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Symantec Corporation (NASDAQ:SYMC)

Q1 2007 Earnings Conference Call

July 26, 2006 5:00 pm ET

Executives

John W. Thompson - Chairman of the Board, Chief Executive Officer

James A. Beer - Chief Financial Officer, Executive Vice President

Helyn Corcos - Vice President, Investor Relations

Analysts

Adam Holt - JPMorgan

Todd Raker - Deutsche Bank

Sarah Friar - Goldman Sachs

Michael Turits - Prudential Securities

Daniel Ives - Friedman Billings Ramsey

Philip Winslow - Credit Suisse First Boston

Walter Pritchard - SG Cowen

Phil Rueppel - Wachovia Securities

Ed Maguire - Merrill Lynch

Gregg Moskowitz - Susquehana Investment Group

Kevin Buttigieg - A.G. Edwards

Chris Hovis - Morgan, Keegan & Company

Operator

Good day, everyone, and welcome to Symantec’s first quarter 2007 conference call. Today’s call is being recorded. At this time, I would like to turn the call over to Miss Helyn Corcos, Vice President of Investor Relations. Please go ahead, Ma’am.

Helyn Corcos

Thanks, Lisa. Good afternoon, everyone, and thank you for joining us.

With me today are John Thompson, Chairman of the Board and CEO of Symantec; and James Beer, Executive Vice President and Chief Financial Officer. In a moment, I will turn the call over to John. He will discuss highlights of our results for the fiscal first quarter of 2007, which ended June 30, 2006. James will discuss the financial details of the quarter and he will review guidance for the fiscal year 2007 as outlined in the press release. John will provide a few more concluding remarks before we open the lines up to take your questions.

Today’s call is being recorded and will be available for replay on Symantec’s investor relations homepage at symantec.com/invest. In addition to today’s press release, a copy of our prepared remarks and supplemental financial information are available on the investor relations website.

Before we begin, I would like to remind everyone that some of the information discussed on this call, including our projections regarding revenue and operating results for the coming quarter and fiscal year, contain forward-looking statements. These statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in the statement. 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 the reporting financial results in accordance with generally accepted accounting principals, or GAAP, Symantec reports non-GAAP financial results. Please note that our combined non-GAAP financial results include the historical results for Symantec and Veritas for the comparative fiscal period. Investors are encourage to review the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP results, which can be found in the press release and on our investor relations website.

Now, it is my pleasure to introduce our CEO, Mr. John Thompson.

John W. Thompson

Thanks very much, Helyn. I am very pleased with the team’s ability to execute our operating plan and deliver solid June quarter results. We saw strength across several areas of our product portfolio. This solid performance was driven by our market-leading consumer suite, Norton Internet Security, as well as unique enterprise solutions such as storage foundation, e-mail management, IT compliance, and a variety of our services offerings.

Our performance speaks to the strength of the diversified business model we have created, our strong market leadership, and our long-standing relationships with customers and partners around the world.

It is becoming more and more evident that customers are leveraging our broader product and services portfolio to help them solve the cost, complexity and compliance issues of their IT environment.

In addition, with CIO’s wrestling with the difficulty of managing hundreds of IT vendors, our customers have a growing need to rationalize these relationships in order to streamline their own operations.

With our much broader product portfolio aimed at high-growth IT segments, Symantec is well-positioned to be a core strategic partner with many of our customers, and ultimately increase our share of their overall spending.

With a solid first quarter behind us, we are well-positioned for the balance of fiscal 2007 as we continue to take steps to drive our competitive differentiation in the marketplace.

The breadth of security and availability solutions continues to drive the number of large transactions Symantec generates. During the June quarter, we booked 280 transactions valued at more than $300,000, and 63 deals more than $1 million.

During the June quarter, we signed one of the largest commercial transactions in Symantec’s history, with a global technology leader serving both the consumer and enterprise markets. They were seeking to reduce costs, consolidate and simplify their massive infrastructure, which had grown dramatically in recent years.

As part of the consolidation, our sales team was able to demonstrate how storage foundation can optimize their heterogeneous data center environment and reduce the number of vendors the customer was using.

