VeriSign Q3 2007 Earnings Call Transcript

| About: VeriSign, Inc. (VRSN)

VeriSign Inc. (NASDAQ:VRSN)

Q3 2007 Earnings Call

November 1, 2007 5:00 pm ET

Executives

Ken Bond - VP of IR

Bill Roper - President and CEO

Bert Clement - CFO

John Donovan - EVP

Analysts

Rob Owens - Pacific Crest

Sarah Friar - Goldman Sachs

IsraelHernandez - Lehman Brothers

Todd Raker - Deutsche Bank

Peter Kuper - Morgan Stanley

Katherine Egbert - Jefferies & Company

Phil Winslow - Credit Suisse

Walter Pritchard - Cowen and Company

Scott Kessler - Standard & Poor's Equity Research

Shaul Eyal - CIBC World Markets

Operator

Good day, and welcome to the VeriSign Incorporated ThirdQuarter 2007 Earnings Call. Today's call is being recorded. At this time foropening remarks, I would like to turn the call over to Mr. Ken Bond. Please goahead.

Ken Bond

Thank you, operator. Good afternoon, everyone, and thank youfor joining us for VeriSign's third quarter 2007 earnings conference call. I amKen Bond, Vice-President, Investor Relations. And I am here today with BillRoper, President and CEO of VeriSign, Bert Clement, our Chief FinancialOfficer, John Donovan, Executive Vice President is also here as well and willjoin us during the question and answer portion of the call.

A replay of this call will be available beginning at 5 p.m.Pacific time via telephone at 888-203-1112 or 719-457-0820 for internationalcallers. The pass code for both numbers is 6843620. The third quarter pressrelease is available on FirstCall, MarketWire, as well as the investorrelations site at investor.verisign.com. For those of you joining us viaWebcast, we also invite you to view the slide presentation, which accompaniestoday's conference call. The same slides will be available for download fromour website after the call.

Financial results in today's press release are unaudited andthe matters we will be discussing today include forward-looking statements, andas such are subject to the risks and uncertainties that we discuss in detail inour documents filed with the SEC, specifically the most recent report on Forms10-K and 10Q, and any applicable amendments which identify important riskfactors that could cause actual results to differ materially from thosecontained in the forward-looking statements.

Additionally, financial results in today's press release andthe matters we will be discussing today may include non-GAAP measures used byVeriSign. Our non-GAAP income statement and the description of items excludedin our non-GAAP financial information are located on the VeriSign investorrelations website.

In a moment, Bill and Bert will provide some preparedremarks, and afterward we will open up the call to your questions. Unauthorizedrecording of this conference call is not permitted, and we anticipate the callwill end at approximately 3 p.m.

With that, I would like to turn call over to Bill. Bill?

Bill Roper

Thanks, Ken. In this call, we're going to continue with theformat that we introduced last quarter: my opening comments will be followed byBert with the discussion of the financial results for the third quarter and ourlimited guidance for the fourth quarter. And then at the end, I will share somethoughts, as they relate to the business outlook, and what we believe to beareas of particular interest to investors, including the status of our strategicbusiness review and our capital structure, before we move on to the Q&Aportion of the call.

So with that, let's take a look at the third quarter. Thethird quarter was a solid quarter, as we reported total revenue of $377 millionincluding $374 million of revenue from continuing operations, which wasconsistent with our previous guidance.

Non-GAAP earnings per share were $0.27. The solid financialperformance was again driven by our core franchises of Naming and SSL. We endedthe quarter with over 77 million domain names in our adjusted zone for .com and.net, compared to 73 million names last quarter. And our installed base of SSLcertificates totaled 912,000 compared, to 883,000 certs at the end of thesecond quarter.

Reorganization that we announced earlier this year and, atthis point expense management, are continuing to bear fruit, as the operatingmargins for the end quarter improved to 23.4%.

On the staff side of the house, Kevin Werner joined us torun our Corporate Development and Strategy Group, as Bob Korzeniewskitransitions to a part time position beginning early next year.

Korzo has been a real mainstay of our organization for adozen years, and we expect to continue to tap his knowledge and experience asKevin takes over responsibility for M&A activities.

Kevin and I have worked together for 13 years now, and hewill be a tremendous successor to Bob. Grant Clark, who also joined the team asour Chief Administrative Officer with responsibility for improving our businessprocesses in addition to overseeing the company's operational and riskmanagement activities. This is a newly created position on our executive teamand having known and work with Grant for 14 years now. He has the right mix ofexperience and skills that help us to add needed structure in business.

Mark McLaughlin, has indicated that he'd like to spend moretime with his family before considering new career opportunities and Iappreciate that Mark made his decision to leave the company in a way thatenables us to develop a smooth transition that he will personally help toexecute over the next month or so. On behalf of the team at VeriSign, I want tothank Mark for his significant contributions to the company over the last eightyears and which in luck he enters the next chapter in his life and his career.

