Full Transcript of VeriSign’s 3Q05 Conference Call - Q&A (VRSN)

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Here’s the entire text of the Q&A from VeriSign’s (ticker: VRSN) Q3 2005 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

[Operator]: Todd (indiscernible) with Deutsche Bank

[Q – Todd]: Hi Stratton, can you just kind of walk through the regulatory change that you have seen in the UK and in somewhat of what’s going on in Germany and talk about how they are impacting your processes in terms of signing up subscribers or renewing subscribers, and how do see the risk of that moving to other market like the US, is that in your forecast?

[A - Stratton]: Right, thanks Todd. So I need to point out at the combination of things, there are some regulatory things but those are really related to some of the recent noise you hear around, times of advertising and types of advertising, that we can do. Those are probably, the smallest factors, what we are really more being impacted by, is the guidelines that we are being made to follow by either the carriers in given countries or by certain groups that oversee those areas in these countries.

So, for example it is having an effect in the way in which we have to advertise the service in terms of how much fine print in text has to be in the screen to acknowledge the subscription in the ways in which the voice levels have to be delivered and in the ways in which the SMS message exchange has to be architecture, so that in Germany obviously its a double octane terminology. In U.K it’s not truly double octane but the effect of all the messaging we have to do back and forth is the same.

So, the reason its impacting us is because for a given amount of churn of the backdoor of subscribers who leave the program in Q1, we would be able to advertise and bring new subscribers in the front door or see all subscribers come back on. The friction in getting somebody on the platform is now much harder than it was earlier in the year because of all these messages that have to go back and forth with different conformation, it just makes it harder to get new subs at the same time our retention programs have not kicked in well enough to keep more of the existing folks on the system.

And I think its particularly harsh in the U.K at the moment given the rapid ramp we had in the U.K late last year and early this year and of course the lack of new content just kind of accelerating the churn there. I do think we will see normalization in the U.K by the end of Q4, quite frankly we continue to lose subs at the current rate in the U.K we are going to be at a very small base there by the end of the fourth quarter, no matter what.

Meanwhile the base in Germany look to be churning less, we did see some improvement there in churn rates from Q2 to Q3 losing less subs in Germany in that quarter and obviously we are monitoring what’s going on, in the U.S as well, but I don’t think you are going to see the kind of restrictions that we are seeing in the U.K or the kind of guidelines go cross the globe in any great shape. What I actually think is the pendulum over time will swing back the other way to our more moderate marketing. As you recall much of the revenues we deliver does in fact go to the carriers themselves and if they are seeing these impact I think you will see them working with us to improve the model.

[Q – Todd]: So you are not seeing any indication that T mobile or Singulair are concerned by the headline risk in proactively making changes to see what you can do?

[A – Steven]: We are constantly making changes with them to those marketing messages and have been since we launched in the U.S so I don’t think that the things that are happening in the U.K are really having effect here and they are thinking about this and certainly they are both benefiting from off portal model having taken some hold. It doesn’t mean we won’t see continued changes over the course of the next 6 to 12 months as we roll this out.

[Q – Todd]: Okay thanks Steve.

[Operator]: Ed Maguire with Merrill Lynch

[Q – Ed Maguire]: The programs or the strategies there, I mean what is it going to take to keep subscribers really on the hook. Is it going to be more price rate content, is there sensitivity to pricing and could you also address some of the issues with elasticity and push back on pricing in some of the different markets you are entering?

[A – Steve]: Ed I will be glad to answer your question but we missed the first part of it, you were not live so, could you repeat them sorry.

[Q - Ed Maguire]: I apologize. Yeah. Could you provide bit more detail around what strategies for retention programs and whether you have any plans to try and secure more exclusive content deals and I just want to understand a bit of dynamics of the role that pricing has played and your understanding of how pricing is effecting churn?