Already a significant user of several of Symantec's security products, including Antivirus, Endpoint Compliance, and Enterprise Security Manager, this customer will now rely on Symantec to provide security, storage management, and availability solutions for their IT infrastructure.

In addition, we booked a multi-million dollar contract with one of the world’s largest financial services companies. We worked with this customer in the U.S., Europe, and Japan to find ways to reduce the cost and complexity of its heterogeneous data center and back-up environments.

The result was a new contract for storage foundation, net back-up, command central, I3, and enterprise vault. They also committed to utilize our consulting services to optimize their back-up environment, adding almost $1 million to the transaction. Importantly, this customer is also a significant Symantec security customer as well.

As reflected in the deal I just discussed, our services offerings are becoming an important element of our solutions portfolio, and helps us expand the scope of our relationship with many of our largest customers.

Today, corporate boards and executive management teams are highly concerned with protecting their company from operational risk. With their access to proprietary technologies and techniques to uncover and mitigate unwanted risk, our security professionals, our services professionals have a unique perspective to offer our clients on IT risk management. In doing so, it enables our clients to concentrate on their core business activities with the assurance that their critical infrastructure and information is safe and reliable.

During the quarter, we led an interesting engagement with one of the world’s largest pharmaceutical companies. Symantec's business continuity management practice was retained to ensure that medications continued to flow uninterrupted in the event of a crisis. Symantec delivered by assessing, testing, and strengthening the business continuity plan, and by helping the company achieve its recovery time objectives and passed its audit with the highest rating available.

In addition to focusing on business as usual during the quarter, we also successfully completed the final steps integrating our enterprise sales teams. In April, we shifted our model in line with the industry approach of having a single account manager for large customers.

Our account managers are responsible for overall opportunity identification and relationship management for both security and availability products and services. They are supported by individual product or solution specialists to ensure we can deliver the deep skills required in some account situations. This structure allows better account and opportunity coverage while leveraging our broad product portfolio.

We also enhanced our sales solution specialization at the SE level and increased our mid-market sales resources. These represent incremental resource commitments to drive stronger penetration into the vast, mid-market segment, and the expansion of the SE resources provides stronger pre-sales technical support as our customers are evaluating our products and services. Throughout all of this, sales attrition rates were very much in line with our full-year projections.

Needless to say, I am very delighted that we have successfully completed the integration of our sales teams and all of our go-to-market activities. This represents an important milestone in the development of the new Symantec.

Our channel partners continue to be instrumental to our success. This year, our focus is on making our partner eco-system even more efficient while at the same time expanding its coverage of our broader solution portfolio.

Our web-enabled programs support tens of thousands of partners around the globe, and we are strengthening our sales, support and program resources focused on our platinum level partners.

Over the past two quarters, we have been at work merging our partner programs, our partner portal, and our deal registration systems. Efforts to date have already yielded a dramatic increase and the amount of availability products that are sold through the channel compared to the pre-merger amounts. This was an important issue for many of our channel partners as we announced the transaction to acquire Veritas.

With more than 60,000 partners around the world, we will continue to enhance the program to include our service, consulting and system integration communities into our offerings and programs.

On a separate note, during the quarter, we decided to streamline our approach to the security appliance market. With a very crowded market and slowing growth rates, we decided to concentrate our efforts on the higher growth segments of the security appliance market, like e-mail security, database security, and security event management. These offerings will continue to be delivered on industry-standard hardware with our unique software capability preloaded at the factory.

However, we will be discontinuing new development on proprietary hardware, especially for our Symantec Network Security and Symantec Gateway Security appliances. We will continue to provide maintenance and signature update support to existing customers and offer the appliances we have in inventory as extensions to existing contracts.

These moves enable us to invest more in higher growth areas of our business, such as enterprise messaging and the important compliance arena.

Before I turn the call over to James for more details on our June quarter financials, I want to touch on a significant step that Symantec made during the quarter towards optimizing our capital structure and increasing our financial flexibility.

In mid-June, the company issues $1.2 billion in convertible notes -- I am sorry, $2.1 billion in convertible notes at interest rates of between 0.75% and 1%, with an effective conversion premium of 75%. Simultaneously, we were also extended a $1 billion line of credit.