And then, finally, I'm really particularly pleased that JimBidzos, has returned to the role of board Chair. As you probably know, Jim completedthe SSL heritage business of VeriSign, he founded our company in 1995 and hehas been a part of it ever since. Jim is a true technology leader and created aforce for an innovation, and we are very pleased to have him walk in the houseagain. Welcome back Jim.

Moving now to the business metrics for the third quarter,I'll start with the information in security products lines, which include ourNaming and SSL services. As stated earlier, our Naming business continues toshow strength, as the adjusted zone for registered names in .com and .net nowexceeds 77 million names that's an increase of 25% year-over-year. This growthis driven by continued global [internetted] option with 7.5 million new domainname registrations for .com and .net during the quarter and as well as renewalof about 10 million names during the quarter combined we booked 17.5 millionnew domain name registrations and renewals during the quarter and this a recordeclipsing last quarters record results.

The underlying growth drivers are consistent with priorquarters with solid growth in both US and international markets. We saw agrowth from all the customer segments including corporate, smaller mid-sizedbusiness, consumer and pay-per-click customers. The PPC slice of the marketremained small but it's a consistent part of our new name sales in overallbase.

As a reminder, we implemented a fee increase last month inregistry fees for dot-com and dot-net, which increased by 7% and 10%respectively, to $6.42 and $3.85.

The actual renewal rate for the second quarter was 76% andthat is our higher end of our historical range and higher than our preliminaryestimate of 75% that we provided you at the first of the quarter. However, wedo expect that the actual renewal rate for the third quarter will be littlelower than last quarter.

And then, finally, our digital infrastructure is nowhandling peak loads of nearly $32 billion DNS requests a day. VeriSign's uniquecapability to operate global network at this scale and reliability isunparallel as the most active network on the pace of the globe.

Moving to our Security Services, we'll start with our secondcore franchise, the SSL business, which sold over 217,000 certificates duringthe quarter, bringing the installed base to 912,000 certs. We are pleased withthis growth and it represents a 3% sequential growth in this base.

We're also pleased with the results of our extendedvalidation or EV certificates as customers like, PayPal, Bank of the West,British Airways, Charles Schwab, Time Warner, Travelocity and many more havegone green with EV. And demand for the EV certificates was excellent in thethird quarter and even after excluding a major customer win sequential growthfor more then 25%.

Now, this product is still in its infancy but we are thenumber one provider for EV certificates in the marketplace at this time. And wecontinue to expect that the EV adoption cycle will be consistent with previous premiumpriced SSL products that we've offered in the past. Microsoft's comments lastweek around Vista adoption further improve ourconfidence around the EV growth potentials.

The annualized average selling price across the entire baseof VeriSign, GeoTrust and Thawte-branded certificates was $262, down from lastquarters $275. This decline reflects the continued trend of a product mix shiftas the GeoTrust branded certificates continue to grow faster than the overallportfolio.

And additionally, the ASP for the VeriSign brandedcertificates has declined slightly during the quarter, as we had two major winswithin the past customers booked during the quarter. One of our primaryemerging businesses is our Identity Protection. The VeriSign IdentityProtection Program, VIP, continues to be a great example of an Internet-scaleservice that's running on a global infrastructure to provide scalable andsecure real time validation capabilities that can support millions of onlineusers.

In addition to the VIP program, we also provide IdentityProtection services including Fraud Detection services and One-Time Password orOTP authentication services.

This quarter our national Tier-1 bank announced a majorpilot program, using our OTP authentication services across tens of thousandsof customers. We also met a key milestone this quarter having now sold over 1million credentials across our OTP and VIP programs to partners such as PayPal.

Speaking of PayPal, their official US rollout in Februaryand their continued geographic expansion in the Germanyand Australiawith more countries to come, we continue to be pleased with the strong uptakeof these credentials by consumers. And they expect to see this as optioncontinue to ramp.

I'll now move to our Communication Services group, whichconcludes three categories. The first is digital content and messaging, whichincludes our wireless and broadband content services combined with our wirelessmessaging service.

The second is communications and commerce, which includesour network, database and billing services. And the third category isprofessional services, which is made up mostly of our wireless consulting and implementationcapabilities.

Let's start with digital content and messaging. We continueto see strong growth in the core messaging volumes. However, pricing environmentremains challenging as we discussed last quarter. And we do not expect this situationto improve over the remainder of this year.

Our focus over the last quarter has been on strengtheningour existing customer relationships, and we've made good strides on this frontin resolving past performance issues with our technical platforms.

On the content delivery front, while we see continuedinterest, strong interest in our Intelligent Content Delivery Network, or ICDN.We see the broader content delivery market, the rich media content as a nascentopportunity, one which will take time and investment to develop into meaningfulfinancial results.

Our legacy Communications and Commerce business continued tobe a mixed bag of results. We saw a growth in the wireless billing subscriberbase at MetroPCS and Leap, as we now support nearly 12 million wireless userswith our billing and payment services platforms. However, the gains for thesecustomers were offset by declines in our prepaid services business.

