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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

Israel Hernandez - 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 Third Quarter 2007 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.

Ken Bond

Thank you, operator. Good afternoon, everyone, and thank you for joining us for VeriSign's third quarter 2007 earnings conference call. I am Ken Bond, Vice-President, Investor Relations. And I am here today with Bill Roper, President and CEO of VeriSign, Bert Clement, our Chief Financial Officer, John Donovan, Executive Vice President is also here as well and will join 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 international callers. The pass code for both numbers is 6843620. The third quarter press release is available on FirstCall, MarketWire, as well as the investor relations site at investor.verisign.com. For those of you joining us via Webcast, we also invite you to view the slide presentation, which accompanies today's conference call. The same slides will be available for download from our website after the call.

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

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

In a moment, Bill and Bert will provide some prepared remarks, and afterward we will open up the call to your questions. Unauthorized recording of this conference call is not permitted, and we anticipate the call will 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 the format that we introduced last quarter: my opening comments will be followed by Bert with the discussion of the financial results for the third quarter and our limited guidance for the fourth quarter. And then at the end, I will share some thoughts, as they relate to the business outlook, and what we believe to be areas of particular interest to investors, including the status of our strategic business review and our capital structure, before we move on to the Q&A portion of the call.

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

Non-GAAP earnings per share were $0.27. The solid financial performance was again driven by our core franchises of Naming and SSL. We ended the 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 SSL certificates totaled 912,000 compared, to 883,000 certs at the end of the second quarter.

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

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

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

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

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

And then, finally, I'm really particularly pleased that Jim Bidzos, has returned to the role of board Chair. As you probably know, Jim completed the SSL heritage business of VeriSign, he founded our company in 1995 and he has been a part of it ever since. Jim is a true technology leader and created a force for an innovation, and we are very pleased to have him walk in the house again. 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 our Naming and SSL services. As stated earlier, our Naming business continues to show strength, as the adjusted zone for registered names in .com and .net now exceeds 77 million names that's an increase of 25% year-over-year. This growth is driven by continued global [internetted] option with 7.5 million new domain name registrations for .com and .net during the quarter and as well as renewal of about 10 million names during the quarter combined we booked 17.5 million new domain name registrations and renewals during the quarter and this a record eclipsing last quarters record results.

The underlying growth drivers are consistent with prior quarters with solid growth in both US and international markets. We saw a growth from all the customer segments including corporate, smaller mid-sized business, consumer and pay-per-click customers. The PPC slice of the market remained small but it's a consistent part of our new name sales in overall base.

As a reminder, we implemented a fee increase last month in registry 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% and that is our higher end of our historical range and higher than our preliminary estimate of 75% that we provided you at the first of the quarter. However, we do expect that the actual renewal rate for the third quarter will be little lower than last quarter.

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

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

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

Now, this product is still in its infancy but we are the number one provider for EV certificates in the marketplace at this time. And we continue to expect that the EV adoption cycle will be consistent with previous premium priced SSL products that we've offered in the past. Microsoft's comments last week around Vista adoption further improve our confidence around the EV growth potentials.

The annualized average selling price across the entire base of VeriSign, GeoTrust and Thawte-branded certificates was $262, down from last quarters $275. This decline reflects the continued trend of a product mix shift as the GeoTrust branded certificates continue to grow faster than the overall portfolio.

And additionally, the ASP for the VeriSign branded certificates has declined slightly during the quarter, as we had two major wins within the past customers booked during the quarter. One of our primary emerging businesses is our Identity Protection. The VeriSign Identity Protection Program, VIP, continues to be a great example of an Internet-scale service that's running on a global infrastructure to provide scalable and secure real time validation capabilities that can support millions of online users.

In addition to the VIP program, we also provide Identity Protection services including Fraud Detection services and One-Time Password or OTP authentication services.

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

Speaking of PayPal, their official US rollout in February and their continued geographic expansion in the Germany and Australia with more countries to come, we continue to be pleased with the strong uptake of these credentials by consumers. And they expect to see this as option continue to ramp.

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

The second is communications and commerce, which includes our network, database and billing services. And the third category is professional services, which is made up mostly of our wireless consulting and implementation capabilities.

