Good day and welcome to Symantec's third quarter 2009 earnings conference call. (Operator Instructions)
At this time, I'd like to turn the call over to Helyn Corcos, Vice President of Investor Relations. Please go ahead.
Thank you. Good afternoon and thank you for joining our fiscal third quarter 2009 earnings conference call. With me today are John Thompson, Chairman of the Board and Chief Executive Officer of Symantec, Enrique Salem, Chief Operating Officer, and James Beer, Executive Vice President and Chief Financial Officer.
In a moment I will turn the call over to John, who will provide high level comments on the company, James will review the financials and our guidance as outlined in the press release, and Enrique will wrap it up with quarterly highlights. This will followed by a question-and-answer session.
Today's call is being recorded and will be available for replay on Symantec's Investor Relations homepage. A copy of today's press release and supplemental financial information are available on our website and a copy of today's prepared comments will be available on the Investor Relations website shortly after the call is completed.
Before we begin I would like to remind everyone that some of the information discussed on this call, including our projections regarding revenue, operating results, deferred revenue, cash flow from operations, amortization of acquisition-related intangibles, and share-based compensation for the coming quarter contain forward-looking statements. These statements involve risks and uncertainties and may cause actual results to differ materially from those set forth in these statements.
Additional information concerning these risks and uncertainties can be found in the company's most recent periodic report filed with the U.S. Securities and Exchange Commission. Symantec assumes no obligation to update any forward-looking statements.
In addition to reporting financial results in accordance with generally accepted accounting principals or GAAP, Symantec reports non-GAAP financial results. Investors are encouraged to revenue the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP results, which can be found in the press release and on our website.
Now I would like to introduce our CEO, John Thompson.
Thank you, Helyn, and good afternoon, everyone.
We're pleased to report stronger than expected December quarter results against the backdrop of a challenging global economy. More importantly, I'm quite pleased that our financials are reflecting our team's commitment to improving our execution. Solid sales activity, coupled with our ongoing focus on managing our cost structure, drove the over performance for the quarter.
We were able to deliver revenue above our forecast despite our customers' continued scrutiny of their IT budgets. Customers tell us that they will allocate funds to areas of storage optimization, data loss prevention, and enterprise security. Furthermore, their attention is turned to initiatives that will drive immediate cost savings rather than longer-term investment programs. I'm pleased that our sales force has been able to successfully illustrate the positive impact our solutions can have on our customers' operating cost.
Our enterprise business benefits from a large recurring revenue base, particularly in the Storage segment, where more than half of our revenue comes from maintenance contracts.
In our Consumer segment we were able to leverage our existing customer base, a very strong customer base, to continue the migration to Norton 360. In addition, our recent acquisitions of PC Tools and SwapDrive are important elements of our strategy to expand into emerging geographic markets and the online backup segment.
Our higher-than-expected non-GAAP earnings this quarter are the result of our very effective cost management programs. The combination of our top line growth, our cost and expense management programs, and our ongoing share repurchases has enabled us to achieve seven consecutive quarters of double-digit earnings growth.
Looking forward to our March quarter - the final quarter of our fiscal year - we expect the market environment to remain challenging; however, we're confident in the competitiveness of our products and services and the determination of our team. We will maintain our focus on execution, striking the right balance between achieving efficiency and sustaining strong business performance without compromising our ability to serve our customers.
In an environment where revenue growth may be the greatest uncertainty, our goal is to grow our earnings and emerge from the economic downturn a stronger company, positioned for ever-greater success in the next economic cycle.
With that, I'll turn the call over to James for financial details.
Thank you, John, and good afternoon, everyone.
I'm pleased that our company wide focus on execution drove over performance in each of our key financial metrics during the December quarter. In particular, our ongoing focus on managing costs has resulted in significant operating margin expansion and earnings growth.
I'll start by reviewing the financial details of the December 2008 quarter. GAAP revenue was $1.51 billion. Non-GAAP revenue grew 1% over the December 2007 period to $1.54 billion, driven by growth in our Consumer, Storage, Data Loss Prevention and Services businesses. Foreign currency movement negatively impacted non-GAAP revenue by approximately 4 percentage points year-over-year. Had the quarter's exchange rates equaled our guided value of $1.25 per euro rather than the actual weighted average rate of $1.32 per euro, our non-GAAP revenue would have totaled $1.505 billion, still above the top end of our guided range.
The December quarter's fully diluted GAAP loss per share is due to a non-cash goodwill impairment charge of approximately $7 billion. During the December quarter, given the current economic environment and the resulting decline in our market capitalization, we concluded that there were sufficient indicators to require us to perform an interim goodwill impairment analysis. We have not completed this analysis, but have concluded that an impairment loss can be reasonably estimated. We expect to finalize our goodwill impairment analysis during the fourth quarter of fiscal 2009 and may make an adjustment to this charge when the goodwill impairment test is completed.