And in closing our business review, the professionalservices results were flat from last quarter, as both revenue and expenses werelower on lower available headcount.

I'd now like to turn the call over to Bert for awalk-through of our financial results for the third quarter and guidance forthe fourth quarter. Bert.

Bert Clement

Thanks, Bill, and thanks to everyone for joining us thisafternoon. We are pleased with the results this quarter, especially thecontinued growth we’ve seen from the Internet Services group and 190 basispoints improvement in our non-GAAP operating margins from continuingoperations. Both revenue and earnings per share were consistent with ourguidance. The non GAAP results we'll discuss throughout this call, reflectcontinuing operations for the third quarter, comparisons with prior periodexcludes both Jamba and Jamba Service.

You'll see Jamba Service classified as discontinuedoperations. In the third quarter price for sales, Jamba Service generatedrevenue of $3.1 million and operating income of over $1.8 million. VeriSignconsolidated revenue for the quarter was $377 million including $374 millionfrom continuing operation.

Our non-GAAP operating margin was 23.4% in exceedingguidance by 40 basis points given continued benefits of the restructuringefforts initiated earlier this year as well as having grown the top line fasterthan expenses.

In mid August, we completed $1.25 billion convertible debtoffering. The large majority of the proceeds from these transactions will beused for share repurchases and today we have repurchased 31.4 million shares atan average price $30.12. We also recognized $5 million in interest expensesquarter and the debt offering will be accretive to earnings per share.

Let me now give you some additional detail on the financialresults of the third quarter. Reported revenue from continuing operations of $374,revenue grew 3% sequentially and 15% year-over-year in line with guidanceprovided during our last conference call.

Past trends continue to hold where we see the strongestgrowth in our core businesses and positive growth in our emerging business. Ourcommunications and commerce businesses continue to be an exception.

As in past quarters, the reporting revenue based on our twobusiness segments ISG and CSG. The Internet Services Group grew approximately5% sequentially and 21% year-over-year, with revenues of $236 million or 63% oftotal revenue. This growth was fueled by strength in .com, SSL and IdentityProtection.

The Communications Services Group reported revenue of $138million for Q3 or 37% of total revenue down 1% from last quarter and up 5% year-over-year.CSG revenue is comprised of digital content and messaging which was upslightly, communications and commerce which was flat sequentially, andprofessional services which was down over the last quarter.

Moving to international operations, the percentage ofrevenue driven from international customers, affiliates and subsidiaries was16% as compared to 15% last quarter.

Cost of revenue for the third quarter was $143 million,non-GAAP Q3 gross margin was 61.8% up from 60.3% last quarter. The factorscontributing to the increase in gross margin includes reductions in headcountsand contract labor costs as well as decreases in direct costs of revenues ISG.

Turning to operating margin, total operating expenses for Q3were $143 million or 38.4% of revenue, down from 38.8% last quarter. Thepercentage decline was expected given our expectation to grow expenses at lowerrates than revenue. We saw similar benefits in other operational areas as well,driving a non-GAAP operating margin of 23.4% as compared with 21.5% lastquarter and exceeded our expectations by almost 40 basis points.

Other income including minority interest was slightly morethan $5 million for the quarter. This includes six-week of interest expense onthe convertible debt transactions and no contribution to other income fromJamba.

In the fourth quarter, we expect a one-time loss of $1million to $2 million from the Jamba JV, as a result of an unplanned one-timeexpenditure. We will be monitoring the situations very closely. With theexpected loss from Jamba and a full quarter of interest expense we expect otherincome will be approximately $1 million to $2 million for the fourth quarter.

Non-GAAP net income for the third quarter was $66 millionincluding Jamba Service with earnings per share of $0.27. The diluted sharecount is in EPS was approximately 246 million shares.

Moving on to the balance sheet and cash flow items,operating cash flow for the quarter came in at a $109 million drivers for thepositive free cash flow were approximately 70 million net stock repurchasesfrom the debt deal, 13 million from the sale of Jamba Service, and 220 millionfrom stock option exercise.

Capital expenditures for the quarter were $47 million with16% attributable to ISG, 48% to CSG, and 36% for corporate infrastructure, andbringing the year-to-date total to approximately $94 million. We do not expectcapital expenditures for the year will exceed $150-$160 million.

Our ability to consistently generate solid operating cashflows resulted in our maintaining a strong balance sheet with ending cashequivalents and short-term investments approaching $1.2 billion an increase of$371 million from last quarter.

Net DSO for the third quarter was up 6 days to 50 days, as aresult of our transitioning through a new CSG billing platform late lastquarter. During the transition, invoices were issued late, resulting in ahigher DSO. The issue was identified and addressed during the quarter, and weexpect DSO will decline next quarter, as we worked the impact through accountsreceivables.

Deferred revenue ended the quarter at $711 million, up $26million from the previous quarter, and 21% year-over-year. The increase indeferred revenue was driven by strength in our registry and security services.We ended the quarter with 4,370 people.

