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Executives

Ken Bond - Vice President of Corporate Communications

Bill Roper - President and Chief Executive Officer

Brian Robins - Acting Chief Financial Officer

Analysts

Sterling Auty - JP Morgan

Phil Winslow - Credit Suisse

Todd Raker - Deutsche Bank

Rob Owens - Pacific Crest

Steve Ashley - Robert W. Baird

Katherine Egbert - Jeffries

Rod Brettler - Sanford Group

Scott Sutherland - Wedbush Morgan Securities

Fred - Goldman Sachs

Ken Wong - Cowen & Company

VeriSign, Inc (VRSN) Q1 2008 Earnings Call May 8, 2008 5:00 PM ET

Operator

Good day everyone and welcome to the VeriSign Incorporated First Quarter 2008 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks, I would like to turn the conference over to Mr. Ken Bond. Please go ahead sir.

Ken Bond – Vice President of Corporate Communications

Thank you, Jamie. Good afternoon everyone and thank you for joining us for VeriSign's first quarter 2008 earnings conference call. I am Ken Bond, Vice President of Corporate Communications and I'm here today with Bill Roper, President and CEO of VeriSign and Brian Robins our Acting Chief Financial Officer.

A replay of this call will be available beginning at 5:00 pm Pacific Time via telephone at 888-203-1112 or 719-457-0820 for International callers. This will be available through May 16. The pass code for both numbers is 1256242.

The press release and the financial information discussed on today's conference call is available on the Investor Relations section of the VeriSign website at investor.verisign.com. The Q1 2008 press release is available on First Call, Market Wire, as well as the VeriSign Investor Relations website.

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

Financial results in today’s press release are unaudited and the matters we will be discussing today include forward-looking statements, and as such are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically the most recent report on forms 10-K and 10-Q and any applicable amendments which identify important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements. Additionally, financial results in today’s press release and the matters we will be discussing today may include non-GAAP measures used by VeriSign. Our non-GAAP income statement and a description of items excluded in our non-GAAP financial information is located on the VeriSign Investor Relations website.

In a moment, Bill and Brian will provide some prepared remarks and afterwards, we will open up the call to you for questions. Unauthorized recording of this conference call is not permitted. And we anticipate the call will end before 6 pm Eastern Time.

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

Bill Roper - President and Chief Executive Officer

Thanks, Ken. In this call, I would like to start with some comments on our key announcements we made during our quarter, followed by our view of our business and operating results for the first quarter, and from there I would like to touch on some areas that we believe are particular interest investor based on conversations we have had with shareholders including how we are managing the business overall and an update on our divestitures activities.

Brian will then discuss the financial results for the first quarter and provide limited guidance before we move to the Q&A portion of the call. In February we announced the formation of our scientific advisory board which includes several highly distinguished members of the technology community, such as Vint Cerf, Marty Hellman, Glenn Adelman and our Board Chairman Jim Bidzos. This group will provide guidance to our Senior Management to ensure that VeriSign maintains and grows its technology leadership position.

As many of you may be aware our board appointed Brian Robins as Acting Chief Financial Officer last month replacing Bert Clement. I realize that Brian will be a new voice to many of you so I would like to share with you how pleased I am that Brian has stepped up in this new role.

At VeriSign Brian has been responsible for domestic and international finance. He has also been instrumental in developing our strategic plan in monitoring our progress and Brian conducts our monthly operating reviews and has implemented some key financial management processes.

Last quarter we also made another key hire in Robynne Sisco who joined the company in February is our Chief Accounting Officer. Prior to joining VeriSign Robynne was Assistant Corporate Controller at Oracle and she brings a wealth of accounting and financial experience to the company. Brian, Robynne, and I, all share a healthy sense of urgency and we are already seeing signs of how both of these fine folks are having a positive effect on the business.

And then, finally I am also pleased to announce or to point out that Kathleen Cote was appointed the company’s Board of Directors in February. Kathleen has more than 25 years of experience in Executive Management and leadership positions in both emerging technology companies and multi national organizations, most recently serving as CEO of World Port Communications so welcome aboard, Kath.

Before beginning let me quickly mention that we expect to file our 10-Q early next week. And as a part of this report, you'll see our revenue segmentation as we have created a new segment for our core businesses of Naming, SSL, and IAS. This new segment is labeled Internet Infrastructure and Identity Services or 3IS for short but we will continue to use the term core businesses interchangeably with 3IS.

So with that, let's take a look at first quarter.Q1 was a solid quarter driven by our core franchises of Naming and SSL. We reported core revenue of 223 million, which was above the high end of our 215 to 220 million guidance.

Additionally, the businesses that we intend to best perform better than expected making for solid quarter all around and I would like to thank all of our employees for their focus and their continued commitment to VeriSign. This is the first quarter that we've reported non-GAAP operating margins for our core businesses and we are pleased this operating margin.