[A – Steve]: Sure okay. So on the retention programs, in early August and through the rest of the quarter we began proactive retention programs as in the UK and Germany in particular, things as if telling people of course that as they were asking to cancel their subscriptions to remind them if they did have credits that had not been used and they might want to stay on the program until they were done using them. To offer them up sell opportunities, to offer them coupons various things and then begin to create some community like services around pointing out that what other people of their demographic were doing and downloading in terms ring tones. So proactive marketing of what’s hot, proactive marketing of your remaining credits on the account various things like that, and we did see some impact from that to the positive through August and then had much of that washed away in terms of benefit as we entered September with new restrictions in the UK. So I think we will continue to roll those programs out and do more of it and be smart about the customers there. And I do think as well at some level of churn you then begin to have a stable or base of existing customers, who are more inclined to stay on than not.

As relates to plans for new content, we do have quite a large seen working on new content creations of our own lots of products in the areas of graphics and screen savers and games and the rest, and we also are continuing to have dialogs with certain of the labels around doing special productions with them of various seasons of content, so we will keep doing more and more of that and I think in the long term that becomes differentiated for us with our own production group and with good promotional capabilities with the labels, obliviously in the short-term it is not going to have much impact.

Pricing has not been something that, I think has been a big reason for the churn in concern, we will continue to test new pricing program, here and in Europe and in new markets we roll out just trying to find that could mix.

[Q - Ed Maguire]: And is just a follow up on the your analysis at least of the, impaired subscribe acquisition rate given. How does that impact your profitability model in Germany and UK and the way you are allocating your advertising resources there?

[A – Steve]:
Well obliviously its harder to sign somebody up, than it means for cost for acquisition of a customer for every commercial we show is more extensive, so as those dripped up, we have to redefine and rethink through where we are going to advertise, how we are going to advertise and the rest. So, that is the careful market management we have to look at in Q4 here, as we get in to the holiday season there should be a lot new popular content and it would look to be a time period where a lot of new handsets sales are going to get done but meanwhile we want to be very careful about those marketing expenses until we see an improvement in the front end acquisition cost.

[Q - Ed Maguire]: Okay, thank you.

[Operator]: Steve Mahedy with Bank of America.

[Q - Steve Mahedy]:
Thank you. I was wondering if I didn’t quite hear you about the content I thought it was 115 but it broke up a little bit and if in fact that was the case, looking at the estimates for Q4 and using the September run rate, I wonder if you could give this kind of a little bit of an overview on what the ramp looked like in July, August and September, and was August a better month than September or not?

[A – Steve]: That’s kind of, the reason for the guidance going forward I did say 115 approximately for Jamba jims for Q3 and 90 to 95 for Q4, that is exactly a fallout of what you are talking about, that’s the September run rate and because we had the big loss in the U.K in September I think that’s impacting obviously the quarter the most and then that’s kind of what you start with as you enter October. So that’s really the thing we are watching and trying to focus on in terms of stopping the bleeding in the U.K and continuing to expand in some of these other markets. We did see that in for example in the U.K we had almost stopped the churn for the month of August and then you see restrictions accelerated again in this September, so I think that really cleared it to us what had the impact in the September period in the U.K. It is these new restrictions because again we had come off of a fairly high churn in July almost having eliminated that in August through these other programs and then saw it turn back on again.

[Q - Ed Maguire]: Just a follow up question relative to …maybe the relative base is the better performance in Germany, is the content mix similar between the two or is just demographics and how would you kind of explain the kind of differential between the two.

[A – Steve]: I think the content mix is very similar, I think culturally, there’s probably I would say a higher ____ for these types of services in the German market than potentially in the U.K and the base there is so much larger because it’s Jamba’s home market and I think that also is helping.

[Q - Ed Maguire]:
Okay thank you

[Operator]: Sterling Otte with JP Morgan

[Q – Sterling Otte]: Hi guys, may be a little bit of qualitative question but is there a census hike to disaggregate the impact here from the regulatory side versus the lack of creative content and then just looking at fourth quarter preliminarily do you think that the up margin then based on these preliminary numbers would be flat with the third quarter?