In conjunction with this transaction, the board authorized a new stock repurchase program totaling $1.5 billion, which is additive to the $1 billion repurchase program that was authorized in January.

Over the past five quarters, we have repurchased nearly $4.5 billion in stock, or approximately 230 million shares. We plan to repurchase approximately $1.5 billion more of stock over the next three quarters, completing the balance of the two outstanding authorizations.

Clearly our share repurchase commitment and high convertible strike price reflect our strong believe in the fundamental value and long-term prospects of our company’s business. We will continue to evaluate our capital structure going forward. In the meantime, the board and I believe that the most prudent uses of cash are to repurchase stock and invest in activities that augment revenue and earnings growth.

As I have indicated in the past, we will continue to look for bolt-on technology capabilities that can be integrated into our product portfolio, as well as acquisitions that expand our addressable market opportunity. We believe our internal R&D efforts, coupled with newly acquired technologies, help to strengthen our businesses and improve our competitive positioning.

With an ever-increasing level of consolidation across the infrastructure software segment, we will always take a look at potential transactions or companies that we believe to be complementary to our existing portfolio.

Now I will turn the call over to James to discuss our financials in further detail.

James A. Beer

Thank you, John, and good afternoon, everyone. Our solid performance in the June quarter is a good indication of the progress we are making towards our FY07 targets.

GAAP revenue for our June 2006 quarter was $1.26 billion. Non-GAAP revenue grew approximately 2% versus the June 2005 period to $1.28 billion.

I am pleased that our revenue performance came in above the guidance range we had previously provided.

The June quarter’s diluted GAAP earnings per share was $0.09. The total stock-based compensation impact in the June quarter, GAAP earnings per share, was approximately $0.03. Non-GAAP diluted earnings per share for the quarter was $0.24. Earnings per share also exceeded guidance.

There were two factors that impacted our year-over-year growth that you should be aware of. First, foreign currency movements negatively impacted non-GAAP revenue by almost $8 million in the June 2006 quarter, as compared to June 2005.

Second, difficult year-over-year comparisons occur as a result of our comparing the June 2006 quarter to a June 2005 period that actually includes Veritas’ results from the March 2005 quarter. Last year’s March quarter was a strong revenue quarter for Veritas, driven by specific pre-merger incentives.

Thankfully, this is the last quarter in which we will be making year-over-year comparisons to different Veritas and Symantec calendar periods.

International non-GAAP revenue for the June quarter was $648 million, growing 5% versus the year ago period, and representing 51% of total non-GAAP revenue. The Europe-Middle East-Africa region grew 1%, and Asia-Pacific, including Japan, grew 16%. The Americas declined 1%, driven primarily by the difficult year-over-year comparable period resulting from Veritas’ March 2005 results.

Now I would like to move to revenue by segment in the June ’06 quarter.

Consumer revenue came in at $385 million, up 6% versus the June 2005 quarter. Consumer revenue grew almost 5% sequentially. Growth was driven primarily by strong, electronic distribution activity from our online store, subscription renewals, and upgrades.

From a product perspective, the growth was driven by strong sales of our Norton Internet Security Suite.

Electronic distribution channels represented 66% of consumer revenue, and grew 21% versus the June 2005 quarter. Norton Internet Security revenue grew 47% and remains the single largest product contributor to our consumer category, generating approximately 53% of consumer revenue.

Moving on to our enterprise segments, as you may recall, we announced at our recent analyst day that we would break out the revenue results of three enterprise business segments. The June quarter performance for the new segments is as follows: our security and data management revenue of $488 million declined by 2% over the June 2005 quarter, due in part to the difficult Veritas year-over-year comparison period.

Our enterprise messaging products, which include Mail Security and E-Mail Archiving, experienced the largest year-over-year gains, as these solutions continue to lead their respective markets. IT Policy Compliance and managed Security Services also posted strong growth.

The Data Center Management Business generated revenue of $351 million. Growth was flat with the June 2005 results. Once again, however, these results reflect the difficult year-over-year comparison of our actual June 2006 activity versus the March 2005 Veritas quarter.

