our understanding is also that the SEC and US Attorney are involved here, engaged in someway and is there anything you can tell us in terms of what they need to see or when their requirements are satisfied toward when the door shuts kind of out from their perspective.

Stratton Sclavos

Our process is like 140 other companies, the internal -- the SEC and US Attorney have tended to be the waiting for the Ad Hoc Committees Investigations to complete which is now done, they've been priced all along the way, of what's been found, and they'll continue to work with the companies outside council to respond to their increase, but there is really no definitive timeline for what they are looking at?

Derek Pingle - Goldman Sachs

Thanks. And then more on, any update on decisions on what you will do with the GeoTrust brand as well? What you might do or what you've may be have done already with pricing on the GeoTrust side?

Stratton Sclavos

No definitive decisions here that team has a lots on its plate right now rolling out the EV Certificates across the different brands. And building in some new enterprise services so, as we talked about, we now have the three leading brands in the market space and we will continue to make pricing and packaging decisions based on what we are seeing in the market, but right now I think we are very comfortable being the price leader with the VeriSign brand, being the channel player with the GeoTrust brand and competing on the lower end of the price side with the top brand. And obviously, our unit counts are very strong right now, so we are pretty happy with where we are.

Derek Pingle - Goldman Sachs

Okay. Thank you very much.

Operator

We'll have our next question from Kevin Buttigieg, AG Edwards.

Kevin Buttigieg - AG Edwards

Thank you, Stratton I heard you mentioned catalyst to 2008 results and I was just wondering if you could talk about that a little bit and perhaps in that context obviously the new ICANN agreement allows you to provide some ancillary services around domain name registration, I was wondering, if you had any plans or any thoughts about that at this point in time?

Stratton Sclavos

We certainly do, and we will be making some announcements on that here in the first half of the year. But the catalyst I was particularly speaking about are one, certainly what we now have the capabilities to put in the .com and .net structure of the contracts as it relates to new product introductions that are ancillary, and have a much quicker and systematic review process, as well as, any price changes we would made, that as I've said earlier would mostly impact the P&L starting in 2008.

Second, in the SSL business, because of having to write-down the deferred revenue our majority of the deferred revenue from the GeoTrust acquisition as that builds backup on the deferred revenue lines, you will actually see growth rates accelerate on the revenue side as we exit the year. And of course we would expect to see economies of scale and synergies there on the operating side, as we continue to integrate all the GeoTrust operation. Certainly, we've also got with the Intelligent Content Distribution Network in the mobile side, but we believe we will be improving margins and high growth rates in 2007 leading to hopefully pretty strong performances in 2008. So, you put all that together, and I think we like the portfolio we’ve got and some of the opportunities we see for improving margins even more as we head out into the future.

Kevin Buttigieg - AG Edwards

Okay. And then, as far as the restructuring is concerned you mentioned about the potential for $0.03 to $0.04 upside or actually Dana did. And I was wondering if you could address, if you receive that upside would you expect it to come more or so through the form of better revenues or more so through the form flow or cost?

Stratton Sclavos

It would be cost savings from the operation.

Kevin Buttigieg - AG Edwards

Okay. And then just finally our clean up item, Dana I noticed that there was a bit of restatement to the '05 numbers that there was a bit of restatement to the '05 numbers that were included in the package of slight reduction to revenues there, I believe. Could you mention what that was about?

Dana Evan

That's all part of the ongoing restatement efforts. As you may or may not know, when you have an official restatement, you do have to go back and restate things that had in the past been passed in terms of restatement and prior audits. And so there is small amount here and there, but you will see that when we file the 10-K as well.

Kevin Buttigieg - AG Edwards

Okay. Thank you.

Operator

We will go next to Walter Pritchard, Cowen.