Non-GAAP fully diluted earnings per share for the quarter were $0.42, up 27% year-over-year. Compared to the high end of our guidance, we over performed by $0.09. $0.02 of the $0.09 were driven by one-time tax and hedging gains, while a further $0.005 improvement was as a result of a lower share count than previously expected. The majority of the remaining $0.065 over performance was driven by expense management.
The U.S. region grew non-GAAP revenue by 7% to total $767 million, equivalent to 50% of total non-GAAP revenue. International non-GAAP revenue of $771 million declined by 5% versus the year ago period. Foreign currency movements negatively impacted international nonGAAP revenue by approximately 7 percentage points year-over-year.
Moving on to our non-GAAP revenue by segment, the Consumer business generated revenue of $448 million, equivalent to 29% of total revenue and grew 2% year-over-year. In the enterprise arena, the Storage and Server Management segment generated revenue of $569 million, up 1% year-over-year and represented 37% of total revenue. Our Security and Compliance segment generated revenue of $396 million, down 5% versus the year ago period. This segment accounted for 26% of total revenue. Our Services segment generated revenue of $125 million, up 20% year-over-year, representing 8% of total revenue. Our continued focus on improving the cost efficiency of our Services operations continues to result in significant contribution margin improvements year-over-year.
Non-GAAP gross margin increased 40 basis points to 86.6% for the December 2008 quarter as compared to 86.2% for the year ago period. Our continued focus on cost management as well as our over performance on the top line increased non-GAAP operating margins during December 2008 quarter to 32%, up 480 basis points year-over-year. This is the fifth consecutive quarter in which operating margins have increased versus the prior year.
The GAAP net loss for the December 2008 quarter was $6.8 billion due to the non-cash goodwill impairment charge. Non-GAAP net income was $350 million, up 20% year-over-year.
We exited December with a cash and short-term investments balance of $1.5 billion. During the December quarter we repurchased $200 million or 16.1 million shares at an average price of $12.45. $400 million remains in the Board authorized share repurchase plan.
We also spent $239 million on the purchase of PC Tools and $619 million on the MessageLabs acquisition during the quarter, for a total of $858 million.
Our net accounts receivable balance at the end of the December 2008 quarter was $927 million. Days sales outstanding or DSO was 55 days, in line with normal seasonal trends.
Cash flow from operating activities for the December quarter totaled $402 million as compared to $462 million in the December 2007 quarter.
GAAP deferred revenue at the end of the December 2008 quarter was $2.92 billion. Non-GAAP deferred revenue grew 2% year-over-year to $2.96 billion. Foreign currency movements negatively impacted non-GAAP deferred revenue by 2 percentage points year-over-year. Had the end of period exchange rate equaled our $1.25 per euro guided rate versus the actual rate of $1.39 per euro, deferred revenue would have totaled $2.86 billion, again, above the top end of our guided range.
Now I'd like to spend a few minutes discussing our expectations for the March quarter. We are assuming an exchange rate of $1.32 per euro for the March 2009 quarter versus the $1.50 per euro we experienced during the March 2008 quarter. Given the rapidly moving exchange rate environment, I'd like to remind everyone to continue to apply the rules of thumb that we provided last quarter as a guide to the impact of currency movements on our financial metrics.
Our guidance also assumes a common stock equivalents total for the quarter of approximately 830 million shares.
For the March 2009 quarter we expect GAAP revenue to be in the range of $1.475 to $1.525 billion. Non-GAAP revenue is estimated to be in the range of $1.49 to $1.54 billion. In constant currency terms, the midpoint of this range would equate to $1.60 billion as compared to the $1.548 billion we generated in the March 2008 quarter.
GAAP earnings per share are forecasted to be in the range of between $0.12 and $0.14. Non-GAAP earnings per share are estimated to be in the range of between $0.33 and $0.35. In constant currency terms, the midpoint of this range would equate to $0.35 as compared to the $0.36 result in the year ago period.
The March quarter guidance includes a full quarter's impact of MessageLabs for the first time and is consistent with the comments we made in October regarding the dilutive impact of this transaction for the remainder of this fiscal year.
At the end of the March quarter we expect GAAP deferred revenue to be between $2.972 and $3.072 billion. We expect non-GAAP deferred revenue to be between $3.0 and $3.1 billion. The exchange rate at the end of the March 2008 quarter was $1.58 per euro. In constant currency terms, the midpoint of this range would equate to $3.23 billion as compared to $3.09 billion at the end of March 2008.
We expect about [61%] or approximately $930 million of our March quarter revenue to come from the balance sheet. This percentage once again illustrates the degree of predictability that we have built into our income statement during the last few years.