[A – Steve]: Qualitatively I think it’s hard in the U.K market to separate the seasonality from the imposition of these new guidelines and restrictions, as I was just saying the second ago we had really seen a much better improvement in the U.K in August coming off of July and then it hit again because of the restriction. So I think ourselves, trying to kind of analyze it all and figure out the best approach in the U.K. As I said that is going to have to normalize just by the sheer mathematics of it in the U.K pretty quickly In Germany we are seeing, we saw less churn in Q3 than we saw in Q2, in terms of absolute numbers and so that’s good and we hope to see that continue again here in Q4 and I think as we get through the end of the fourth quarter in those two big markets we really should have much better definitive answers around what the normalized basis for both market.

[A – Dana Evan]: And then on the operating margin side given the guidance that Stratton gave that would indicate operating margins in the 23% range.

[Q – Sterling Otte]:
Okay may I just one last, in the rest content how is ____ and some of the SMS performing?

[A – Steve]: More or less on plan, I would say that in terms of the picture messaging and MMS interoperability as you have seen we made a lot of announcements on that during the courses of Q2 and Q3 and are continuing to pursue lots of new activity there and the SMS stuff continuous to see message traffic grow pretty substantially.

[Q – Sterling Otte]: Okay great thanks guys

[Operator]: Sara Friar with Goldman Sachs.

[Q – Sara Friar ]: Good Afternoon may be just following up briefly on the last question on the SMS, MMS side should we assume then that in the September quarter that grew on a quarter-over-quarter basis.

[A – Steve]: I am sorry the SMS?

[Q – Sara Friar ]:
The SMS on ____ of the content division?

[A – Steve]: Yes it did.

[Q – Sara Friar ]: Okay and then can you give us a sense in your forecast for what you are breaking out for the U.S I know I am getting into the ____ shop but I am trying to understand how much do we see the U.S continue to grow given that you are rolling with new carriers etc., versus the shrinkage that you are seeing going on in U.K

[A – Steve]: I think at this point until we get through closing the books on the quarter and get to the announcement of the final result, I think I will hold off trying to break it up by any given market

[Q – Sara Friar]: Okay but is your expectation with the U.S still continuing to grow or has it actually started… I know it is such a young market… but it is important because it is the U.S having such trouble getting off the ground, that kind of leads me to wonder why that will be the case?

[A – Steve]: Yeah I think we saw modest churn in the U.S in the summer again because of dialing back some of the marketing efforts because there was really no new content. Spring came on in mid to late September in a very limited way. WE would expect to turn that on more fully in Q4 as well as land B-to-B deals and so I think our hope is that the fourth quarter we will see the U.S grow again but at this point again it is too preliminary to tell.

[Q – Sara Friar]: And then just one more question on the competitive landscape, are you seeing any changes placed on focus ability to get content in other ways, there seems so much talk about what happens with being able to download iTunes onto your phone can you customize that serving cost and just wondering outside of the core market of who you think you can be with ____ of the world, is it bigger the Apples of the world starting to have any effect?

[A – Steve]: As far we can tell none what’s so ever.

[Q – Sara Friar]: Okay.

[A – Steve]: I think it is a very different, different prospect.

[Q – Sara Friar]: Okay, thanks a lot.

[Operator]: Laura Liederman with William Blare

[Q - Laura]: Yeah. Can you talk a little bit about the ability to forecast this since you bought it, it has been higher than expected lower than expected? So, I guess my question is going forward how comfortable are you with that you have modeled it correctly, cause you know it is so incredibly difficult to model and then separately, I wonder how sustainable the business is, given that it is based on hit, and given itself to people that are sort of a trendy age, so I guess there are two different questions, sustainability of the business long term and the ability to forecast?