Moving now to guidance for the fourth quarter, and keepingwith our new guidance policy discussed last quarter, we're providing revenueand operating margin guidance for the following quarter as also providinghigh-level commentary about longer-term trends we expect to see in ourbusiness.

We continue to expect organic revenue growth accompanied bymargin expansion and earnings acceleration. For the fourth quarter, weanticipate revenue will be approximately $375 million to $385 million which isflat to up 3% from the third quarter. We expect to solid and continued growthin our core businesses, partially offset by decline in our communicationsbusiness.

Turning to operating margins for Q4, we expect operatingmargins will be approximately 25%, up from 23.5% this quarter. We will continueto execute on plans, while we are investment for growth in next generationservices as well as remaining focused on discipline, expense, management. Asdiscussed earlier, we expect the Jamba JV will incur a loss of $1 million to $2million in Q4, which we would expect to impact EPS by a penny.

Lastly, we would expect that diluted share count would beapproximately 230 million shares assuming current stock price level. Theaccelerated share repurchases or ASR program will be ongoing through the end ofthe fourth quarter. At the conclusion of the ASR program, we planned tocontinue share repurchase activity over the following quarters using the $985million of authorization remaining under our $1 billion plan.

So in summary, we are quite pleased with the results thisquarter. As we look to Q4, the continued strong performance we expect from ourcore services increasing contribution from emerging services as well as positiveresults from the restructuring provide us with positive momentum going into Q4as we approach 2008.

We'll provide additional perspective on 2008 at our AnalystDay on November 14th with our strategy business review we'll have a significantimpact on current revenue and earnings estimates.

Let me now pass it back to Bill, for the business outlook.

Bill Roper

Thanks. As Bert just mentioned, we continue to see strengthin our core businesses. And we are also focusing on the development of severalbusinesses, including content delivery, messaging and identity protection.Overtime, we expected our portfolio or emerging businesses well above as wecontinually access our opportunities in terms of our strategy, market positionand our ability to win.

From an internal management perspective, we continue to worktoward a higher level of discipline in our business practices. Efforts are wellunderway on his front and our hiring of Grant Clark, who I mentioned earlier isindicative of our commitment to improve our performance over time.

Our financial position is strong, allowing us to invest inour core and emerging businesses to maintain our growth, to expand ouroperational leverage and at the same time improve the efficiency of our capitalstructure.

On that note, I would like to turn the discussion areas thatwe believe our particular interest based on conversations we've had withshareholders. These topics include status of our strategic business review andour capital structure.

As a reminder, we initiated a company-wide reorganization inJanuary. This reorganization was not really a destination as much as it was ourfirst step and our continual process of adjusting and refining our overallstrategy to meet changing the market conditions.

And as stated before, I'm a big believer and focused. Wesimply must focus our resources on a more limited set of meaningful growthopportunities to improve our success rate as a company. And to that end, weinitiated a business review to understand and asses how each businesses fits interms of our strategy, our market position and our ability to win.

This business review is now substantially complete. Andwhile we won't into details on today's call, we do intend to discuss this infurther detail at our Analyst Day on November 14th. We hope that you'll be ableto attend in person or video of the webcast.

The second area that I like to discuss is the capitalstructure. As we discussed earlier, we successfully completed our convertibledebt offerings raising $1.25 billion and we use a large majority of theproceeds to repurchase shares. In fact this quarter we repurchased over 31million shares accounting approximately 13% of the total shares outstanding.

Our balance sheet continues to be strong, with cash andequivalents approaching $1.2 billion, and of course, we expect we will continueto generate healthy operating cash flows. So in total, we're in excellentposition to continue to invest with greater discipline in our businesses. Andto the extent that we do not see investment opportunities, which meet our riskadjusted return threshold, we will seek effective and efficient means ofreturning cash to our shareholders through initiatives like our sharerepurchase program.

And we're not going to provide guidance on future sharerepurchases, but we do note that we still have approximately $985 million authorizedfor share repurchase. And we continue to believe that our capital structure isan avenue to unlocking shareholder value overtime.

So in summary, the third quarter was a solid quarter, in termsof, key financial metrics. We are pleased with the performance of our corebusinesses and their future prospects, the strength of our management team, andthe commitment of our tremendously talented employee base.

Looking forward, we except strong organic revenue growth inour core businesses, partially offset by the clients in our communicationbusinesses accompanied by margin expansion and earnings accelerations.

I'd like to conclude my remarks by thanking ourshareholders, our business partners, our customers, and our employees for theircontinued support. And with that, we'd like to open the call for yourquestions.

Operator, may we have the first question, please.

Question-and-AnswerSession

Operator

(Operator Instructions) And we'll go first to Rob Owens,Pacific Crest.

Rob Owens - PacificCrest

A couple of questions: First of all, could you give us asense of where the attach rate is for EV certs right now? And kind of how weshould think about that as we move forward? And in light of that, at what pointdo we see ASP start swing the other way?