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

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

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

Our legacy Communications and Commerce business continued to be a mixed bag of results. We saw a growth in the wireless billing subscriber base at MetroPCS and Leap, as we now support nearly 12 million wireless users with our billing and payment services platforms. However, the gains for these customers were offset by declines in our prepaid services business.

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

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

Bert Clement

Thanks, Bill, and thanks to everyone for joining us this afternoon. We are pleased with the results this quarter, especially the continued growth we’ve seen from the Internet Services group and 190 basis points improvement in our non-GAAP operating margins from continuing operations. Both revenue and earnings per share were consistent with our guidance. The non GAAP results we'll discuss throughout this call, reflect continuing operations for the third quarter, comparisons with prior period excludes both Jamba and Jamba Service.

You'll see Jamba Service classified as discontinued operations. In the third quarter price for sales, Jamba Service generated revenue of $3.1 million and operating income of over $1.8 million. VeriSign consolidated revenue for the quarter was $377 million including $374 million from continuing operation.

Our non-GAAP operating margin was 23.4% in exceeding guidance by 40 basis points given continued benefits of the restructuring efforts initiated earlier this year as well as having grown the top line faster than expenses.

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

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

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

As in past quarters, the reporting revenue based on our two business segments ISG and CSG. The Internet Services Group grew approximately 5% sequentially and 21% year-over-year, with revenues of $236 million or 63% of total revenue. This growth was fueled by strength in .com, SSL and Identity Protection.

The Communications Services Group reported revenue of $138 million 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 up slightly, communications and commerce which was flat sequentially, and professional services which was down over the last quarter.

Moving to international operations, the percentage of revenue driven from international customers, affiliates and subsidiaries was 16% 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 factors contributing to the increase in gross margin includes reductions in headcounts and contract labor costs as well as decreases in direct costs of revenues ISG.

Turning to operating margin, total operating expenses for Q3 were $143 million or 38.4% of revenue, down from 38.8% last quarter. The percentage decline was expected given our expectation to grow expenses at lower rates 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% last quarter and exceeded our expectations by almost 40 basis points.

Other income including minority interest was slightly more than $5 million for the quarter. This includes six-week of interest expense on the convertible debt transactions and no contribution to other income from Jamba.

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

Non-GAAP net income for the third quarter was $66 million including Jamba Service with earnings per share of $0.27. The diluted share count 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 the positive free cash flow were approximately 70 million net stock repurchases from the debt deal, 13 million from the sale of Jamba Service, and 220 million from stock option exercise.

Capital expenditures for the quarter were $47 million with 16% attributable to ISG, 48% to CSG, and 36% for corporate infrastructure, and bringing the year-to-date total to approximately $94 million. We do not expect capital expenditures for the year will exceed $150-$160 million.

Our ability to consistently generate solid operating cash flows resulted in our maintaining a strong balance sheet with ending cash equivalents 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 a result of our transitioning through a new CSG billing platform late last quarter. During the transition, invoices were issued late, resulting in a higher DSO. The issue was identified and addressed during the quarter, and we expect DSO will decline next quarter, as we worked the impact through accounts receivables.

Deferred revenue ended the quarter at $711 million, up $26 million from the previous quarter, and 21% year-over-year. The increase in deferred 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 keeping with our new guidance policy discussed last quarter, we're providing revenue and operating margin guidance for the following quarter as also providing high-level commentary about longer-term trends we expect to see in our business.

We continue to expect organic revenue growth accompanied by margin expansion and earnings acceleration. For the fourth quarter, we anticipate revenue will be approximately $375 million to $385 million which is flat to up 3% from the third quarter. We expect to solid and continued growth in our core businesses, partially offset by decline in our communications business.

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

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

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

We'll provide additional perspective on 2008 at our Analyst Day on November 14th with our strategy business review we'll have a significant impact 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 strength in our core businesses. And we are also focusing on the development of several businesses, including content delivery, messaging and identity protection. Overtime, we expected our portfolio or emerging businesses well above as we continually access our opportunities in terms of our strategy, market position and our ability to win.

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

Our financial position is strong, allowing us to invest in our core and emerging businesses to maintain our growth, to expand our operational leverage and at the same time improve the efficiency of our capital structure.

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

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

And as stated before, I'm a big believer and focused. We simply must focus our resources on a more limited set of meaningful growth opportunities to improve our success rate as a company. And to that end, we initiated a business review to understand and asses how each businesses fits in terms of our strategy, our market position and our ability to win.