Walter Pritchard - Cowen

Hi, just a couple of questions on my end, just trying to highlight around the restatement, it's around the restructuring of the restatement, you're basically bringing on 350 sort of lower margin type employees relating to consulting and you are exiting 350 of your own employees in the restructuring. And you are looking for operating margins up about 6% between Q1 and Q4. I just wondering if you could maybe walk us through how you get to that with kind of similar mix of business and maybe give us some examples of large areas where cost are coming out and enable that happen?

Stratton Sclavos

Certainly. So, the numbers Dana talked about on the headcount side, Walter, are roughly 8% of the employee population at VeriSign, excluding the inCode bring over. But if you look at how the effected employee list was put together, it represents more about 16% to 18% within what we would call the management layers of the company, right, and less so at the bottom. So in essence, there is a higher cost component to the folks who have -- are leaving the business or being repositioned within the business.

Second, in terms of bringing on the consulting resource a lot of those heads are filling roles that we would believe, we would've had to add into our '07 plans to support revenue growth in some of these key areas, especially around implementation services on things like video, mobile and voice. So in essence, those heads are filling in critical heirs if you will in many locations, whereas the management infrastructure that's leaving is really the potential redundancies that come from having three sales organization fold into one, redundancies of three sales operations teams and the rest.

So I think we feel pretty comfortable around how this is all being done very, very effective teamwork across the management team in getting this done. So, the numbers we're showing, as we said, likely have a little bit of upside. As we get through the restructuring, we will be more comfortable talking about.

Walter Pritchard - Cowen

Okay. And then just on one of the domain name business. I know with some talk of price increases, although I know you haven’t given any official notification there, are you starting to at all see as term length increases, maybe registrar has started to anticipate that the price, their cost are going to go up?

Stratton Sclavos

No, not at all.

Walter Pritchard - Cowen

Okay.

Stratton Sclavos

We're actually seeing the registrars continue to do some of the same marketing programs that we were doing before, which is increasing volume. In fact last week is the highest volume week we've ever seen.

Walter Pritchard - Cowen

Okay. And then lastly, Stratton maybe you can talk little on your ICDN offering. How do you position that relative to somebody comes in the market maybe specifically optimize -- who sort of maybe a more traditional CDN, but just trying to get a sense for how it compares?

Stratton Sclavos

Well, I think what we're trying to do is really two-fold here. First of all, we're bringing the best of peer-to-peer and the best of streaming together underneath a VeriSign brand with our own global infrastructure. So, when we really go out and start talking to most of the media and entertainment companies, who are today delivering through streaming services, they will tell you it's their single largest cost and it continues to be unprofitable for them.

So by leveraging the peer-assisted technology and by putting it into VeriSign data centers that have massive network capacity due to our DNS services, we believe we can reduce by up to 40%, the cost of delivering high-definition quality video. And if you start talking about high-def films in long format, right? You are really looking at something that the market has not yet done yet and one of the barriers has been the efficiency of delivery. I can tell you I've met with several of our UK customers who are already using the peer-to-peer service and they are getting anywhere from 50% to 80% peering rates already, and in many respects seeing that bandwidth cost savings very dramatically. So you do all of that and we think we've got a very competitive offering in the market, but we'll really be targeting the high-end of rich media delivery, less of the more traditional FMI services around web pages and the rest.

The second thing then is our relationship with the Adobe where we like this to become a ubiquitous client technology deployed on somewhere near their 700 million Acrobat and Flash desktops around the world. As you know, obviously client downloads or client code downloads are a buried entry, but if you are riding along with the prevailing ubiquitous video technology in the marketplace, you have an opportunity to really create a standard. So I think 2007, we have to prove that out and execute with our partners at Adobe. But we are pretty excited about the opportunity and we do believe the market is going to be very large and will support several players.

Walter Pritchard - Cowen

Okay. Thanks a lot.

Operator

Our next question will come from Peter Kuper, Morgan Stanley.