For the first quarter was 30.3% putting us in a good position to achieve our Q4 exit rate target of 35% or higher. Non-GAAP earnings per share for the core businesses was $0.21 opinion ahead of consensus estimates on strong revenue growth and lower than expected operating expenses. We also repurchased over 31 million shares of common stock in the first quarter and since recommencing the share repurchases, we have now reduced the common shares outstanding by more than 28% since June of 2007.

Moving now to business metrics for the first quarter I would like to talk a bit about our core businesses and I will start with Naming. Our Naming business continues to show strength as the adjusted zone or registered names in dot.com and dot.net totaled 84.4 million names at the end of quarter compared with 84.4 million names last quarter, that’s a sequential increase of 5% and an increase of a 22% year-over-year. This growth is driven by continued global internet adoption. And we processed 7.8 million new domain name registrations for dot.com and dot.net during the quarter.

The underlying growth drivers are consistent with prior quarters as we saw a solid growth in both US and international regions. And while we continued to see solid growth domestically we also continue to develop our international opportunities, regions that we see as having significant growth potential for both dot.com and dot.net.

We also saw continued growth from all customer segments including corporate, small business, consumer and online adverting. And this growth reflects unit growth and the entrance of new registrars in key customers and growing international markets. The online adverting activity remains a small but consistent part of our new name sales and overall base.

The renewal rate for Q4 was slightly affected by private litigation which Verisign is not a party to. Pending the outcome of the litigation the deletion of certain domain names has been prevented. So adjusting for these non-recurring factors the adjusted renewal rate for Q4 was 74% the unadjusted renewal rate was actually 1% higher.

As a reminder we announced in March that effective October 1st registries fees for dot.com and dot.net names will increase by 7% and 10% respectively to $6.86 and $4.23 per year. Which at these prices we believe continues to be an outstanding value.

And finally our internet infrastructure continues to operate at ever increasing levels and recently we've seen peak loads of over 50 billion DNS request per day. While the peak load increased dramatically this quarter our systems again demonstrated that Verisign's capability of being able to operate global networks at this scale and reliability remains unparalleled do in large part to our continued investment in infrastructure such as project type. As an example our global network now allows Versign to handle up to 2 trillion that’s a trillion with a T DNS requests per day.

This quarter we also announced our intention to locate new regional internet resolution site in India in one of the most rapidly growing internet markets in the region with more than 60 million internet users. Additionally we've located new resolution sites in Honk Kong, in Italy and other locations as we continue to build out our constellation system of more than a hundred resolution sites as well as expand the capacity of the existing sites.

In summary no one else no one has operated a global network of this nature at this volume level with 100% uptime over the last 10 years.

Moving on to security services we were honored last month as the best security company of the year by SC magazine. The award recognizes Verisign's outstanding achievement security including security services from our second core franchise SSL which now has an installed base of over 1 million certificates. This figure represents a significant increase from the last quarter reflecting continued strong organic growth as well as a refinement to the methodology for calculating the installed base for our stock multiyear certificates which were excluded from the installed base after each certificate pass the one year mark in the past.

So as a result we refined the installed base in the AUR metrics with historical information for both measures included in the slide presentation that company is webcast. But to summarize the effect of this refinement, the installed base is increased; the AUR has decreased in their zero effect on revenue. The installed base for this quarter increased a $1, 24,000 certificates compared with a revised 987,000 last quarter and a revised 886,000 same quarter last year. We are very pleased as this represents a 4% sequential growth and a 16% year-over-year growth in the base.

The Q1 revised annualized Average Unit Revenue or AUR for installed base of the VeriSign, GeoTrust and Thawte branded certificates was $261 this quarter, up from the revised $260 last quarter and the revised 251 same quarter last year.

We also continue to be pleased with the results of our Extended Valuation or EV certificates as more than 3,000 internet domains have gone green with EV. And the demand for EV is continues to be strong in Q1.

Now, all our EV product line is still in its early stages we are seeing growing stream of customers including both like HSBC, over 100 US credit unions and through our VeriSign deal with NTT Data another 80 bank in Japan covering with SEV.

We remain the number one provider of the EV search in the market and we continue to expect that the EV adoption cycle will be consistent with previous premium product, premium price SSL products in the past.

We continue to see early success as customer research confirms the strong value preposition or EV, as EV business are seeing higher click through rates as their customers recognized the green bar and VeriSign seal, which is now seen over a 150 million times a day. We are also continuing our marketing efforts to stimulate customer pull through. As example, we launched our bio marketing campaign our U2 platform to raise awareness of how the EV search enable secured e-commerce transactions, the card whisper video was broadly due laid into Google machine the VeriSign campaign on there earnings goal.