The storage foundation family of products delivered its second-strongest performance ever, with solid double-digit percentage growth, and our services group posted another strong performance, increasing revenue to $58 million, up 18% from $49 million in the June 2005 quarter.

Services represents 5% of our total revenue.

Non-GAAP gross margin decreased to 83.7% for the June 2006 quarter compared to 84.7% for the year ago period. The decline was largely driven by excess appliance inventory. As John mentioned, we will maintain our appliance lines that are built on industry standard boxes. However, we have decided to discontinue proprietary hardware development. We will reinvest the funds generated by this move in other high-growth opportunities, such as end-point compliance, message management, and security policy compliance.

Non-GAAP operating expenses of $725 million for the June 2006 quarter were up 3% sequentially. Expenses were driven by increased hiring, information technology initiatives, and sales and marketing programs ahead of Microsoft’s introduction of its OneCare product.

GAAP net income was $95 for the June 2006 quarter. Non-GAAP net income equaled $248 million.

As John mentioned, we announced several actions during the June quarter to optimize our capital structure and increase our financial flexibility. We issued $2.1 billion in convertible notes, which have an effective conversion premium of 75%, or $27.32.

This relatively high premium was obtained by entering into two additional equity related transactions. We purchased a call option which will effectively neutralize the dilution associated with the convertible notes, which have a conversion premium themselves of 22.5%, equivalent to a stock price of $19.12.

We also sold warrants at $27.32 to create the 75% effective conversion premium.

The call options and warrants will have a limited near-term impact on our share count from an accounting perspective. The purchased call is anti-dilutive, and is thus ignored. The sold warrants only impact our share count once our stock rises above $27.32.

At stock prices above $19.12, our fully diluted share count will increase in line with the in-the-money value of the equity underlying the convertible notes.

Simultaneous with the issuance of the convertible notes, we established a $1 billion revolving credit facility. This facility remains un-drawn.

Using the proceeds of the convertible notes, we are already halfway through our new $1.5 billion share repurchase program. As a result, Symantec exited June with a cash and short-term investment balance of $4.1 billion.

During the quarter, we repurchased approximately $57 million shares valued at nearly $890 million, equivalent to an average price of $15.75. During the December quarter, our share repurchase activities will continue. We expect to repurchase approximately $975 million worth of our stock. This activity will complete our new $1.5 billion share repurchase program and will continue our progress towards the previous $1 billion share repurchase goal.

Also during the September quarter, we expect to use $520 million of our cash balance to retire the Veritas convertible notes, which will likely be put to us by their holders.

Our net accounts receivable balance at the end of the June 2006 quarter was $539 million.

Days sales outstanding, or DSO, was 38 days, in line with normal seasonal trends for the combined business.

Cash flow from operating activities for the quarter is expected to be between $340 million and $360 million. This compares favorably to the pro forma combined cash flow from operations of $318 million in the June 2005 quarter.

GAAP deferred revenue at the end of the June 2006 quarter was approximately $2.21 billion. Non-GAAP deferred revenue at the end of the quarter reached a record $2.24 billion. In fact, non-GAAP deferred revenue grew approximately $455 million, or 26%, as compared to the June 2005 quarter.

Deferred revenue also grew sequentially, despite what is typically a seasonally down quarter for deferred revenue.

On a non-GAAP basis, enterprise products represented roughly 60% of deferred revenue, with consumer products accounting for the remaining 40%. We expect about 60% or approximately $775 million of our September quarter revenue to come from the balance sheet.

Now I would like to spend a few minutes discussing our guidance.

In summary, we are on track to deliver on our previously announced expectations. Given the current business environment and an exchange rate of $1.26 per Euro, our forecast for the September quarter and FY07 are as follows:

For the September quarter, GAAP revenue is estimated at between $1.265 billion and $1.295 billion. Non-GAAP revenue is estimated between $1.275 billion and $1.305 billion;

GAAP earnings per share are forecasted between $0.11 and $0.12. The total stock-based compensation impact to the September quarter GAAP earnings per share is estimated to be approximately $0.03.

Non-GAAP earnings per share are estimated between $0.26 and $0.27.