Lastly, I would like to remind everyone that the upcoming June 2009 quarter will be comprised of 13 weeks versus the June 2008 quarter, which included an extra 14th week. Let me briefly review the impact of the extra week on our financials this past year:
Our June 2008 quarter revenue included approximately $75 million and earnings per share included approximately $0.03 of one-time generated from the extra week. Deferred revenue was negatively impacted by approximately $5 million as a result of the extra week. The June 2008 quarter also benefited from significant currency tailwinds. We expect normal seasonality for the June 2009 quarter which typically includes sequential declines in revenue, earnings per share and deferred revenue from the March quarter. We encourage analysts to consider these factors when modeling the upcoming June quarter.
In closing, I believe we are well positioned to deal with the current macroeconomic environment. We will stay focused on our costs and earnings, but we'll also capitalize on opportunities to boost our long-term competitiveness and top line growth rate.
And now I'll turn the call over to Enrique, who will provide more detail on the December quarter highlights.
Thanks, James, and good afternoon, everyone.
I'm pleased with the execution of both our sales and our product teams during the quarter. While the environment continues to be challenging, we believe the mission critical nature of our products, combined with the compelling ROIs delivered by many of our solutions, positions us well in this environment. We are continuing to drive many new license sales and our customers are renewing at a high rate across both our Storage and Security business.
Now I'd like to highlight a few key items of our fiscal third quarter.
Starting with our data center business, a key factor driving our Storage and Server Management results over the past four quarters has been our ability to enable clients to quickly reduce IT spending, particularly storage spending. In this economic climate, customers are looking for solutions that can deliver cost savings within an operating budget cycle. As such, we initiated a new selling campaign built around the theme of stop buying storage. Customers using our solutions can reduce storage costs by better utilizing existing storage and by buying lower cost storage.
Our data center backup and de-duplication products posted strong year-over-year revenue growth. The transition of net backup to a platform-based architecture has enabled our customers to take advantage of best of breed features such as disk-based backup, virtualization, continuous data protection, and de-duplication.
In the small-medium business segment, our strategic partnership with Dell in the backup area is off to a good start. The Dell-based disk arrays that are preinstalled with Backup Exec 12.5 is outselling a similar appliance shipping with our competitor's technology by 3 to 1.
Next, Vontu just celebrated its one-year anniversary at Symantec. I am pleased with how well this integration has gone. The DLP team has been very successful in leveraging the broader Symantec direct sales force and channel presence and has expanded the business globally. The team also made significant progress in integrating the DLP product with the broader Symantec portfolio. DLP 9 is now fully integrated with our end point management solution leveraging Symantec's open collaborative architecture.
The revenue from our DLP business continues to show strong growth. We signed deals with some of the largest global enterprises, spanning many different industry verticals.
For example, our complete Symantec Data Loss Prevention suite was licensed by Continental Airlines to protect credit card numbers, personally identifiable information, and other sensitive content. The airline chose to implement our DLP solution to ensure compliance with various state data privacy laws and to help maintain PCI compliance. The customer selected our DLP solution for its best in class features and for its mature reporting and workflow capabilities. In addition, Continental also decided to standardize on Symantec Endpoint Protection and Symantec Endpoint Encryption for mobile devices.
Symantec Endpoint Protection garnered several competitive wins in the large enterprise segment. The performance improvements made in the recent maintenance releases have been well received by both our customers and our partners.
Now I'd like to take a few minutes to talk about our market leading Consumer business, which clearly generates the most profits in the consumer security market. Our stellar 2009 products and associated accolades are allowing us to replace the competition and increase our presence in both the retail and electronic channels. We continue to aggressively pursue OEM relationships for customers who benefit from the ever-increasing value of our premium security software. Symantec signed or extended or renewed more than 20 new customer agreements in the December quarter.
The notebook market is an exciting new opportunity for us. We are working with a number of providers in this fast-growing market, including Asus, the number one vender in the ultra low-cost PC segment. We recently signed a multiyear deal to ship a 60-day trial of NIS on Asus laptops and desktops worldwide. In addition, we signed new contracts with United Online and Fujitsu. We also won a deal with a leading PC OEM to ship NIS on their gaming platform, and we are pursuing other new OEM opportunities, particularly with our online backup offering.
In the emerging markets, we are expanding our portfolio to derive growth from new markets by leveraging our recently acquired PC Tools brand and it's online go-to-market channel. PC Tools just completed its first full quarter as part of our company, and we're pleased with their ability to reach new customers. PC Tools allows us to seed emerging markets and new consumer segments with less expensive point products while protecting our premium Norton brand.
We're also now shipping Norton Internet Security for the Mac. Even Mac owners are susceptible to online threats, and when it comes to pfishing, it doesn't matter what platform you're using. NIS for Mac helps safeguard users from pfishing threats, malware, and hackers without compromising system performance.
As we look ahead, we're excited about the upcoming product cycles in both our Enterprise and Consumer segments. In the Enterprise segment we're shipping new versions of Enterprise Vault and Control Compliance Suite. Later this quarter we expect to ship the next version of our Altiris Management products.