Also, our necessary foundation explaining the green bar is having the proper operating system in browser searches Microsoft, Vista and IE7. Microsoft’s recent comment is data set NASA over 140 million is the licensees, further is our confidence around EV adaption and growth potential.

Now, I would like to share some comments on the progress of our identity in authentication services business. Within IAS the strength continues with VIP and a onetime cash work programs, as we now sold over a $1.8 million prudentials, and we continue to be pleased by the strong uptake of credentials by consumers as we expect to see this adoption continue to ramp.

We believe that IAS has the potential to form the third core franchise for the company over the next few years and help to accelerate consumer adoption we recently announced two programs for parties issuing credentials. The VIP quick start and the VIP test drive for developers. Both programs are key investments and what we believe is a very promising market space which is well and our long-term strategy and matches our core DNA of global scale and trust. So I'd like to comment now on some areas that we believe are of interest to investors based on discussions we've had since our last call. Last quarter, we shared with you our divide and conquer approach to managing our businesses so that the company would continue to remain focussed on continuing to develop and grow our core businesses while at the same time maintaining the continuity and optimizing the eventual sale of the businesses being the best.

The importance of executing on planned investments in an expedient manner is not lost on us and we continue to diligently pursue the timely sale of these businesses. However, we periodically remind ourselves that while these events are important, the key to unlocking shareholder value will be driven by what happens in our core businesses more so than the sales proceeds from the non-core businesses. And we are also mindful that in addition to executing on plan, we must also invest for growth in next generation products and services which fit our G&A around global scale and trust.

As we've said before, 2008 is going to be an interesting year with a lot of moving parts, we expect that over the course of the year, not only we will complete most of our planned divestures but we will also reduce our indirect overhead counts. And speaking about divestiture program, overall I’ll describe the program is being essentially on track with our expectations.

As discussed in the past we expect there will be a half dozen or more transactions over the course of 2008 and to date we’ve closed three smaller transactions including the sale of our former content delivery network, digital brand, management business and the self care and analytics business in three separate transactions.

The remaining businesses are in varying stages of the sale process with some business being further along and possibly ready for discussion in our next conference call.

So overall we continue to be satisfied with our product risk and while we are aware of credit market conditions and we are seeing some affect at the margin as a few prospective buyers have dropped out, there continues to be good interest at this time from both strategic and financial buyers. Of course there is always a possibility that credit market conditions and expected valuations could further decline but at this time, we continue to believe that we will substantially complete all transactions this year yielding proceeds of approximately 10% of our market cap give or take a couple of moments.

We will continue our practice of reporting transactions during these calls if not otherwise required. And now, I'd like to turn the call over to Brian for a walkthrough of our financial results for the first quarter as well as guidance. Brian?

Brian Robins - Acting Chief Financial Officer

Thanks Bill and thanks to everyone for joining us this afternoon. Before turning to the first quarter, I would like to discuss how our reporting of the results will be somewhat challenging this year as we continue to work within accounting standards. This quarter, we have begun to play some of the businesses we intent to divest into discontinued operations. In order for a business to qualify for discontinued operations, it must first meet several criteria including management having the sufficient authority to sell the business, the businesses available for immediate sale, and an active program to sell the business has been initiated, and its sale is probable within one year.

Further, we must conclude that there is no significant continuing involvement in the operations of that business once it is sold. Utilizing these standards, we place enterprise security, digital brand management services, and communications consulting, as well as some smaller businesses into discontinued operations this quarter.

Those businesses not included in discontinued operations in Q1 did not meet all the technical requirements for one reason or another. For example, the messaging business was not included in discontinued operations as we do not have an active program to sell the business as of March 31st. We expect that messaging will be placed into discontinued operations in Q2 as we begin to actively market this business for sale within the next month.

We expect that most of the other businesses targeted for disposition, will also be placed into discontinued operations by the end of the second quarter. As mentioned earlier, the reporting of results will be challenging this year as we work through this period of transition. With some businesses not yet qualifying for discontinued operations, continuing operations this quarter reflects the mix of core businesses and non-core businesses. We believe representing key operating results for core businesses provides greater transparency around the financial performance of those businesses, which we believe will drive long-term shareholder value. To this end, we have also included non-GAAP financial information around our core businesses, including operating income and earnings per share in addition to the GAAP results included in our press release.

Additionally, accounting standards require us to include shared services cost and continuing operations. Unless this cost can be fully and directly associated with the discontinued business, as a result, the performance of core businesses may appear to be less favorable than what we believe it otherwise might be and conversely the financial performance of discontinued operations may appear to be more favorable. As we complete divestitures, we expect core operating margins will continue to improve as we reduce shared services cost, which are currently included in the core businesses.

Lastly, we also expect there will be a period of time whereby we provide transition services to the buyers and as we complete these transition services agreement we expect further improvements to the operating margins of our core businesses. Today discussing operating results for our core businesses, we will not be providing comparable figures for prior periods as it is not practical to do so. Next quarter we will begin providing comparative analysis and commentary on a sequential basis.