Peter Kuper - Morgan Stanley

Thanks very much. Most of my questions have been answered, but actually, Stratton, you picked my interest with that last comment on the video delivery. In particular, I mean how much of opportunity do you think this is near-term; this is kind of a long-term, that's already about a couple of years from now. I agree with you the opportunity in video growth is going to be massive, but you are well-positioned today versus -- let's say better positioned down the road? And then, the other question I had actually in line with that is on the margin side, total of 25% to 30% towards the end of this year going to '08, is that a sustainable target range, now our years going forward for modeling purposes?

Stratton Sclavos

I think it's very much the ICDN will follow traditional kind of VeriSign infrastructure build up. The last year was the investment year, we built it, put it into the market. We've got it in four of our data centers plus the peer-assisted technology out. Now, we will be putting it into 8 to 12 of our data centers over the course for the next few quarters. So, we can deliver from the streaming prospective with our grid servers and then, obviously supported with our peer-to-peer assist.

I think, you will see revenues ramped there relatively nicely this year, but you'll still be in the low double-digit million here in terms of revenue. I think the marketplace itself is going to have a year of inflection here, and we are going to see a lot of decisions get made. So I think we are hitting the market at the right time, lots of announcements most likely this year, more and more revenue await in '09. As relates to going from our exit rate of 25% margins in Q4 of this year closer to our 30% margins, we do believe that's achievable in the new structure and we will continue to push for it, that's probably 6 to 8 quarters out, right, from the end of this year, but something that we can see within our sight.

Peter Kuper - Morgan Stanley

Okay. Thanks very much.

Operator

We'll have our next question from Phil Winslow - Credit Suisse.

Phil Winslow - Credit Suisse

Hi guys. A lot of my questions have been answered, but just to spend a little bit more time on your core communications services side, Stratton you sort of mentioned slower ramp up in Asia then expected but I wonder if you can comment just on North America here it seems like you had a another sequential decline. And what would your expectation be for this business I guess Q1 and then sort of the growth in longer-term?

Stratton Sclavos

Phil, I think its kind of simple way to look at it. We've kind of projected internet 0% to 5% decline this year on the legacy services around the voice [stuff]. Yeah we hope we'll do better then that if we kick the international in, and if we can obviously raise the profile in our billing services a little bit with our key customers here who are experienced being pretty strong growth right now. I think we will be in relatively conservative and assuming 0% to 5% this year on core legacy telecom stuff, and if we do better than that it will be a bonus meanwhile we will continue to manage it for profitability.

Phil Winslow - Credit Suisse

And then I guess when you do look at that one sort of a strategy that you laid out here focusing on IP. How do you see the legacy comp services side sort of fitting in your roadmap?

Stratton Sclavos

I think we'll continue to evaluate as you've seen over the last few years we've been relatively disciplined and relatively candid around getting out of the businesses. We didn't believe we could be the best in the world that and it didn't fit the strategy. So we will continue to look at all the product line within VeriSign around that. And we'll take the same action at the right time on any of those, but again all these product business are profitable then our portfolio, and so it's not something that we're worry about on a minute-by-minute basis we look at it more long-term and making the right decisions at the right time.

Phil Winslow - Credit Suisse

Hey then one last just asking, Dana what fully diluted share kind you're using for next year?

Dana Evan

For Q1 we have 248 and because we will institute the share repurchase program we have that ticking down a bit each quarter throughout the year.

Phil Winslow - Credit Suisse

Great, thanks.

Operator

We'll go next to Gregg Moskowitz, Susquehanna.

Gregg Moskowitz - Susquehanna Financial Group

Yeah, thanks and good afternoon. Stratton, it sounds like you had pretty solid results in security services overall this quarter, I know there was some weakness in Q3 in Europe and Japan, can you just walk through how it performed this quarter across all major Geos?

Stratton Sclavos

Very, very strong performance in the US as I said during the call. Record bookings quarter in the enterprise team and security. They really had great performance and booked some very new, some big new deals for us and some key accounts. Japan as we've talked about was a little bit weak by a few million dollars, about half that tax related half performance related and then Europe was I would say on plan. No major surprises one way or the other.