[A – Steve]: Yeah. Those are great questions Laura. A couple of things that I would say and clearly our ability to forecast, on 90 day windows has been very difficult so when it was out stripping our original guidance in last year and early this year and now of course this has seen some bumps the other way. So I think it is a tough market to gauge on a 90 days window. Now I will remind everybody that if end at 2003 has the $40 million business and it is about 10 times plus that today, so from what all of us in technology would think of as a high growth product line this clearly is it, it is having its growing pains and probably was over heated from a demand perspective early in the year because of some other perfect storm things that you got with the Crazy Frog plus the US market launch plus the impulse by advertising model kicking in, in some new areas. So I think we are going through those growing plains, I do think it will settle out and I do think that people have to remember its not just ring tones that this whole notion of mobility in entertainment as we are seeing at the PTI show this week, we will bring T.V, we will bring video, we will bring full track music channels and rest, so I don’t think the market is a sad market nor do I think to use demographic is the only demographic that is going to be targeted here as we will start to see sports and more live action video probably target older the demographic so we are in the first year, what I expect will be a 5 to 10 year explosion in mobile entertainment and I think ring tones are just the tip of the iceberg and right now they are going through their ups and downs in terms of growth rate.

[Q - Laura]: Kind of a strange question in the past you have entered businesses that, where they did not work out as you saw, you were able to cleave or sell out part, how long will you give this that kind of be a business that is one that continues to grow and help the stock instead of hurting it, as it has over the last couple of quarters?

[A – Steve]: Yeah I think, bought this business after consultation with several of our customers who wanted us to provide them an infrastructure platform for mobile content and so the main pieces around why we entered the content area was to provide VeriSign traditional infrastructure platform for delivering mobile content to carriers around the world and we are doing that. The consumer brand of it obviously took of with the impulse by marketing activity and so we are going to continue perusing that I think the customers that will tell us if we can win large portal deals if we can win large white label para deals and we can continue to promote the brand as the premium brand in mobile content I think all those things you know will kind of play out, we continue to manage these things profitability and will listen to what our customers tell us, is the most effective way to deliver the services for them.

[Q - Laura]: Thank you

[Operator]: Rob Allen with Pacific Crest Securities.

[Q - Rob]: Yeah, you mentioned incremental phase of content, like sports and live action video and I think it was today, yesterday you mentioned you announced weather bug but what types of other content can we expect and what is the time line on that?

[A - Steve]: I think, you have to separate the couple. So what are the other product areas here, clearly there are video related products whether they be video messaging, on-demand video highlights, video ring tones or full track download videos. All of those things we believe show up second half of ’06 and beyond because the networks in the handset are much better. And if you look at the Sprint announcements or if you look at the Horizon announcement and TV ads around ____, you are starting to see video come to the market. Our bet is not in any substantial way till the second half of the next year. You talk about the games obviously we think the games are going to go through the same phenomena as ring tones lots of early demand, lots of early hype, better realization that PC games on a handset probably aren’t the best experience and then you are going to start to see new games emerge that are really designed for that environment. And then we talked about sports and news and weather and other things that targeted demographic of adult kind of them beyond the 30 years old range like the rest of us. And I think those things are easy to do in terms of sourcing the content I haven’t seen packaging yet that makes it compelling for another $5 or another $10 what exactly would I as a subscriber want to get. So to make a long story short the product road map here have dozens of new products on them. Some of which are dictated by handset networks some of which dictated by figuring out compelling packaging that actually a consumer would want a pay for, and as I said I think this is just still the beginning of this market and it will be measured in tens of billions of dollars by the end of the decade.

[Q - ]: Okay and as your analyst said I think you showed us about 60% of your Jamba business was ring tones and rest was graphics, games and others. Is that mix still pretty consistent, or have you seen ring tones increase as a percentage of the total.

[A – Steve]: Ring tones are probably about 70% and I am now going also end of Q2 numbers if I remembered I don’t have numbers obviously yet for Q3 but it doesn’t seem like there is a big shift yet.

[Q - ]: Okay thank you

Greg ____ with ____

[Q – Greg]: Okay thank you Stratton first of all I guess just a clarification does the Q4 guidance include nominal revenues from Sprint or none at all and then also I was wondering if you’ve given in the past a total projected dub number worldwide by the end of the year. And just kind of a triangulating that with the new Q4 guidance if you had an update on that?

