A key question in the field of RNA regulation is how some exosome substrates, such as spliceosomal snRNAs and telomerase RNA, evade degradation and are processed into stable, functional RNA molecules. Typical feature of these non-coding RNAs is presence of the Sm complex at the 3'end of the mature RNA molecule. Here, we report that in Saccharomyces cerevisiae presence of intact Sm binding site is required for the exosome-mediated processing of telomerase RNA from a polyadenylated precursor into its mature form and is essential for its function in elongating telomeres. Additionally, we demonstrate that the same pathway is involved in the maturation of snRNAs. Furthermore, the insertion of an Sm binding site into an unstable RNA that is normally completely destroyed by the exosome, leads to its partial stabilization. We also show that telomerase RNA accumulates in Schizosaccharomyces pombe exosome mutants, suggesting a conserved role for the exosome in processing and degradation of telomerase RNA. In summary, our data provide important mechanistic insight into the regulation of exosome dependent RNA processing as well as telomerase RNA biogenesis.