In Consumer we have several exciting new product launches which will benefit our existing user base as well as attract new customers. The new release of our industry leading all-in-one security suite, Norton 360, will include all the performance and security enhancements of our award-winning 2009 products. We will also be introducing the web-based Norton online backup in February.
Driven by our acquisition of SwapDrive last June, we are providing online backup to customers. We have 6.5 times more customers than our nearest competitor. Today we host 26 petabytes of data and with 2.5 million backups per day, we are the clear leader in the online backup market. Our online backup offering is particularly valuable for netbook users who want to access their data from multiple devices and who tend to have limited local storage for their high volumes of photos, music and videos.
Going forward, I've established three key focus areas for our team - first is enterprise security, given the importance our customers place in protecting their critical information; second, we will solidify our leadership in the transition to next generation data protection, including disk-based backup, virtualization support, continuous data protection, and de-duplication; and finally, we will scale our software as a service business to include archiving, DLP, backup and many other services.
In closing, we have a broad set of products and services that customers continue to value and we are very excited about our new product pipeline. We will continue to focus on execution, invest in growth opportunities and drive earnings growth in order to emerge from the economic downturn as a stronger company.
And with that, I'll turn the call back to Helyn so she can take your questions.
Thanks, Enrique. Tom, will you please begin polling for questions?
Yes, ma'am. (Operator Instructions)
While Tom is polling for questions, I'd like to update you on four upcoming events.
First, Symantec will be hosting our financial analysts day on June 11th in San Francisco, so please mark your calendars.
Second, we encourage you to attend Managed Fusion, our annual customer conference during the week of March 9th in Las Vegas.
Third, we'll be presenting at three financial analyst conferences this quarter.
And fourth, we will be reporting our fiscal fourth quarter and fiscal year end 2009 results on May 6th.
For a complete list of all our investor-related events, please visit the Events Calendar on the IR website.
Tom, we're ready for our first question.
Your first question comes from Sarah Friar - Goldman Sachs.
Sarah Friar - Goldman Sachs
James, just on the margin side, on the guidance for the fourth quarter, it seems low, and I know you're incorporating MessageLabs there, but excluding the dilution from MessageLabs, is your assumption that the margins on the core business stay flat or decline into the fourth quarter and why would they decline?
Well, what we have tried to do on all of these guided figures is adjust for currency and so I made the comment that the midpoint of our guidance would equate to $0.35 versus the $0.36 that we recorded in the March quarter of last year.
Now, as you point out, we are going to be experiencing some dilution associated with the MessageLabs acquisition. When we entered into that deal we pointed out that we were going to have $0.02 dilution for the balance of the fiscal year, with the significant majority of that coming in the March quarter.
So when you make that adjustment as well, our midpoint guided EPS would be actually coming in in advance of what we recorded last year.
Sarah Friar - Goldman Sachs
Sure, but sequentially -
[Inaudible] gives you a sense as to how we're thinking generally about the business.
Sarah Friar - Goldman Sachs
But I guess the question was a little bit more sequentially. You just put up those great operating margins in December and you've been on this very nice ramp to improve margin. Why then the downtick sequentially, I guess?
Well, there are clearly a variety of different factors that will drive this. At the start of any calendar year, there will be some costs that kick in again. So, for example, the 401(k) match begins again. Payroll taxes begin again. So you would naturally see a cost increment in the March quarter over a December quarter typically.
Now, that said, of course we continue our focus on all elements of the cost structure and we certainly won't be changing that perspective in the March quarter, so we'll be going in a very focused way in that regard.
Sarah Friar - Goldman Sachs
And I would assume there's still some uptick coming from some of the [inaudible] that you did towards the end of -
Well, that's right because, as you well know, in certain parts of the world it takes quite awhile to actually sort through the mechanics of this sort of an action, and so I would expect there to be some of those benefits coming through in the March quarter for the first time.
Your next question comes from Adam Holt - J. P. Morgan.
Adam Holt - J. P. Morgan
I had a couple of questions about the Consumer business. Could you give us the detail on where 360 was in terms of the percentage of bookings as well as the percentage of revenue in the Consumer business?
Secondly, maybe talk a little bit about how you think that the changing momentum in the PC market potentially impacts your Consumer business.
And then just lastly, you talked a little bit about the opportunities to expand distribution for 360 at the OEMs. Could you maybe drill down on that a little bit, what specifically you're discussing?
Sure, Adam. If you look at it right now, Norton 360 for the quarter was about 25% of the Consumer revenue.
When you look at the opportunity for us with Norton 360, with Norton Internet Security, I think you start with just the tremendous awards that we've received. I mean, Norton Internet Security is by far the best product on the market. I mean, we are running the table right now with the awards, and so we've got around the world, in geographies that previously have been a little bit challenging for us where we are gaining market share.