In terms of day to day management, Bill shared our divide and conquer approach with you earlier. We remain focused on our core businesses, while at the same time optimizing the sale process of businesses being divested. As the results indicate, the efforts to-date have been largely successful.

Moving now to a more detailed discussion of results for our core businesses. Q1 by all accounts was a solid quarter. Revenue of our core businesses came in above the high end of our guidance at 223 million, up 5% sequentially and up 23% year-over-year. The growth was driven again by continued strength of all three core businesses, with Naming are having a good quarter. Additionally, we had one-time benefit to revenue of slightly over $1 million, which we do not expect will reoccur.

Turning to operating margins. As we continue to execute our strategy, we are seeing operating leverage as reflected in non-GAAP core operating margins, a 30.3% for the quarter. This represents a significant improvement to last year and we are continuing to see the results of our focus and discipline. Non-GAAP cost of revenue and operating expenses for the quarter were 155 million, down from last quarter primarily due to lower labor expenses from both our regular and contingent workforces.

Below the operating income line, we incurred a loss of nearly 4 million as the interest expense related to our convertible bonds was then offset by interest income as it was last quarter. With significant share repurchases during the quarter, our cash balance is lower and coupled with the decline in interest rates, interest income was significantly lower this quarter. We expect interest income will be lower for the remainder of the year.

Non-GAAP core net income for the first quarter was 44 million resulting in non-GAAP earnings per share of $0.21, above our internal plan due to solid revenue results and disciplined expense management. Our non-GAAP earnings per share of $0.21 includes the $4 million below the line loss related to interest expense, which negatively impacted earnings per share by $0.02. The diluted share count used in EPS calculations was slightly above 210 million shares, down from nearly 230 million shares last quarter.

Moving on to the balance sheet and cash flow items. Our ability to consistently generate solid operating cash flows resulted in our maintaining a strong balance sheet with ending cash equivalents and restricted cash of over 500 million, down nearly 900 million from last quarter as we repurchased over 1.1 billion of stock or approximately 14% of the shares outstanding at the end of last quarter.

Capital expenditures for the quarter were 26 million. Operating cash flow for the quarter was strong, in excess of $74 million. There were multiple drivers to the positive operating cash flow this quarter including strong deferred revenue growth which was up on strong net registration this quarter as well as disciplined working capital management.

As a reminder, Q1 is typically a seasonally weak quarter for operating cash flow as annual employee bonuses are paid in the first quarter. Net DSO for the first quarter was down 3 days to 41 days due to more disciplined collection efforts. Overtime, we expected DSOs will continue to decline as both Naming and SSL businesses have very favorable working capital requirements.

Deferred revenue ended the quarter at $761 million, up 23 million from last quarter end. The increase in deferred revenue was driven by strong sales in Naming and SSL. Naming in articular have the strong quarter as average weekly additions for common net were above our expectations. We ended the quarter with 4050 employees, 200 lower than last quarter, as we began to transform the company with focus on the core and reduce shared services headcount. Headcount will continue to decline through the year with the sale of non-core businesses as well as further reduction in share services headcount.

Moving now to guidance. As I mentioned earlier, we expect to place most non-core businesses into discontinued operations during Q2. As a result, we are providing guidance for our core businesses which include Naming, SSL and IAS. We include VeriSign Japan in our core numbers given his focus on SSL and IAS services. For Q2, we expect revenue for the core businesses will be in the range of $228 million to $233 million reflecting sequential growth of 3% to 5%.

As discussed last quarter it is not possible to forecast exactly when divestitures will take place within a year. We also continue to expect a lag effect to operating margin, standing from the inclusion of significant indirect operating expenses. For those reasons, our guidance around non-GAAP operating margins is for modest sequential improvement. As we believe we are on track to achieve Q4 2008 exit operating margins of 35% or higher.

The non GAAP operating margin guidance is also reflects increase investments we are making in our core businesses such as project Titan and the SSL platform. For example, in SSL we are consolidating GeoTrust, Thawte, and VeriSign platforms into a single system which will help us allow our backend system cost while improving the user interface our ability to up sell the higher price brands.

We also expect that either slower line will result in a larger loss than what we experience in Q1 for a number of reasons including our expectation that interest income will be lower this year.

Finally, we now expect that the fully diluted share account will be below 200 million shares well before the year end as was originally expected, reflecting the rest of share repurchase activities today.

In summary, we are pleased with our business execution in the first quarter particularly as it relates to revenue growth from the core businesses as well as non-GAAP operating margin expansion. We are keenly focused on executing our strategy in 2008 as we clearly see that there is a key to further unlocking shareholder values longer-term. We now like to open the call for your questions. Operator?