For FY07, we are forecasting GAAP revenue of between $5.1 billion and $5.3 billion. Our non-GAAP revenue guidance for FY07 also remains between $5.2 billion and $5.4 billion.

We expect FY07 GAAP earnings per share to be between $0.46 and $0.56.

The total stock-based compensation impact to FY07 GAAP earnings per share is estimated to be approximately $0.12.

We are increasing our non-GAAP earnings per share guidance for FY07 by $0.06 to adjust for the additional $1.5 billion stock buyback program. As such, non-GAAP earnings per share are now expected to be between $1.06 and $1.16.

Given our planned completion of both repurchase programs, we expect fully diluted common stock equivalents for fiscal year 2007 to be approximately 980 million shares.

Lastly, we are reaffirming non-GAAP deferred revenue and cash flow from operations expectations for FY07.

Specifically, we expect deferred revenue to be in the range of $2.4 billion to $2.6 billion.

We expect cash flow from operations to be in the range of $1.5 billion to $1.7 billion.

With that, I would like to hand the call back to John.

John W. Thompson

Thanks, James. There are a couple of areas we plan to focus on to drive performance over the next few months.

In September, we plan to refresh our flagship Norton Security products -- Norton Antivirus and Norton Internet Security. Both of these products will offer enhanced protection from today’s threats, and represent industry-leading functionality when compared to all of today’s in-market competitors, including Microsoft’s OneCare.

Also during the quarter, we plan to launch an important new product called Norton Confidential that addresses the security requirements of identity theft and online fraud, protecting consumers at the moment they are conducting an online transaction. This is a high-priority launch because we feel it represents an incremental sales opportunity into our existing customer base. As such, we feel there is more potential for revenue lift in the current fiscal year with Norton Confidential.

Norton Confidential offers advanced website authentication and password security capabilities. Additionally, it includes features for protection against fraudulent websites and crime ware. As more and more customers are reluctant to divulge personal information and conduct important business online, Symantec is focused on the new threat landscape. We expect to have this product in the marketplace in October.

We plan to initiate our Norton 360 beta by late summer. Norton 360 will seamlessly integrate our best of breed security products, including all of the advanced functionality of Norton Confidential, along with our market-leading PC Health and back-up technologies, to offer protection from the threats impacting today’s digital lifestyles.

We will determine the formal launch timing of this product based upon customer feedback from the beta.

Our Norton product portfolio continues to evolve to address the ever-changing threat landscape, and I am confident in our ability to continue our category leadership in the consumer segment.

As the leading infrastructure software company, Symantec is committed to delivering innovative solutions to meet the changing requirements of our customers around the world. In order to sustain our technology and product leadership, we must continue to invest in our R&D teams around the world.

Our acquisition of Veritas and BindView significantly expanded our base of engineering expertise in India. We currently have over 1600 employees in the [Punay] region. This group focuses on product development, technology innovation, and localization.

Over the next six to 12 months, we intend to further expand our presence in India and expand our development operations in China. We also plan to further expand our internationally based technical support organization for some customer segments.

Our investments in these markets allows us access to the rich talent pool, as well as a rich customer base as we develop the worldwide footprint of Symantec.

In conclusion, I am pleased with our execution in the June quarter and the solid results against a very touch compare from last year. I am very proud of the tremendous efforts that the team put forth. I firmly believe that Symantec has a much stronger market position today largely due to our broad portfolio of award-winning technologies and our diverse base of enterprise and individual customers around the world.

I am looking forward to the remainder of fiscal 2007 as we ready ourselves for several important product introductions and a major brand campaign launch. More than ever, our customers and partners are looking to Symantec for IT risk management solutions across a full spectrum of operating platforms, and we look forward to delivering on those expectations.

Now I will turn the call back to Helyn to address your questions.

Helyn Corcos

Thank you, John. Lisa, will you please begin polling for questions?

Question-and-Answer Section

Operator

(Operator Instructions)

Helyn Corcos

While we are polling for questions, I would like to announce that Symantec plans to attend the following upcoming conferences: the Pacific Crest conference on August 8th and the Citigroup conference on September 6th. For a complete list of investor related events, please visit our event calendar on the investor relations website.