Bill Roper

Would you repeat the question? You broke up a bit, and wedidn't hear the first part.

Rob Owens - PacificCrest

Question was regarding EV certs: Extended ValidationCertificates, and effectively what the attach rate looks like right now? Andwhat some expectations might be in terms of how that can drive overall ASPsmoving forward?

John Donovan

Hi, it's John Donovan. I'll take the question. Right now,we're seeing continued uptake. One of the things that we have done this yearis, we've augmented the channels to ensure that that up sale goes much moresmoothly. So, we were very pleased with the take rate.

We haven't established yet metrics, which we think are goingto be consistent and sustainable for you to measure that performance. But themetrics that we're using right now internally, which were the root drivers ofthat are up rather smartly this quarter.

So, I think, we will provide at Analyst Day a more detailview of some of the metrics of measurement in that business, but from thestandpoint of enterprise adoption, we're very pleased with where that's beenheaded.

Rob Owens - PacificCrest

Okay. And as we look at guidance for the fourth quarter,fairly flat sequentially modest uptake, any sense as to what comes out of ISGversus CSG, what type of declines quarter-over-quarter you're expecting in CSGthere?

Bill Roper

Yeah. We don't usually provide that level of detail but inline with what we have been seeing historically here.

Rob Owens - PacificCrest

Great, thanks.

Operator

We'll go next to Sarah Friar with Goldman Sachs.

Sarah Friar - GoldmanSachs

Good afternoon guys. Just on that question around guidance,I mean, you are being guiding than a little from where the street was, is therea concern that in some of the non-core businesses, particularly and now at theCSG area that you continue to see erosion because they've effectively becomenon-core, I mean, how are you dealing with that?

John Donovan

Yeah, this is John, what we have seen, we're obviously arelead indicators that are the customer activity indicators and that's the RFP'sthat we see the, the bookings that we get and the backlog and we watch thatvery closely not only by win rate and customers, but we look at it buy productas well and we actually have been having very strong quarters throughout thelast two quarters in the customer activity, in the bookings, in thecommunications.

So, I would say that in general our sharing some of the morechallenging businesses is growing up and what we are dealing with there is abackdrop against a price decline. So, I'm very thrilled that what the channelhas been doing and the focus that we've been able to maintain through thisportfolio review.

And I would say that those businesses as we start tocategorized them as non-core and mange them that we'll find that '08, Q4 in '08will be consistent with the guidance we've given you and we're dealing with theunderlying economics of our price decline and volume, but I think the win ratesare good and right now the pipeline is healthy.

Sarah Friar - GoldmanSachs

Okay, that's good to hear. And then, just maybe on morepositive note, on the registry side, obviously we have the price increasestarting to kick in now, but when we could we start to see maybe someadditional services coming out of that registry business and given that you cannow that, how they, I cannot be able set up?

John Donovan

Yeah, this is John, one of the things that we are going togo through extensively at Analyst Day, and Bill has been a big proponent, andwe talk a lot about focus and discipline, and we've done a great job of thathere over the last several quarters. One it maybe has been underserved its someof our dialogues with new folks, as just the innovation process itself. Andwe've been using the same focus and discipline into building how we gait inhurdle things in the investment portfolio.

So, I would suspect that over the course for next, for thewhile here, as we talk about areas where we are going to invest and grow thatwe will, you will see a very logical path and plan for growth in all of ourcore services evolving the base product line. And also looking for adjacentmarkets, that we conserve that have either similar go to market and technologyor potentially the length of the businesses that we are in today.

So, we don't have the answer that it will provide a lot ofclarity on Analyst Day for the things that we are doing there and I think thatyou'll see that we have a lot of great opportunities presented by the businessin both the SSL and the domain business as well.

Sarah Friar - GoldmanSachs

Great, okay. We look forward to seeing at there. Thanks alot.

Operator

(Operator Instructions) We'll go next to Israel Hernandez ofLehman Brothers.

Israel Hernandez - Lehman Brothers

Hello everyone. With respect to the ICDN, you indicated thatit was still in nascent stages and this is require some time and someinvestment, is that suggesting that perhaps ICDN might not be in VeriSignlong-term plans or are you going to committed its growing that business or isit just may not be worth it?

Bill Roper

Good question Israel, I hope you are coming toAnalyst Day. We'll spend a little time on that. We are constantly reassessingall of our investment periods. We are adding new ones, we are taking a hardlook at the fundamentals of these markets develop and the stream really is thetechnology and our capabilities, the market size, growth rate in economics thatthey deliver and our ability to win and have a meaningful market position. Andwe are constantly looking at all these opportunities against those streams.

Israel Hernandaz - Lehman Brothers

Okay. Thanks. That sounds like nice.

Operator

We'll go next to Todd Raker with Deutsche Bank.