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

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

Our balance sheet continues to be strong, with cash and equivalents approaching $1.2 billion, and of course, we expect we will continue to generate healthy operating cash flows. So in total, we're in excellent position to continue to invest with greater discipline in our businesses. And to the extent that we do not see investment opportunities, which meet our risk adjusted return threshold, we will seek effective and efficient means of returning cash to our shareholders through initiatives like our share repurchase program.

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

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

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

I'd like to conclude my remarks by thanking our shareholders, our business partners, our customers, and our employees for their continued support. And with that, we'd like to open the call for your questions.

Operator, may we have the first question, please.

Question-and-Answer Session

Operator

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

Rob Owens - Pacific Crest

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

Bill Roper

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

Rob Owens - Pacific Crest

Question was regarding EV certs: Extended Validation Certificates, and effectively what the attach rate looks like right now? And what some expectations might be in terms of how that can drive overall ASPs moving 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 year is, we've augmented the channels to ensure that that up sale goes much more smoothly. So, we were very pleased with the take rate.

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

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

Rob Owens - Pacific Crest

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

Bill Roper

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

Rob Owens - Pacific Crest

Great, thanks.

Operator

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

Sarah Friar - Goldman Sachs

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

John Donovan

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

So, I would say that in general our sharing some of the more challenging businesses is growing up and what we are dealing with there is a backdrop against a price decline. So, I'm very thrilled that what the channel has been doing and the focus that we've been able to maintain through this portfolio review.

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

Sarah Friar - Goldman Sachs

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

John Donovan

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

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

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

Sarah Friar - Goldman Sachs

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

Operator

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

Israel Hernandez - Lehman Brothers

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

Bill Roper

Good question Israel, I hope you are coming to Analyst Day. We'll spend a little time on that. We are constantly reassessing all of our investment periods. We are adding new ones, we are taking a hard look at the fundamentals of these markets develop and the stream really is the technology and our capabilities, the market size, growth rate in economics that they deliver and our ability to win and have a meaningful market position. And we 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 - Deutsche Bank

Hi, guys. Two questions for you. First, on the price increase 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 your renews cycle, kind of, looks like over the next, I think it's about 18 months for that to roll in, how should we think about that? And then, from a pricing perspective, when would be the next opportunity, you guys can take pricing up a second time?

Bill Roper

I think I got part of that question and I may have missed part, can I start at the back and go forward. The current contract that we have goes 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 - Deutsche Bank

Yeah. What is the average contract links for domain these days?

Bill Roper

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

Todd Raker - Deutsche Bank

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

Bill Roper

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

Todd Raker - Deutsche Bank

Yeah. From the renewal perspective should we see seasonality around the end of the year or is it going to be pretty smooth over the four quarters?

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 it will be slightly lower than what it was in Q2, which turned out to be higher than our initial estimate guess. The historical range on that's been about 73 to 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 a seasonality of who is doing renewing, and those sorts of things. But also in the non-renewals you're dealing with business failures, and pay-per-clicks and we had the price increase and the economics for the pay-per-clicks of how you get an ROI on a name.

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

Todd Raker - Deutsche Bank

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

John Donovan

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

Todd Raker - Deutsche Bank

Okay…

John Donovan

If you have not had those two in.

Todd Raker - Deutsche Bank

Okay. Thanks, guys.

Operator

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

Peter Kuper - Morgan Stanley

Great, guys. Just maybe two simple questions as here, but I noticed in your comments, you said about $220 million from stock option exercising, 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 stock in desire, shall we say, are you feeling comfortable now that, you know, we have kind of passed a Russian stock selling on the insiders, and that you might see more normalized activity, enhance your buyback activity, maybe more normalized going forward?

Bert Clement

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

Peter Kuper - Morgan Stanley

Okay. And then that maybe 5 million, that's a share repurchase authorization that's remaining, is there expiration on that?

Bert Clement

There is not.

Peter Kuper - Morgan Stanley

Okay. Great. Thanks a lot.

Operator

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

Katherine Egbert - Jefferies & Company

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

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 any divestiture numbers.

Katherine Egbert - Jefferies & Company

Okay. And then, I've a question for Bill, how are you doing versus 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 were ready. They've turn to the task well. I actually think we're little ahead of where I might have expected to be. I don't think I had a particular timeline in mind. You might note, we’ve accomplished a number of things. We completed the option review. We got our books in records up-to-date and we reopened our stock system.