Lisa, we are ready for our first question.

Operator

We will take our first question from Adam Holt with JPMorgan.

Adam Holt - JPMorgan

Good afternoon. I have two questions, one on the consumer and one on the foundation suite. First on the consumer business, it looked like not only was revenue particularly strong in the quarter, but so were bookings. I was wondering if maybe beyond the mix strength, you could give us some of the dynamics behind the consumer business this quarter, particularly in front of some of the launches next quarter.

Secondly, foundation up double-digits in front of a major product release where you might see some transition. I was wondering if you could talk a little bit about what was behind that product in the quarter. Thank you.

John W. Thompson

On the latter one, which is the foundation suite product, I think it is really underpinned by the large deal transactions that we saw during the quarter. In almost every one of the multi-million deals, or $1 million and above deals, the Storage Foundation suite, or some component out of that product portfolio were a part of those transactions.

So the team is off to a very solid start, and we have now shipped the new capability that was announced back in May at our vision conference.

On the consumer side, Norton Internet Security continues to be the market-leading integrative security suite bar none. Even with Microsoft’s entry of OneCare into the marketplace, a number of independent research firms have continued to rate Norton Internet Security well above everyone else, and particularly strong against Microsoft’s OneCare solution. Norton Antivirus continues to be a strong product, but obviously with the 40%+ in NIS, what consumers are coming to realize is that they need to switch to a more feature-rich capability, as is reflected in Norton Internet Security. So we expect to continue to put functions and features into that product as we roll out Norton Confidential, Norton 360 and enhancements to Norton Antivirus.

Adam Holt - JPMorgan

Is it possible if you could just give us a sense of where you are in subs and maybe the totals for the potential subs number that you have?

John W. Thompson

We do not really disclose subs per se. We talked about having over 50 million active users of our products around the world, and we think that is a very, very strong base from which we cannot only upgrade people to new products but sell new capabilities like Norton Confidential into that base.

Obviously the announcement of our partnership with Yahoo! yesterday is a part of our strategy to grow our customer base, not just to mine the base of customers that we have.

Adam Holt - JPMorgan

Thank you.

Operator

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

Todd Raker - Deutsche Bank

Getting into the consumer side a little bit more, can you give us some insight in terms of what you are seeing from OneCare? With the incredible growth we have seen this quarter relative to the expectations, is it being driven by new channel strategies? What has really changed here in your mind?

John W. Thompson

We really have not changed our channel strategy at all, Todd. Our channel strategy forever has been to place Symantec’s products, the Norton branded products, in any channel where a consumer wants to buy, but do that with an eye toward balancing our growth in customers, revenue growth, and profitability. That strategy has been in place for seven years, and I do not see any reason to change that at this point in time.

With respect to OneCare, I think it would be fair to say that the summer months are always a challenging time to launch consumer products, so while we are pleased with our results, we do not think OneCare was a significant factor in the market at all, we are not going to sit back and rest on one quarter’s results for us or for Microsoft and OneCare.

Our team is sharpening their focus to deliver the products that are on our portfolio plan, and you will see us be even more aggressive as we exit the September quarter.

Todd Raker - Deutsche Bank

When you guys ship Norton 360 sometime this fall, how do you envision taking that product to market, given the nature of it? Is it going to be exactly like the existing product portfolio or is it just going to be selectively introduced in certain relationships?

John W. Thompson

No, I expect that product will be available in all channels, just as all of our others, when we decide to release it. We have not announced a release date. Our plan date for the beta is the late summer timeframe. Once we get feedback from that, we will then decide what the release date of the product will be.

Todd Raker - Deutsche Bank

Last question for you, with the discontinuation of the 5400 series, how do you guys see yourselves playing longer-term in the UTM market?

John W. Thompson

We do not.

Todd Raker - Deutsche Bank

Thank you.

Operator

We will take our next question from Sarah Friar with Goldman Sachs.

Sarah Friar - Goldman Sachs

Good afternoon. Again, on the consumer side, a quick question there. Can you give us any sense for the impact of the new product, that Norton save and restore product, and maybe it is less the actual revenue, but how many current customers signed up for that incremental product? Give us a sense for penetration right now.