If you look at the retail channel or you look at the OEM channel, they're all very interested in using Norton Internet Security 2009, which is the product that we take to the OEMs and we see an opportunity to continue to expand our relationship with OEMs. And so there's a number of OEMs who cater to the premium security segment where we think we've got a competitive advantage and so we're going to focus there.
Adam Holt - J. P. Morgan
And then if you could just touch on the other two elements. Obviously, the PC market's decelerating materially. How does that impact you and how do you think about the influences there?
And then just secondarily, as you think about continuing to expand your distribution both with traditional OEMs and then also thinking about the opportunities with netbooks, maybe touch on your thoughts there.
Let me give you a couple of thoughts. So, you're right, we are seeing a change in the growth rate in the PC market and so what we're doing to compensate for that - and we've been planning this for some time - is bringing new offerings to the market that allow us to get more revenue per customer.
And so, for example, we'll be shipping a stand-alone version - a product that we call Norton Online Backup - and so that product is something that we can go into, quite frankly, any customer, whether they're an existing Symantec or not. We also can use that product on netbooks, where netbooks are devices that typically don't have as much storage and customers are going to download pictures, download videos, and we can use our backup capabilities to help those customers.
I think the second thing that we want to talk about is PC Tools, the acquisition we did a couple of quarters ago that closed at the beginning of the December quarter, allows us to go into more price-sensitive markets, both where the customer's more price sensitive or potentially they're going to use it on a netbook offering, and so that gives us the ability to go after new customers who are not the traditional Norton buyer without having to take the Norton product down into that segment.
And so we've got a dual-brand strategy that I think will allow us to expand and bring in some new customers in some of the emerging markets where, quite frankly, we haven't been willing to take the Norton brand because we haven't been willing to drive the prices down.
Your next question comes from Brent Thill - Citigroup.
Brent Thill - Citigroup
If you could comment on the personnel, total headcount. I think you mentioned you're going to be managing that number down. I think at the quarter end you were at mid-17,000. Can you just walk through going forward what your plans are on that line item?
Well, as part of what we've released this afternoon, we show a headcount for the December quarter of 17,621. Now, 811 of those people came to us just recently through the acquisitions of MessageLabs and PC Tools, so quarter-over-quarter we're down around 950 or so.
So I wouldn't want to make any predictions around specific employee numbers going forward. I would say that this is obviously one of the areas in which Enrique and I have really been focusing on the cost side of the ledger. So as we have employees attrite from the company, we're being very careful about how many of those positions we backfill and so forth. So this is a topic we're looking at in great detail.
Brent Thill - Citigroup
And just a quick follow up. John had mentioned on the Storage business that more than half the revenue's from fairly sticky maintenance contracts. Can you just update us on what the maintenance rates are today and any changes in terms of that line item you've seen recently?
Yes, Brent. When you look at it - we haven't talked about the maintenance rates, but what I am pleased with, even in this tougher economic environment, we continue to see customers renewing their maintenance, and they are continuing to buy new licenses alongside of those maintenance agreements.
What I do want to emphasize is that our storage products continue to perform well very specifically because customers are looking for ways to save money and with our current offerings we're able to do that. This notion of stop buying storage absolutely works with CIOs around the world.
Your next question comes from John DiFucci – J. P. Morgan.
John DiFucci – J. P. Morgan
It sounds like the Consumer business, if you back out some of the acquisitions in your pro forma numbers, it's down just a little bit year-over-year. And given what Microsoft put up, it talked about the consumer, what others have talked about, that's actually a lot better than expected. And then, Enrique, you sort of hit on that. It sounds like you're selling more products into those same consumers, which is helping that business quite a bit. And the Storage sounds steady, but the Security and Compliance business was down year-over-year. You all said large deals down, a number of large deals. Maybe if you can comment on that and just tell us what's happening in that business at least relative to your other businesses.
Sure. There's two places where I think we've got good performance where, if you look at the DLP business, the Data Loss Prevention business, that has continued to do well. But it's a smaller number, so it's growth rate doesn't have as large an impact.
We've also seen good performance with Symantec Endpoint Protection at the large enterprise, which is where we focus that product.
In the mid market, given some of the improvements we've made in the SMB space, there's still more work to be done there, and I would tell you that is a place where we need to see some improvement. But overall, the DLP business, SEP and the large Enterprise continues to do very well.
John DiFucci - J. P. Morgan
Do you think that has more to do with the mid market, the market itself is a little tougher? Is that something that you, Symantec, on an execution basis just needs to work better at?
I think ultimately it's - we can definitely do better. I think we can definitely continue to execute well in that segment, and I think we'll make some improvements with our Symantec Endpoint Protection product where we'll be able to serve that market segment better.
In terms of the volume of large deals, one of the themes there is that we're seeing customers buying what they need for the short to medium term sometimes rather than investing in those longer-term large-scale type transactions that were more voluminous in the last quarter or two.