Gregg Moskowitz - Susquehanna Financial Group

Great, and Dana, in terms of the delayed customer acceptance that you saw on the mobile services side, can you just elaborate on that a little bit for us and what kind of effect that had in Q4?

Dana Evan

Some of the services that we deliver, we actually need to receive some acceptance from our customers and with the holidays it just happened that the customer didn’t get the acceptances done before the end of the quarter.

Stratton Sclavos

That's related to some of our content services delivered for customers in Europe as a subcontractor.

Gregg Moskowitz - Susquehanna Financial Group

I kind of thought of in a few million dollar range if you had to kind of put a --

Stratton Sclavos

A few million dollars, yeah.

Gregg Moskowitz - Susquehanna Financial Group

Okay, perfect and just one quick housekeeping since this was the first full quarter with GeoTrust, just wondering if you have any color in terms of what the revenue contribution was and or the amount of the deferred revenue write-down pertaining to the Q4?

Stratton Sclavos

We don't -- we didn't count it up that way, we actually roll them up all in the same way so. We don't have that at our fingertips Gregg, you'd be glad to get back with you on that. As I believe from the differed revenue write down, I want to say was something close $18 million or something. We will have to get that numbers for you as well.

Gregg Moskowitz - Susquehanna Financial Group

All right, thanks guys.

Operator

[Operator Instructions] We will go next Gene Munster, of Piper Jaffray.

Gene Munster - Piper Jaffray

Good afternoon, trying just to clarify another I think, the question has been asked couple of times, but existing 2007 Stratton and Dana your 25% operating margin and then the 30% is six to eight quarters after that?

Stratton Sclavos

That’s our goal Greg, I am sorry, that’s our goal Gene. We believe we know how to get there but we are not pegging an exact date for that. But we do believe we can continue our progression towards this 30% level over the next couple of years.

Gene Munster - Piper Jaffray

Okay. Great, and then second is, the whole any, theme obviously that’s a new theme and you touched on the beginning of the call, but obviously your two core businesses really tap into that and you touched on some other areas where you could be developing new products around that. Can you just, you conceptually touch on how that any of your team is going to involve from your two core business going forward?

Stratton Sclavos

I think the product themes obviously putting together solution sets that really drive towards serving up interactions on these network. So, what we focused in communication in a broad tense as it relates to web based and wireless based communications, voice and data. We will also be focused on commerce and transaction support both of a wireless and broadband. So I think all the platform investments you saw as make in '06, we are strictly around as focus on the any IRA and being the key provider in the middle of the network to enable and protect those interaction. So that’s one of the ways you will judge our portfolio going forward. Just ask yourself that this service enable or protect an interesting set of interactions that needs somebody in the middle handling billions of transaction today. Up kind how we gage it ourselves, so well it may be a new theme we did start talking about it last year, certainly within our analyst day presentation as received a very-very strong and if support in the customer bases we go in and talk about these end-to-end solutions that help them accelerate kind of their move into some of these service areas.

Gene Munster - Piper Jaffray

So it sounds that you really have all the key pieces already in place for it.

Stratton Sclavos

I believe so, I mean would clearly are going to be building out more infrastructure in the constellation as we call it to support not only delivery of these services but obviously also the monitoring and the localization of them. So I did talk about some of the investment that we will make around volume, security and reliability or related to that but for the most part I don’t see adventuring into a new service area in 2007 that we had to talk about.

Gene Munster - Piper Jaffray

Great thank you.

Operator

And that this time we have no further questions in the queue, I'll turn the conference back over to Mr. Bond for any additional or closing remark.

Stratton Sclavos

Thank you operator and thank you everyone for your time today as always we would look forward to speaking with you answer any additional questions you may have, thank you and good evening.

Operator

That does conclude today's conference call. You may disconnect at this time. We do appreciate your participation

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