John W. Thompson

Candidly, Sarah, I do not have the data in front of me. I would venture to say that it is relatively small, but as you well know, we do not give out product details anyway.

Sarah Friar - Goldman Sachs

Okay, so it is just beginning. To flip over to the enterprise side, bookings there if I look at it are still kind of low single-digit. Obviously, James, you made the point there is a tough year-over-year comp there, given the inclusion of the Veritas March quarter. What do you think is a more reasonable growth rate for the enterprise side of your business? Should it be a high single-digits, high-growth business in aggregate?

What are the particular product lines -- you did not mention email archiving, for example, much on the call, but what are the product lines that can really outpace that high single-digit growth?

John W. Thompson

We have not given up on building a business that has aggregate growth rate that is consistent with the addressable market. We run a product portfolio and a business portfolio here that covers consumes, mid-market and enterprise. That diversity I think is at the bedrock of the performance we had this quarter. That being said, we made the very explicit move to [inaudible] or reduce our investments in proprietary appliances so we could fuel growth in areas like e-mail archiving, like IT policy and security compliance, and areas that we think represent stronger long-term growth than the addressable market for the total company in aggregate.

We have not given up on driving very, very strong double-digit growth across our company.

Sarah Friar - Goldman Sachs

Thank you.

Operator

We will take our next question from Michael Turits with Prudential Equity Group.

Michael Turits - Prudential Securities

Two questions, one a follow-up on the enterprise side, and then one for James on the share count.

On the enterprise side, anything else you could tell us about, especially in the mid-market segment, about what are some of the factors were there? Obviously there were tough comps. What was going on with pricing? Obviously we have been tracking pricing over the last couple of quarters, but how is that and what products were stronger or weaker within that?

Then I have a question on share count.

John W. Thompson

In general, the products that are strongest for us in the mid-market relate to e-mail archiving, electronic message management, and anything around viral protection or protection technology.

What we did in the most recent quarter was allocate a significant increase in sales resources to target mid-market solutions where we could literally bundle certain products together with the channel to address a particular problem that a mid-market customer might be experiencing.

While it was the first quarter of that focus, we would expect it to build momentum, if you will, as the year unfolds. It is early to declare victory or lack thereof in the mid-market, but I think it is an important initiative for our team for sure.

James, I will let you comment on the share count.

James A. Beer

Do you have a specific question?

Michael Turits - Prudential Securities

First of all, did you have a common share equivalent guidance for the coming quarter? Also, if you would review the effect -- when the Veritas convert gets put to you, does that effect the share count? Also, you talked about the effect of the new converts when the stock price goes above 19. How does the hedge work against those and what is the effect on share count?

James A. Beer

We have not put out a guidance for share count for this September quarter, just for the full year that I mentioned.

The Veritas convertible notes, when those are put back to us, as I would expect they would be, that should not have any effect on share count.

Then, say again the last part of your question?

Michael Turits - Prudential Securities

The new converts, when you go above $19, how does it work with the hedge since you got the hedge?

James A. Beer

Well, from an accounting perspective, the rules work this way; because the bond hedge that we purchased, the lower-strike call is anti-diluted. It has no effect on share count calculations. Obviously, the higher-priced warrants that we sold, they will only have an impact on share count once stock exceeds $27.

At least in the very near-term, the driver of share count will be when the stock moves above $19.12. The way that works is that in essence, the in-the-money value that is created above $19.12 is then divided by the share price at the measurement period.

Say the stock price has got to $22. You take $22 minus $19.12 to get the in-the-money value, and then you divide that in-the-money value by 22, and that drops out the number of shares that you add to the share count. Is that helpful?

Michael Turits - Prudential Securities

Yes, thanks very much. If you could give a common share equivalent guide for next quarter, that would be even more helpful.

Operator

We will take our next question from Daniel Ives with Friedman Billings Ramsey.

Daniel Ives - Friedman Billings Ramsey

John, could you talk about the acquisition strategy in a little more detail? There is obviously some [inaudible] out there, fears that you guys will go after another big acquisition. You talk about [Tokken’s], can you define that maybe a little clearer in regard to is that $200 million, $500 million -- can you get that granular?