John DiFucci - J. P. Morgan
And if I could just squeeze one in on the goodwill impairment there, that implies that the fair market value of something that you had bought along the way - it's big or a lot of things are now below the carrying value, and I'm just curious what specifically is that? The net present value, the way you calculate it, of the cash flow from that, is that related to Veritas or is it related to - if you could just identify what assets that's related to.
Well, the way the calculation works, it's done on a segment basis as opposed to a specific acquisition basis, so I actually can't answer that question.
And what's driving the overall calculation is the notion that obviously cost of capital has risen given what we're seeing in terms of dislocations in the financial markets, the short-term growth rates have to reflect the realities of today's recession, and then interestingly the other element of this that drives the overall scale of the charge is, ironically, really, the fact that we invest a very large amount in R&D organically here. And so when you go through this calculation you have to value the organically developed intellectual property, and that is actually deducted from the amount of goodwill that you can keep on the books.
So it's really those three drivers, and it's a segment analysis rather than a specific acquisition analysis.
John DiFucci - J. P. Morgan
Can you tell us which segment, James, it is, though, just out of curiosity?
Yes. The segments that obviously - we're, as I mentioned, still going through this calculation, but it'll be the Enterprise segment that will be impacted here, and we should be in a position to have more information in the 10-Q that we'll be issuing in a week or two's time.
Your next question comes from Phil Winslow - Credit Suisse.
Phil Winslow - Credit Suisse
Last year you made a change to the sales incentive structure - sorry, at the beginning of this fiscal year. When you start to look going forward here, are there any more refinements that you're planning to make over the next several months here to put even more focus on license revenue or do you feel pretty comfortable with the current sales model?
Well, I think that we've made all the changes of any consequence that we're going to make to the comp structure. We've already made those, Phil, and I think it's more a matter of we'll make some refinements.
But make no mistake about it - our focus here is how do we keep driving new licenses, and so things that we can do to improve new license generation, we will do. And are there a few more things we can do? Yes, but they're going to be tweaks to the current plan, not any big changes.
Phil Winslow - Credit Suisse
And any expectation for a change just in the mix of the sales force, you have more quota-carrying heads, etc.
As far as the mix, I would tell you we always look at the coverage model and we're trying to find where the big opportunities are. I will tell you that in this economic environment we're looking at which segments are going to have higher growth, but the priority for us right now is looking at what are some of the big opportunities for our customers.
And I would highlight three areas: One is we can continue to grow our Security business, and so we need to focus there. Two is as customers move to kind of the next generation data protection, I think that creates an opportunity for Symantec to look at how do we allocate resource against that opportunity. And then three, we're definitely seeing as folks continue to look at how they reduce costs and understand what they need to do themselves or what their core competencies are, they'll do more leveraging software as a service, so that'll be another area for us to look at.
And so across the segments looking at those three opportunities will be how we decide our resource allocation.
Your next question comes from Heather Bellini - UBS.
Heather Bellini - UBS
I was just wondering - and I may have missed this because my phone's cutting in and out; I'm over in Europe - but I was wondering if you could share with us, there's been some questions I've been getting about when your Enterprise Security contracts are up for renewal, how do we think about the impact of job reductions and is there the potential for true downs in the number of seeds or nodes that you guys are protecting that we might have to think about when we're thinking about the Enterprise Security growth rates?
I think, Heather, what you want to think about is we've got over 100 million endpoints that we protect, and so the current economic environment has a de minimis effect as far as the number of nodes that we're going to go protect.
I think the more salient point at times is going to be how long are people willing to re-up their maintenance. Are they doing a three-year maintenance, which was pretty typical in a lot of our Security business, or are they going to go for shorter terms? And I think we'll see more of the shorter term, but the number of nodes will still be out there. There'll be a de minimis effect from the current economic environment.
Your next question comes from [Unidentified Analyst] - Pacific Crest Securities.
Unidentified Analyst - Pacific Crest Securities
I kind of wanted to talk a little more about Enterprise Security in terms of it's the second quarter in a row of negative sequential growth. Do you feel like you guys are ceding share at all there?
I think what you want to look at is the segments that we are in - meaning the products that we offer I think we're doing well. We are gaining share in DLP, in Data Loss Prevention. I mean, if you look at the numbers, very good performance there. I think that there are parts of Security that haven't been as resilient, and I think in the SMB space it's an area where we have to do a better job.
But make no mistake about it - in large Enterprise, when I look at the business that we've done I highlighted Continental and a few others we are displacing competitors at the high end of the market with Symantec Endpoint Protection. So at the high end, I think we're gaining. I'm looking at a segment analysis, though, where I think there's a couple of segments where we can do a better job with SEP specifically. I think we can do more in the SMB space.
Unidentified Analyst - Pacific Crest Securities
North America had a strong quarter. Could you kind of just touch on that, what drove it, what specific products?