Question-And-Answer Session

Operator

Thank you sir. [Operator Instructions]. And we’ll go first to Sterling Auty with JP Morgan.

Sterling Auty

Yeah, thanks. Hi guys.

Bill Roper

Hi Sterling.

Brian Robins

Hey Sterling.

Sterling Auty

So two questions, first, Bill, just picking up on some of the tone around the divestitures, you had talked about I think most of deals will get done by the end of the year and it seems like a little bit of a change, is that just based on the experience so far and giving the books out there and just execution as well as the talk of 10% couple of points in terms of proceeds versus 10% of market capital that just gives the stock price is higher?

Bill Roper

Okay, two questions there Sterling. I think we are essentially on track, we’re seeing good interest, at the margin there is may be of few people who might out stay tune to the final round that are dropping out due to financing or something, while we’ve got strategic and financial players at the table and at this stages we still feel pretty good, I think all along we said we would like to get them all completed this year, this calendar and I think we will do that or come close to it, and we think the procedure will be essentially what we would have expected maybe off a kicker too, the market cap with the company is a little higher, but I think we are in the same neighborhood.

Sterling Auty

Okay. And one followup question on the naming business, we have all that the noise of our testing and ICAAN as well as the economy. Can you just kind of give some color as to how you feel about the results of the naming business, and more importantly, how you think the trajectory of that business will look for the remainder of the year?

Brian Robins

Okay, fair Sterling. We had a 5% sequential and a 23% year-over-year in naming, we’re very pleased with that 4 million net ads for the quarter. The business is on the same trajectory essentially, we believe where it’s been in the last few quarters, we feel good about it, we got a price increase coming up. There are issues with testing in online adverting and so forth, but there will be in work to the system and we’ve analyzed the various scenarios and how they might impact us and we feel great about the business.

Ken Bond

Sterling its Ken, I will just add a comment in that, last quarter I think that people were looking at some of those number and it gave a little bit of pause and hopefully folks were picked up here that in this quarter we really want to underscore that naming had a very strong quarter, and then what we saw in Q4 was really as we can now talk a little bit about was a function this ligation and again it was not involving various line but a couple of other party. The naming business had a very strong quarter and we are very pleased to see, we think the trajectory is back on path.

Brian Robins

Operator next question please.

Operator

Thank. We will go next to Phil Winslow with Credit Suisse.

Phil Winslow

Hi, guys. Just wanted to get some highlights from you, this is for as how you expect the operating margins in future and over the next couple of quarters ahead, obviously, you talked about exiting at least 35% just kind of in order to get feel for us some of these divestitures are made and there is expenses do you start to role off those continuing upside, do you expect to see a trend Q2, Q3 and then also just on the naming directory side, on the dominion front just curious what you would expect the naming growth look like for Q2 and also just for the full year?

Brian Robins

Okay Phil, this is Brian, I will take the first part of the question, Bill will take the second part of the question. You know, as we reported we had operating margin of 30.3% for the first quarter and we expect to see modest sequential improvement quarter-over-quarter with an exit run rate of 35% or higher.

Bill Roper

And then Phil on the naming business as I said before it was solid first quarter, we don’t really see any change in the trend lines there, we’re happy with the weak links which we monitor very carefully, and we think we’re going to have a good year and we’re short on that same growth sector of 20% 22, 23% that we’ve been for sometime.

Operator

And we will take our next question from Todd Raker with Deutsche Bank.

Todd Raker

Hi, guys. Nice quarter

Brian Robins

Thanks Todd

Bill Roper

Thanks.

Todd Raker

Just wan to dig into there performance a little bit, first of all on the growth margins 76.7% growth margin ISG historically would run at around 82% if I remember correctly and clearly there are some share to overhead from this continued in that, as we think about that business longer term that where you kind of surviving businesses, should we be thinking about the gross margins trend in north of the 82% from ISG. And then, I have two follow-ups?

Brian Robins

This is Brian, the gross margin is roughly 82% that you have referenced and was non allocated, and so the gross margin of approximately 77% as a fully allocated gross margin on the core business.

Todd Raker

Yes, but I expect some of that cost to come out even with the allocation is discontinued, some of other after sales on it. Is that a fair stable and is this 77% level kind of the baseline issue we see a growth from here on out?

Brian Robins

It is, as mentioned earlier we do have shared services and the number that get allocated to the core and as we sell the businesses we will manage the shared services out, and you will see 77 of the base moving up.

Todd Raker

Okay. And then, on the operating expense line items if I kind of look through sales and marketing R&D and G&A, one anomaly clearly SG&A running about 19%, is there any region as we look at that overtime that we shouldn’t see this comedown to a more normalize run rate around 10% of the business going forward?

Brian Robins

It will be more normalized, the reason why I have seen the business later is because you do have the shared services cost in there today that are supported to discontinue businesses as well.