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

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

Katherine Egbert - Jefferies & Company

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

Bill Roper

We thought, we have really not talked about an optimal capital structure or those type things but we will just note that we have a strong balance sheet. We have a very good stable, predictable cash flows, we have good businesses that have a lot of visibility and so a company like that should be able to carry a reasonable amount of leverage and services without running into problems.

Bert Clement

And we also have a $500 million line of credit that is untapped 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 - Credit Suisse

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

Bert Clement

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

Phil Winslow - Credit Suisse

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 could give us around professional services headcount, you talked about that and the bill of account being down. Could you maybe quantify that for us year-over-year or are you see year-over-year might be the most meaningful in terms of how many it is down?

Bill Roper

Yeah, without talking about the specific numbers, let me tell you what the chart of professional services was for this year and that was in addition to the professional services, which enabled some of the comps business. We have professional services virtue an integral part in the early stage of sales in the security side of the business in particular the MSS portfolio.

So, we recharged them this year to move the big needle of the company looking for larger sales in increasing the average deal size that we had in those businesses, we've done a good job of doing that. Our average deal 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 service offering areas which are pure professional services, because the blended margins will obviously not be that acceptable. So that, moving the big needle is the objective that we have. So, we'll continue to have professional services as the tail on the dog. And I think right now we've recalibrated that portfolio to 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 and we are on track with aligning it to the performance of the businesses that supporting. But I would expect that going forward that we will probably reduce the total numbers that we have in there consistent with the portfolio moves that we make.

Walter Pritchard - Cowen and Company

Got you. And is that part of the guidance for Q4 or is that something 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 executive changes, is there a plan to bring somebody else in the external to fill some of the product marketing and customer service roles that Mark McLaughlin had or is that, are you filling it around with internal personnel?

Bill Roper

There is no plan to bring in any additional executives in that area. We've got a good team here, John Donovan is stepping up to some broader responsibilities. Several other members of the team are accepting some additional 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 of Standard and Poor's Equity Research.

Scott Kessler - Standard & Poor's Equity Research

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

Bill Roper

No one is having a diminish role, Bob Korzeniewski, who has been 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 has been desirous or slowing down for quite sometime now.

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

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

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

Scott Kessler - Standard and Poor's Equity Research

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

I’m wondering kind of what contributed to that activity, obviously, we all know that you were forced out from repurchasing stock for pretty 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 actually went up. Now, obviously, you are guiding for a notable decline but I’m kind of wondering, is it just a notion that you wanted to deploy your cash and you didn'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 Bret wants to jump in, he can. The several questions I think embedded, maybe, part of your question is, why didn't we use existing cash versus a debt offering. We thought it was a unique window in the market and the structure of the particular transaction that we used is very, very efficient, its very low cost capital. So the net-net of that transaction was to materially lower our weighted average cost of capital. That was part of that.

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

and so that should be taken as a signal that we will continue to take that money and either invest internally in new product development and so forth or make acquisitions that we can find meaningful acquisitions and state our strategy. And we can be assured they will get a good risk adjusted return on them and debt cash or cash flow is left over after that. We intend to continue to employ message to return on debt to our shareholders. 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 share issuance due to the -- that's the time of the year we do our equity round for our 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 third quarter 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 already mentioned that was having been, sort of, out of business, if you will, for about 15 months.

There was this for backlog of employee stock option exercises and the ESPP catch-up and so forth. So that would have happened whether we bought stock back or not in the third quarter, really the repurchase just helped to minimize that and you'll see us return to being net purchaser, I believe of own shares or you'll see shares outstanding going down quarter-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 CIBC World Markets.

Shaul Eyal - CIBC World Markets

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

Bill Roper

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

Shaul Eyal - CIBC World Markets

Got it. Thank you very much.

Operator

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

Ken Bond

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

I would also like to remind you that in light of Regulation FD, VeriSign plans to retain its long-standing policy to not comment on its financial guidance during the quarter, unless it is done through a public disclosure. Please call the Investor Relations department with any follow-up questions from this call. Thank you for your participation and continued support. This concludes our call. Thank you, and good evening.

Operator

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

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Source: VeriSign Q3 2007 Earnings Call Transcript
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