I think it's ultimately just strong execution by our sales team. I think overall we've focused our efforts on what are the things that are going to resonate with our customers. If you think about it, you've got a situation where people are looking for how do they drive costs out of their environment, so technologies like Storage Foundation, our NetBackup product, both did well.
And then also I highlighted just a moment ago our Data Loss Prevention business, where customers continue to need to protect their information, is something that has proven to be, you know, shown continued strength. I expect that to continue. I don't think customers are going to stop looking at how they protect their intellectual property, their customer data, their employee data, and so I think our DLP business - that full suite, now that we've moved it out to the Endpoint with DLP 9 - I think will continue to perform well.
Unidentified Analyst - Pacific Crest Securities
You talked a little bit about the security for Macs. Do you have any idea of how big that market size would be?
Well, I think what you want to look at is - I would look at it on the percentage of Macs that are out there. And that number's growing; their market share of total PCs is growing. And so I think our opportunity will grow commensurate with that. I think what's important is that, for example, with pfishing, whether you're on a PC platform or a Mac platform, you still need protection. You've still got to get protected. And so that creates an opportunity for us because we've got a fantastic brand, we've historically had a good footprint on the Mac, and so we expect that to continue.
I think it's fair to say that the Mac users tend to be high-end premium type users and that's very much our target market with the Norton brand.
Your next question comes from Todd Raker - Deutsche Bank.
Todd Raker - Deutsche Bank
First, on the Consumer side, can you guys give us any sense in terms of early conversion rates on netbooks or any kind of indication in terms of how you think penetration's going to look on the netbook segment versus traditional?
I don't have any data that I can share right now. We are on the Asus netbooks and a couple of others that we're in discussions with.
I would tell you that the price of PCs has been dropping for the last 15 years, from the day they were introduced in the early 80s, and ultimately the value of our software has not, meaning, if you think about when we launched Norton Internet Security in 1999 2000, it was $69; we're still charging $69 for that product. And the reason is it's less about the cost of the hardware and much more about what you're doing on that PC, it's the information on the PC, it's your identity when you go online.
And that's why I think the notion of the price point of the netbook is not driving whether they're willing to pay for security software or not because if that would be the case we wouldn't be able to get $69 and $79 for NIS and Norton 360, respectively.
Todd Raker - Deutsche Bank
And then on the Enterprise side, if you look at the March quarter here, have you guys changed any of your assumptions around close rates versus what you saw in December or how are you thinking about the business environment impacting March?
We've got a couple of things going on. We think it'll be a similar close rate. And plus, it's driving into the end of our fiscal year. So I think that we expect a similar close rate at this point and I think that you saw in our results that we've been able to perform both on the top line and the bottom line.
Your next question comes from Walter Pritchard – Cowen & Company.
Walter Pritchard – Cowen & Company
I'm wondering if you could give us a sense, just with the - you had a lot of acquired revenue on the PC Tools side in the Consumer space and with MessageLabs for part of a quarter in the Enterprise space - any sense as to what the contribution was from acquisition there? Just trying to get a sense of kind of the underlying growth rate in those businesses.
No, we're really not going to try to break out acquisition numbers here. These are relatively small deals. Where we've done in the past, they've been much larger figures, so I think we'll just leave it to your own analysis.
Walter Pritchard - Cowen & Company
I guess the thing that confused me a little bit, it was on the Consumer revenue you had like a $16 million add back for deferred revenue which would kind of lead me to believe that the number that you're adding back is a big number and therefore meaningful. Is there a reason why that deferred revenue add back was so big?
No, I wouldn't want you to infer that that's a small percentage of the total impact from PC Tools. Absolutely not, no. These are net-net small impacts to the Consumer business unit in the current quarter and I would expect that to be the same in the March quarter.
Walter Pritchard - Cowen & Company
There's been a few questions on the Enterprise Security business, but I just wanted to follow up with one. I mean, SEPTA 11, I think, released about 15 months or so and you've been through a few cycles on that in terms of getting out service packs or whatever they're referred to. I'm just wondering as we look forward there, is the catalyst in that business waiting for a new release, SEP 12 or whatever it may be called? Because it seems like it's been more of a product issue there or maybe I'm wrong, but just trying to get a sense of what's going to be the catalyst to getting that business growing again on a year-over-year basis outside of the macro environment.
I think it's a matter of continuing to leverage the breadth of our portfolio, Walter. And you saw that with DLP 9 we integrated with Endpoint. We are going to leverage the technology there to strengthen our overall Endpoint business, because when you protect data, you've got to protect it everywhere, at the end point, at the server, at the gateway and the network.
And so from our perspective, while we are absolutely going to do enhancements to Symantec Endpoint Protection. We've made significant performance improvements in the latest maintenance release, and you should expect us to continue to do that, the real value and the growth opportunity comes from bringing in the other parts of the portfolio that bring in DLP and some of the other capabilities.
Your next question comes from Daniel Ives - Friedman Billings Ramsey.