Todd Raker

Okay. Thanks. And then, the last question for you, aggressive on the stock buyback I love to see that Bill, can you just comment in terms of capital structure of the company and your cash balance is now 500 million. At what level do you continue to buy stock to and would you use debt going forward in addition to the convert that you have outstanding?

Bill Roper

Okay. We, I think we -- the answer to that is really consistent with the past. We are going to repurchase shares when it is advantageous to do so and we don’t have better internal investment opportunities. We are – we got a strong balance sheet. We have got debt capacity, so we will use it as necessary. I think we ended the quarter with 500 million in the bank and we generated cash regularly, so we got a healthy balance sheet, we are generating cash, we are looking for good internal risk adjusted returns on internal investments and otherwise and we will repurchase shares when it’s advantageous to do so.

Todd Raker

Okay. Thanks guys.

Brian Robins

Thanks, Todd.

Operator

And we will go next to Sarah Friar with Goldman Sachs.

Fred

Hi, guys. This is Fred Grive (Ph) for Sarah Friar. The annualized ASP has been slowly creeping up over the past year or so in the search business, is the main driver of that EV or is it sort of something else?

Bill Roper

It’s a mix. There is a mix shift between the three product lines. There is a small but growing component of EV, but frankly at this stage it doesn’t really by itself move the needle even though it has a very nice premium price to it, it’s not really yet to the size that it moves the needle a lot. But it relates to just mix shift, the GeoTrust is growing faster than the other two, but they're all growing.

Brian Robins

Yeah, I’d only add to that Fred is that individually within those brands we’ve seen generally pricing trends at the ASPs in those individual brands has been increasing over time.

Fred

Great, thanks. And one follow-up. Sort of any update on growing out additional services around the registry business?

Bill Roper

We have – this is Bill. We have a number of products in the pipeline. We are always upgrading, we are always making improvement to the products and we have several things that we will rollout over the years, but you should do these over the months or quarters, you should do these as small incremental things. We are not ready to talk about any blockbusters or anything at this stage.

Brian Robins

No, I’d add one Fred. Just as an example, we’ve got a service that we now use that’s called data analyzer and it’s the service that really is not a fee service, but it’s something that we use with our registrar to help them evaluate potential domain name so that around the grace period you don’t have an opportunity to evaluate the quality of names directly without having to use the grace period and that’s the service that we’ve been using with some of our registrars and we make freely available to them as a value added service.

Fred

Great, thanks a lot.

Operator

And we will go next to Walter Pritchard with Cowen & Company.

Bill Roper

Walter, are you there?

Operator

Looks like Walter’s phone just disconnected. We will go on to Rob Owens with Pacific Crest.

Robert Owens

Yes, thanks. Question around the EV search, and as you look at it on a per customer basis, can you talk a little bit any metrics around the uplift you might be seeing in total transaction value, is that purely a function of price you are accessing more units per customers as well.

Ken Bond

Hey, Roberts, Ken, as you know the list price on the ED search is quite a bit higher. On a per unit basis, we generally are seeing premiums of at least 30% if not higher in terms of the unit price that we are garnering from ED versus the normal FCC search, but on the second half of that question in terms of the actual unit volume, it’s a little bit of a mix there, and we are not seeing a decline. But, what I think you are alluding to is something that we are watching carefully, and that is the potential for customers to be using EB certificates not around the back of other shops, but our normal payment gateways and that type of things, but the on front end, when we go the places like www.swap.com, or www.paypal.com. We are definitely seeing some of that, but nothing overly material at this point.

Robert Owens

Great, and then, on the registry, with you guys having formerly inserts in the quarter, I think last year Q1 kind of represented the largest net sequential increase of new domains, sorry for inserts. Do you think this year will follow the same seasonality where Q1 the $4 million in sequential net new domains will be the peak for the year or should we see different cycles buy out.

Bill Roper

I don’t know that we have a huge amount of seasonality in this business, this is Bill, and there is a lot of factors, and sometimes they relate to a little noise around the edges with the pay per click business, but I don’t think we have a lot of seasonality in this business.

Robert Owens

Great, thanks.

Operator

And then we will turn to Walter Pritchard with Cowen And Company.

Ken Wong

Hi guys, this is Ken Wong for Walter Pritchard.

Bill Roper

Hi, Ken, how are you?

Ken Wong

Good good, so you guys mentioned there was 7.8 new domains registered, did you guys give the number of renewals?

Bill Roper

It was slightly over 12 million, Ken.

Ken Wong

Okay, great, and then with the new structure of the business though, where do you guys see CapEx going?

Brian Robins

CapEx is, this is Brian, CapEx historically has ran between 12 to 14% and that’s going to trend down. We have some investment that we are making right now, Project Tighten and ED search, but you can expect that to trend down over time.