Todd Raker - DeutscheBank

Hi, guys. Two questions for you. First, on the priceincrease for dot-com and dot-net, can you just give us an inside, in terms of,the current contracts links around the domain name? And how you feel with yourrenews cycle, kind of, looks like over the next, I think it's about 18 monthsfor that to roll in, how should we think about that? And then, from a pricingperspective, when would be the next opportunity, you guys can take pricing up asecond time?

Bill Roper

I think I got part of that question and I may have missedpart, can I start at the back and go forward. The current contract that we havegoes through 2012 and allows for a total of four price increases of up to 7%each in the case of dot-com. And they can be no more frequent then once a year.That was the part I remember. Can you repeat the first part of the question?

Todd Raker - DeutscheBank

Yeah. What is the average contract links for domain thesedays?

Bill Roper

It's a little over a year, it's about 1.2 years is theaverage term.

Todd Raker - DeutscheBank

Okay. And some renewals factor, they've been pretty smoothover the four quarters or should we see seasonality here around the end of theyear?

Bill Roper

I'm sorry we're just not hearing you're faded. Could yourepeat?

Todd Raker - DeutscheBank

Yeah. From the renewal perspective should we see seasonalityaround the end of the year or is it going to be pretty smooth over the fourquarters?

Bill Roper

Season's question, I see.

Bert Clement

I think it's in a range of where it's between historically,we are still analyzing where the actual rate is for Q3. Our view is that itwill be slightly lower than what it was in Q2, which turned out to be higherthan our initial estimate guess. The historical range on that's been about 73to 77, our second quarter, which is the sort of the higher end of the range,and we expected to drift back down towards nil?

John Donovan

Yeah. This is John. Just to add there. I mean there is aseasonality of who is doing renewing, and those sorts of things. But also inthe non-renewals you're dealing with business failures, and pay-per-clicks andwe had the price increase and the economics for the pay-per-clicks of how youget an ROI on a name.

So, we think Q3 was a little unusual in the things that wesaw, but we don't see anything that would indicate that we're going to beoutside our traditional range, although, we believe Q3 will probably be on thelower end of that historical range.

Todd Raker - DeutscheBank

Okay. And then, just one quick follow-up on the SSLbusiness, you've mentioned that the VeriSign ASP was down, but you stated toolarge on prior transaction. If you have not had those two large deals with theASP around the VeriSign certs have been down?

John Donovan

Yeah. The ASP would have been slightly up at that point.

Todd Raker - DeutscheBank

Okay…

John Donovan

If you have not had those two in.

Todd Raker - DeutscheBank

Okay. Thanks, guys.

Operator

We'll go next to Peter Kuper from Morgan Stanley.

Peter Kuper - MorganStanley

Great, guys. Just maybe two simple questions as here, but Inoticed in your comments, you said about $220 million from stock optionexercising, perhaps you bought a lot of stock. One concern we have had those --given the ongoing stock option verification lot of employees had end-up stockin desire, shall we say, are you feeling comfortable now that, you know, wehave kind of passed a Russian stock selling on the insiders, and that you mightsee more normalized activity, enhance your buyback activity, maybe morenormalized going forward?

Bert Clement

Yes. I think we had pent-up demand. We were locked up forabout 15 months. The stock price also moved over 100% in that time period, sothere was definitely a big push there. We expected to go back to a normalizedrate at this point. We also did have a catch-up with our employee stockpurchase program as well. So we expect those numbers to level-off as we goforward. And we do expect to continue to buy stock regardless.

Peter Kuper - MorganStanley

Okay. And then thatmaybe 5 million, that's a share repurchase authorization that's remaining, isthere expiration on that?

Bert Clement

There is not.

Peter Kuper - MorganStanley

Okay. Great. Thanks a lot.

Operator

(Operator Instruction). We'll go next to Katherine Egbert ofJefferies and Company.

Katherine Egbert -Jefferies & Company

Hi, good afternoon. Just a quick clarification on youroutlook for Q4. Does it include the loss of any lines of business or anyrevenue?

Bert Clement

What do you mean by the loss of…

Katherine Egbert -Jefferies & Company

Does it include anything in terms of divest?

Bert Clement

No, we're given you number as if today, without anydivestiture numbers.

Katherine Egbert -Jefferies & Company

Okay. And then, I've a question for Bill, how are you doingversus you initially thought on kind of the strategic rational of the Company,especially, when the fact that there has been so many changes in the personnel?You feel like you are in track?

Bill Roper

Actually, I think we are little ahead of track. We are not“came on board”, the team has done a fair amount of the work already. They wereready. They've turn to the task well. I actually think we're little ahead ofwhere I might have expected to be. I don't think I had a particular timeline inmind. You might note, we’ve accomplished a number of things. We completed theoption review. We got our books in records up-to-date and we reopened our stocksystem.