[A – Stratton]: I would say to answer your first question, there will be nominal Sprint revenues in the guidance we just gave. But again we will be clearer on that when we give the earnings the full final earning announcements on the 19th. Sub counts at the end of the third quarter were still north of 10 million worldwide I am not yet capable of projecting what they are going to be at the end of the year. But I think we are still at the highest numbers of subscribers in the state and obviously monitoring that number very closely as we look at the decline in the UK and Germany hopefully offset by growth in the new markets.

[Q – Greg Melcovich]: Okay and I am just wondering if you could may be give an update on the Verizon and then there is a lot of talk reaching over the past week or so, any comments or thoughts about continued discussions with them and is it mostly a technical issue at this point or is it a _____ still at play as well?

[A – Stratton]: Yes we continue to have good discussion with other carriers about launching the Jamster brand here in the US including Verizon, Verizon has it’s own schedule for how they will announce those opening up the off portal with them. So I won’t say any more than that. I have heard conflicting stories from Verizon spokes people in the last ten days on that myself in the press but our view is, that they will continue to move forward on opening up the off portal opportunity to ourselves and other and that we will be one of the earliest participants.

[Q – Greg]: Okay thank you.

[Operator]: Steve Ashley with Robert W Bear

[Q - Steve]: Hi, I was just wondering if you could may be comment on how the new markets are ramping up in France and Spain in Europe?

[A - Stratton]:
I don’t have the end of quarter numbers and haven’t really been focused on those market place.

[Q – Steve]: What roll do you see Jamba playing in the distribution of full track MP3 current hits in the future?

[A - Stratton]: As we said before we do intend to have an operating there likely first will be in international market and likely first will be as a beta B play using our platforms.

[Q - Steve]: Great thanks so much.

[Operator]: Jason Lilly with Morgan _____.

[Q -Jason Lilly]: Yeah good afternoon, I just want to know if you can give me a little bit more detail on the Beta B side of the business you started to talk about it a bit more here recently, if you get some times of what type of the contributors that is now quarterly and may be some just of kind of been broad sense of that, what you expect from it going forward?

[A - Stratton]: First currently less than 10% of our Jamba and Jamster revenues we do think it will grow significantly over the course of the next 12 to 24 months and we are positioning it as the leading platforms to do white label services here in mobile and overtime in broad band and not just with carriers right with others who are interested in distribution of these types of products.

[Q -Jason Lilly]: And just on the new market I was wondering if there was any market In particular that they contributed to the growth you saw in the third quarter from the new segment?

[A - Stratton]: I am surely was, but I don’t have that in front on me I just have a rest of world number in front on me which is the over 400,000 that I gave but we will give some more detail on that on the 19th.

[Q - Jason Lilly]: Thank you.

[Operator]: Kevin Dudishae with AG Edward.

[Q – Kevin]: Thank you. Just I want to get understanding of the magnitude of the reductions in SG& A expenses in the third quarter. I would imagine that the cost of good soul would be up with the relatively lower contribution from the mobile content business and is it that gross margins I understand what you are saying about operating margins but could you provide a little bit of color on that what’s happening on the gross margin line that’s what I can understand with the magnitude of changes on the SG&A expense items and then secondly do you have any kind update on the ____ law suit, is that still expected to begin in November and do you have comment on that.

[A - Dana Evan]: Let me take the first part of that, gross margins in Q3 will be a consistent with the guidance that we gave and marketing trend is a reduction of little over 20% on Q2.

[Q – Kevin]: Great.

[A - Stratton]: And on the ____ law suit, as far I know it is still slated for November trial. We still believe that the case is without merit and we will defend it vigorously.

[Q – Kevin]: Thank you very much.

[Stratton]: Thank you every one presented on today, the reports to talk these further at our Q3 earnings call on October 19th. Thank you.