Bill Roper

For the core business, it was $17 million this quarter.

Ken Wong

Okay, great, that’s -- those are all my questions, guys.

Bill Roper

Thanks, Ken.

Operator

And, we will take our next question from Steve Ashley with Robert W. Baird.

Steven Ashley

I was wondering if you could give us some idea of what the international business might have represented in the core business, and then secondly, if you could talk about general business trends, the pace of growth of domain names in the United States versus may be outside the United States, thanks.

Brian Robins

Okay, this is a difficult question to answer because we don’t really have valid data, but we can give you trends. The way we measure things, the international business is about 23 percent of the core. But, for instance, in the naming business it really relates to where the registrar is. That's how it's tagged, not necessarily where the customer is. In the SSL business, it relates to the billing address of the enterprise and of course the servers, the server sit on could be anywhere around the globe. So, actually, how you measure it to how you define it, you get different numbers. Both segments, both domestic and international are growing, growing nicely. International is growing a little faster than domestic, so you will see a slow mix shift over time there. We are investing this year through the P&L fairly significantly, and building our international sales and marketing efforts, and those sort of things, and that's with an eye towards the fact that the non-North American markets are under-penetrated vis-a-vis the North American markets.

Steven Ashley

Great. And Brian, you talked about the interest income and the fact that that could cascade a little lower here. Could you provide us any guidance or color around what we should think about other net for the second quarter? The loss was 1.8 million this period, what might we look for and what should we think about modeling the second quarter?

Brian Robins

Yeah, for the following quarters, especially for the second quarter, I would go about two acts around eightish.

Bill Roper

Okay, great.

Company Representative

He also asked about the ..

Brian Robins

Yeah, that's for other income and interest expense, that’s the whole everything.

Steven Ashley

Okay, thank you.

Operator

(Operator Instructions). We’ll go next to Katherine Egbert with Jeffries.

Katherine Egbert

Hi, good afternoon. You said that there was a drop in overhead costs so far that weren’t just related to the divestitures. Can you tell us what that was and how you expect the organic cost structure to kind of flow through the rest of the year?

Brian Robins

Yeah, this is Brian, our – the overhead cost I referred to is in first quarter we actually, as the business continues to transform, we’ve readjusted our cost structure and headcount. So, we had lower headcount for the quarter, about 200 lower than the previous quarter. Additionally, our contingent work force as we focus and be disciplined, our expense management has been reduced.

Katherine Egbert

Okay, can you put any numbers behind that? I mean of the bulk ops in operating margin for the quarter, what percentage was related to that headcount reduction?

Brain Robins

I don’t have the specific numbers.

Katherine Egbert

Okay, thanks and then --.

Brian Robins

Probably around 200 people.

Katherine Egbert

Okay, can we revisit some longer term guidance that you’ve given out before you know for example like a 40 percent plus operating margin in the out years, is that still valid?

Ken Bond

Katherine, it’s Ken. Let me just clarify that the – at Analyst Day, we talked about 2008 guidance of out margins of 30 percent with a long term number of 35 percent. And then in the last conference call, we upped the 2008 target from 30 to 35 percent. We never did come back and make any formal changes on that 35 percent. So, I can understand where this natural assumption that 35 would go to 40, but we have never formally said that. Our long-term guidance is that, it’s obviously going to be higher than 35 percent, but we haven’t formalized it.

Katherine Egbert

Okay, not bad. Thanks, Ken.

Ken Bond

Okay.

Operator

We will take our next question from Rod Brettler with Sanford Group.

Rod Brettler

Thank you very much, nice quarter guys.

Bill Roper

Thank you.

Rod Brettler

Would you, most everything has been asked and answered, and I have only got one pair of eyes here, so it may have been in the prepared remarks, but did you say anything about the target revenue range for the core business for the end of the year? If you did, I missed it, and I apologize.

Brian Robins

For next quarter it will 228 to 233 million and we expected to end the year at 900 million plus.

Bill Roper

With an underscore, Rod, on that plus part

Rod Brettler

Okay, thanks a lot for the clarification, again, I appreciate it. That’s all I have got, thanks.

Brian Roper

Okay thanks.

Operator

And we will go next to Scott Sutherland with Wedbush Morgan Securities.

Scott Sutherland

Great, thank you. A couple of questions, guys. First, I want to talk about your IAS. I know this is an emerging market segment, you have good hopes for. Can you talk a little bit about kind of what the revenue ramp you are seeing there may be the margin structure and breakeven levels you could target there?

Bill Roper

This is Bill. There is really two parts to that business. There is the existing PKI business. It’s a very sound, very stable business, generates good margins, good cash flow, and it’s growing relatively slowly. And then we have the new business that we are ramping up, the VIP business, that’s ramping fairly quickly year-over-year, but that’s on a fairly small base. So -- but we are very pleased with the growth. We are very pleased with the enterprise adoption and the customer take up rate. So, we have got good, you know, we are getting good numbers out of there. The growth is actually a little ahead of track for the year. We are real pleased with this, but it’s pretty small base.