We did the share repurchase. We’ve added some staff members.We’ve substantially completed the strategic review of the business portfolioand we are now going into the action mode there. And we’ve continue to operatethe Company pretty much on track for the first three quarters of this year. SoI’m pretty pleased with what we’ve accomplished. I will tell you that we got alot of people working very hard. But I think very effectively and very dedicateand committed staff and team and overall talent base within the Company.

So, if you are asking how I feel, I'm actually pleased withwhere we are.

Katherine Egbert -Jefferies & Company

Okay. And then, last one, just quickly. How much leverageare you comfortable with?

Bill Roper

We thought, we have really not talked about an optimalcapital structure or those type things but we will just note that we have astrong balance sheet. We have a very good stable, predictable cash flows, wehave good businesses that have a lot of visibility and so a company like thatshould be able to carry a reasonable amount of leverage and services withoutrunning into problems.

Bert Clement

And we also have a $500 million line of credit that isuntapped at this time.

Katherine Egbert -Jefferies & Company

Okay, thank you.

Bill Roper

Yeah.

Operator

We'll go next to Phil Winslow from Credit Suisse.

Phil Winslow - CreditSuisse

Hi guys, I just wanted to insight of our deferred revenueportrait and just what your expectations are for next quarter? And then, whenyou do look longer-term when you start to making the effect of the priceincrease but also if you see improvement in terms of ASPs or the certs, justhow should we think about deferred revenue in the next quarter but potentiallynext year?

Bert Clement

Yes. We think deferred revenue is going to continue to growat the rate is being growing over the last couple of quarters. Obviously, Q1 isusually a very strong deferred revenue quarter for our registry business. Sothat will be again continued the time not as to the magnitude that has been inthe past as of as the new names have been running all year round, a record atthis point. So, we do think that the price increase will kick in to thedeferred revenue base here late in the fourth quarter and then going into thefirst half of next year before we see meaningful results on the revenue end. Welook pretty confidently as the deferred revenue is going to continue to grow.

Phil Winslow - CreditSuisse

Great, thanks guys.

Operator

We'll go next to Walter Pritchard of Cowen and Company.

Walter Pritchard -Cowen and Company

Hi guys, just one level of addition detail may be you couldgive us around professional services headcount, you talked about that and thebill of account being down. Could you maybe quantify that for us year-over-yearor are you see year-over-year might be the most meaningful in terms of how manyit is down?

Bill Roper

Yeah, without talking about the specific numbers, let metell you what the chart of professional services was for this year and that wasin addition to the professional services, which enabled some of the compsbusiness. We have professional services virtue an integral part in the earlystage of sales in the security side of the business in particular the MSSportfolio.

So, we recharged them this year to move the big needle ofthe company looking for larger sales in increasing the average deal size thatwe had in those businesses, we've done a good job of doing that. Our averagedeal size is up both in the pipeline and in the things that we have booked.

And we are starting to get out of some of the serviceoffering areas which are pure professional services, because the blendedmargins will obviously not be that acceptable. So that, moving the big needleis the objective that we have. So, we'll continue to have professional servicesas the tail on the dog. And I think right now we've recalibrated that portfolioto be in line where we think it can make a bigger difference.

So I think we are on track for what it's designed to do andwe are on track with aligning it to the performance of the businesses thatsupporting. But I would expect that going forward that we will probably reducethe total numbers that we have in there consistent with the portfolio movesthat we make.

Walter Pritchard -Cowen and Company

Got you. And is that part of the guidance for Q4 or is thatsomething that's a longer-term move into 2008 and beyond?

Bill Roper

That's a longer-term move in the 2008.

Walter Pritchard -Cowen and Company

Okay. And then, just last question, around the executivechanges, is there a plan to bring somebody else in the external to fill some ofthe product marketing and customer service roles that Mark McLaughlin had or isthat, are you filling it around with internal personnel?

Bill Roper

There is no plan to bring in any additional executives inthat area. We've got a good team here, John Donovan is stepping up to somebroader responsibilities. Several other members of the team are accepting someadditional responsibilities. We've really got a pretty good team here.

Walter Pritchard -Cowen and Company

Thanks.

Operator

(Operator Instructions) We'll go next to Scott Kessler ofStandard and Poor's Equity Research.

Scott Kessler -Standard & Poor's Equity Research

Thanks a lot. I think most of my questions have been askedand answered, but can you just repeat the specifics about the executives whoare going to have, either have diminish roles of the company or leaving thecompany?

Bill Roper

No one is having a diminish role, Bob Korzeniewski, who hasbeen heading up our strategic development area for, I guess, since about 2000,and part of that was with network solutions and even before that with SAIC hasbeen desirous or slowing down for quite sometime now.

We've continued to encourage Korzo to stay on Board, andhe's really come to the point where he'd like to spend a little more time onsome personal and charitable philanthropic-type activities. And so, inconjunction we're being able to bring Kevin Werner on Board, Korzo will beslowing down. He'll still be with us on a part-time basis. And we're lookingforward to continuing contributions from Korzo and Kevin is a great replacementand I think he'll do a super job there.