Daniel Ives - Friedman Billings Ramsey
Just a quick question on the Consumer business. Last quarter the retail obviously dropped off because of some macro issues. It looks like that came back pretty strong. Was that the Best Buy that helped that? Can you talk about that, even though it's a small percent of the Consumer in the retail business.
Yes, well we continued to see this trend that we've had for years now of retail becoming a lesser part of the total Consumer revenue, online continuing to grow steadily. I think it is fair to say that the retail side of the equation did not go down as much as it did in the last quarter year-over-year. Last quarter we were talking in the low 20s%. This quarter I would describe it much more as mid-teens, something like that.
So there has been something of a shallowing, if you will, of the trend line, and certainly we feel good about our relationship with Best Buy as we go forward here.
Daniel Ives - Friedman Billings Ramsey
Enrique, when you thought about the quarter and just visiting with customers, month over month, was it sort of panicky in December or it felt very kind of smooth in terms of pipeline and deal flow and just overall kind of environment from what you've seen?
I think that when you look at it, I was pleased with the close rates, and it was going into the calendar year end for lots and lots of our customers, and so it was a fairly orderly process.
I think that the change that we have seen is the term. I think folks are committing to a little bit shorter term than they may have previously.
Your next question comes from Matt Hedberg - RBC Capital Markets.
Matt Hedberg - RBC Capital Markets
Enrique, you spent some time in your prepared remarks talking about the Backup Exec product. I'm just wondering there, one of your competitors released a new version of their suite earlier this week and I'm wondering if you could talk a little bit about the competitive nature of that product specifically.
Sure. When you think about it, we've got the clear market leading product; we've got 47% plus market share. And I did see their announcement. There's nothing new in that product that we aren't offering today. I think some of the features that we've been delivering, things like deduplication, disk-based backup protection, are available from the Symantec portfolio.
And the nice thing about where we are is not only do we have the lead market share product in backup and recovery, we also have the market leading archiving product. And that combination because customers are starting to say hey, I don't want to differentiate between archiving and backing up; I think that I just want to protect my information - and hence the notion of having both market leading technologies positions us very, very well.
Matt Hedberg - RBC Capital Markets
And then, James, one small housekeeping question for you on the tax side. It was a little bit lower than we had anticipated, a little lower than the year-on-year number. What are your assumptions for your March tax rate? Do you think it'll be about flat or tick up a little bit?
We're looking at March to be 30.5% as opposed to what we've traditionally said, 31%. So what we had happening in the December quarter was in essence a move to 30.5%, but of course you have to catch up for the first two quarters of the year as well. Hence, when you add it all up you end up with a 29.5% tax rate in the December quarter.
We have time for one more question, please, Tom.
Your last question comes from Katherine Egbert - Jefferies & Company.
Katherine Egbert - Jefferies & Company
You have a competitor, obviously, McAfee, whose done a lot of things in the PC-OEM channel to kind of get more share there. Does that come at your expense and could you just talk about you're combating some pretty aggressive efforts there by them?
I think you look at a couple of things. First of all I want to make sure we point to we've got the best profits in this industry. I think second we've got the best products in this industry. And third, we are always very diligent about making sure that we're going after segments that are going to pay for premium security. And so we look at every deal and, given our scale, we are in every discussion, but we're not going to do bad deals. And so what that means is if people aren't going to value our technology appropriately, we're not going to go do them.
But if you look at the results given the strength of our products - and I mentioned this in the comments we got over 20 wins in the last quarter in a range of both OEMs in the retail channel because we've got the best technology.
Now, the other thing we're doing is we're going to leverage PC Tools in emerging markets and for more price-sensitive segments, so we feel we can go after our traditional customer, the more premium-oriented buyer, with Norton, and we can go after the more price-sensitive customer with the PC Tools brand.
Katherine Egbert - Jefferies & Company
And then James, it looks like on the billings, the revenue plus changing deferred, you know, the guidance for the March quarter, if my numbers are right you're guiding to have billings about 5% or 6% year-on-year. And that's better than they were in the December quarter, but not as good as they were last March. Is that right and, if so, why the downtick?
Well, the way we try to do this calculation - which we think is the way you do the calculation at the midpoint of the guided range we're coming up with on a constant currency basis a 5% increase in bookings year-over-year. So in this sort of an economic environment, we're relatively pleased with that look forward.
Katherine Egbert - Jefferies & Company
John, I think this is your last conference call. Good luck to you. Good luck in Washington.
Thank you very much. Well, with that I guess I would close by saying I'm particularly proud of our team and their ability to execute so well in what is undoubtedly a very, very challenging economic environment. We would expect that environment to continue, but we'd also expect our team to maintain their resolve and their focus to deliver the best results that we possibly can.
I couldn't be more proud to have spent 10 years at Symantec, so thank you very much.
This does conclude today's conference call. We appreciate your participation. You may disconnect at this time.
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