Scott Sutherland

Okay, and on the navy side of business, it sounds like you have some other top level domains to bid on. What’s your activity there and what is your kind of belief of winning some of that?

Bill Roper

Well, we don’t forecast what we might do in that area for obvious competitive reasons, but we intend to build and protect our core business and do whatever it takes.

Operator

And we will return to Sterling Auty with J.P. Morgan.

Sterling Auty

Yeah can you hear me?

Company Rep

No.

Sterling Auty

Two follow-ups, you talked about the advertising being staked. Can you just give us an update in terms of what was advertising as percent of – may be as the new names or may be as the percent of the base at the end of the quarter?

Company Rep

Sterling, so you are talking about -- there is a quarterly activity. So, as the percentage of the new registrations, it was a little bit lower in term of new registrations. But, as it relates to the install base, it continues to be a very consistent part of our base, and that’s about 8 to 10% of our install base is represented by online advertising.

Sterling Auty

And the other question is for Brian, I thought -- I caught part of what you were saying in terms I thought you mentioned one million of kind of one time type of revenue, was that in the core or the areas the discontinued operation?

Brian Robins

That was in core.

Sterling Auty

And what was that related to?

Brian Robins

It was revenue based on cash collection.

Sterling Auty

Okay. Can you clarify that a little bit, I am not sure I understand that?

Brian Robins

There is one time services that were performed in prior periods that we didn’t collect on where we were able to collect on that revenue in that quarter.

Sterling Auty

Got it. All right. Thanks, guys

Brian Robins

Thanks Sterling.

Operator

[Operator Instruction]. And we will return to Todd Raker with Deutsche Bank..

Todd Raker

Hi, guys. Just following-up, if I look at the deferred revenue line, do you expect that to be impacted at all as you divest some of these businesses going forward, or should we think about 100% in deferred revenue being associated with the three surviving businesses?

Ken Bond

It’s – Todd, it’s Ken, the deferred revenue is largely associated with the core businesses, but not a 100%. If you were to look at the deferred revenue on a year-over-year basis, you can se it’s pretty modest increase. It’s not going to be that much. And it is important to keep in mind, we’ve got a little bit of apples and oranges here where the prior periods was for all the operations and what you are seeing on the balance sheet now is the continuing operations and the discontinued operations piece has been stripped out. So, it makes the year-over-year comps a little awkward.

Todd Raker

Could you guys give us kind of the normalized figure for this quarter?

Unidentified Company Representative

Yeah, there was – there is a little less than $20 million in discontinued operations in deferred revenue, the balance of it would go to the core business.

Todd Raker

Okay. So, sequentially, you should think about – what you reported is the right base line going forward?

Brian Robins

That’s correct.

Todd Raker

Okay thanks guys.

Operator

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

Phil Winslow

Hi, guys, just wanted to follow-up on the SSL Security platform. I was wondering if you could give us what the base was in Q2 and Q3, but also the ASPs like in ’07, if these numbers have changed, and also does that change at all the number of – the number you were giving out historically for the new and renewed search during the quarters?

Bill Roper

Well, while Brain is looking for that, there are – there is a graph in the presentation slides that will show you that.

Phil Winslow

I was just looking for the hard numbers.

Bill Roper

For the install base, what are you looking for, Q2 ’07 and Q2 ’01?

Phil Winslow

Q2 ’07 and Q3 ’07, you gave us Q4 and Q1.

Bill Roper

Sure, yeah, Q2 ’07 was 923,000 and then Q3 ’07 was 957,000.

Phil Winslow

And what were the ASPs?

Bill Roper

ASPs on that in Q2 ’07 was $256 and in Q3 ’07 was $258.

Phil Winslow

Great, thanks, guys.

Brian Robins

There is a little seasonality in the ASP of that because of the heavy commercial large enterprise purchases in the fourth quarter.

Operator

And that does conclude our question-and-answer session. At this time, I would like to turn the conference back over to you, Mr. Bond, for any additional or closing remarks.

Ken Bond

Thank you, Jamie, we anticipate that our next quarterly conference call, which will reflect our second quarter 2008 results, will be held on Wednesday, August 6, at 2 pm Pacific time, 5 pm Eastern time. Final confirmation of this date will be provided the first business day after the close of the quarter on July 1. I would also like to remind you that in light of Regulation FD VeriSign plans to retain its longstanding 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 on this call. Thank you for your participation and your continued support. This concludes our call. Thank you all and good evening.

Operator

And that does conclude today’s conference. Thank you for you participation. You may disconnect at this time.

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Source: VeriSign, Inc Q1 2008 Earnings Call Transcript
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