We mentioned that Mark was leaving for personal reasons, weare sorry to see Mark go, but we respect his desire to spend some more timewith his family and to evaluate other opportunities that may come his way.

Other than that, I'd say we've had people step up toadditional responsibilities including John that I just mentioned and there reallyaren’t any other changes off significance. We’ve some internal promotions. Ifyou go back to shortly after I joined, Bert Clement, our Chief FinancialOfficer, is an internal promotion and Marie Law, our Head of HR is an internalpromotion. And so we’ve had a few things like that but we’ve not -- therereally hasn’t been that much movement.

Scott Kessler -Standard and Poor's Equity Research

Great. Okay. Thanks. And my second question involves, Iguess this is kind of been touched upon, but I wanted to explore it a littlebit more. I was surprised frankly, when I saw the news that you guys were doinga debt offering and an accelerated repurchase, largely because you already hada pretty strong cash position at that point, especially given the status of thecredit markets.

I’m wondering kind of what contributed to that activity,obviously, we all know that you were forced out from repurchasing stock forpretty extended period of time, but if you look at the outstanding shares,let’s say, in Q2 versus this quarter, I think as it was alluded to it actuallywent up. Now, obviously, you are guiding for a notable decline but I’m kind ofwondering, is it just a notion that you wanted to deploy your cash and youdidn't see any other internal or acquisition opportunities. Thanks a lot.

Bill Roper

Okay. This is Bill. Let me take up charge and then if Bretwants to jump in, he can. The several questions I think embedded, maybe, partof your question is, why didn't we use existing cash versus a debt offering. Wethought it was a unique window in the market and the structure of theparticular transaction that we used is very, very efficient, its very low costcapital. So the net-net of that transaction was to materially lower ourweighted average cost of capital. That was part of that.

We use substantially all of the proceeds for repurchase thatwe made in conjunction with the transaction or co-link said that we fixed theprice, which we repay the shares. So there was a decent arbitrage there. We dostill have as noted excess cash. We have borrowing power. And we have greatcash flows.

and so that should be taken as a signal that we willcontinue to take that money and either invest internally in new productdevelopment and so forth or make acquisitions that we can find meaningfulacquisitions and state our strategy. And we can be assured they will get a goodrisk adjusted return on them and debt cash or cash flow is left over afterthat. We intend to continue to employ message to return on debt to ourshareholders. Does that cover you question?

Scott Kessler -Standard and Poor's Equity Research

Yeah. I guess, I was wondering I think it was touched upon,but you saw sequential outstanding shares all increased?

Bill Roper

Let me touch that one too.

Scott Kessler -Standard and Poor's Equity Research

Yeah.

Bill Roper

The third quarter is always the quarter of net shareissuance due to the -- that's the time of the year we do our equity round forour employees or large number of our employees participate in equity programs,both non qualify stock options as well as our issues. And so in the thirdquarter there is a fair amount of issuance typically in connection with that.And then we also in this particular third quarter as a factor that Bert alreadymentioned that was having been, sort of, out of business, if you will, forabout 15 months.

There was this for backlog of employee stock optionexercises and the ESPP catch-up and so forth. So that would have happenedwhether we bought stock back or not in the third quarter, really the repurchasejust helped to minimize that and you'll see us return to being net purchaser, Ibelieve of own shares or you'll see shares outstanding going downquarter-to-quarter from this point forward.

Scott Kessler -Standard and Poor's Equity Research

Okay. Thank you.

Operator

Okay. We'll take our last question from Shaul Eyal of CIBCWorld Markets.

Shaul Eyal - CIBCWorld Markets

Thank you. Hi, good afternoon, guys. One quick question onthe ISQ front, the growth that you have seen in the addition in new URL inwebsite, can you quantify for us kind of from a geographic perspective whereit's coming from mainly?

Bill Roper

Yeah. Well, I mean there are a number of geographies thatare doing well. But if you look at the international expansion we have rightnow, it's growing faster than the overall rate in Chinaand Germany,are two areas right now where we are getting substantial growth.

Shaul Eyal - CIBCWorld Markets

Got it. Thank you very much.

Operator

We have no additional questions at this time. I'd like toturn the call back over to, Mr. Ken Bond for any closing remarks.

Ken Bond

Thank you, operator. We anticipate that our next quarterlyconference call, which will reflect our fourth quarter 2007 results will beheld on Thursday, January 31st, at 2:00 p.m. Pacific time, 5:00 p.m. Easterntime. Final confirmation of this date will be provided, the first business dayafter the close of the quarter on January 1st.

I would also like to remind you that in light of RegulationFD, VeriSign plans to retain its long-standing policy to not comment on itsfinancial guidance during the quarter, unless it is done through a publicdisclosure. Please call the Investor Relations department with any follow-upquestions from this call. Thank you for your participation and continuedsupport. This concludes our call. Thank you, and good evening.

Operator

This concludes today's conference. We thank you everyone fortheir participation, and you may now disconnect your lines.

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