Also, were you possibly also in that bidding contest for RSA? If you could comment. Thank you.

John W. Thompson

We are not going to comment on market rumors because that is just inappropriate, I think.

With respect to our strategy, we have always had a view that we would look for acquisitions that fit the strategic intent of the company, hence be in the security and availability business, to look for ways that would expand the addressable market for our company in a way that is meaningfully impact-able, at least in a product area or in a new segment.

I do not think there is an appropriate metric to say we will not buy a company over this size or under that size. I think we have to look at what is going on in the market around us and make sure that we are prepared to digest whatever it is we plan to do.

I can assure you that there is no plan to do another Veritas-sized transaction anytime soon, but beyond that, I am not going to comment on pricing of transactions and transaction sizes.

Operator

We will take our next question from Phil Winslow with Credit Suisse First Boston.

Philip Winslow - Credit Suisse First Boston

I just have one question on the SMB side of the security market. I am just curious what you are seeing there. I think someone asked a question previously about pricing pressure, whether you have seen any of that come to bear, and if you still -- have you seen any sort of change in the competitive landscape there?

John W. Thompson

I do not think there has been a marked changed in the competitive landscape, as we have moved sequentially from the March quarter to the June quarter.

It is clear that the security market is tightening a bit, and I think you have seen that in the results published by some of our peers, our colleagues in the industry. Over time, it is our belief that the way you distinguish yourself is through new technology integration into the existing base of customers and capabilities that you have.

That is why Project Hamlet is so important to us. It extends not just our capability for compliance and new threat detection capability, it allows us to deliver a more integrated capability at the upper end of the marketplace and down into the mid-market as well.

The mid-market right now continues to be a target-rich environment, but it is also very, very competitive for sure.

Philip Winslow - Credit Suisse First Boston

Also, James, just from a deferred revenue standpoint, obviously stronger than expected this quarter. What should our thoughts be as far as growth or decline for the September quarter?

James A. Beer

Again, we have not tried to put out a specific piece of guidance for that, so I would not necessarily expect dramatic movements one way or the other. I think I would just leave it at that.

Operator

We will take our next question from Walter Pritchard with Cowen and Company.

Walter Pritchard - SG Cowen

Just one question, James, on taxes. I noticed on the balance sheet the accruals for taxes came down by quite a bit. If you could just comment on that and tell us what the impact was on cash flow, if any. Then I have one follow-up for John.

James A. Beer

The change in the deferred tax liability is driven by the fact that is where we record the tax benefit associated with the lower-strike call that I was referring to earlier, that was part of our overall financing initiative.

That is what drove that, so it would not have a cash flow from operations type benefit.

Walter Pritchard - SG Cowen

John, for you on the sales and marketing side, you talked about higher sales and marketing activity in the quarter around the OneCare launch. Just being a consumer and looking around on the Internet, I did not necessarily see a lot of visible pick-up in activity from you guys. What was that money spent on? In terms of looking forward, what should we look for as we get into the launch period here in terms of your activity around pushing the Norton brand?

John W. Thompson

We typically had a very strong launch program around all of our consumer brands, and I think the period of time leading into really October 10th, which is where we are gearing up for a big corporate brand launch, in addition to outlining our strategy for Security 2.0, not just for the consumer markets but for the enterprise markets as well.

So a lot of the spending in preparation for those activities will occur in early October will actually occur in the September quarter.

We did not spend incrementally a substantial amount more in the most recent June quarter primarily because the retail markets are fairly weak in the June period, and there was no need to do that in light of what Microsoft eventually did. There was, however, some incremental investment made in what we do with channel partners around specific rebates to try to drive demand.

Operator

We will take our next question from Phil Rueppel with Wachovia Securities.

Phil Rueppel - Wachovia Securities

Could you give us a little bit of color on the changes in the direct sales side? This was the first quarter of the combined sales force. Were there any implications on that sort of accelerating some of the big deal strength that you saw? Or are there still some regions or pockets of sales folks that are still finding there way and might cause further growth as we go further into 2007?

John W. Thompson

I am sure if you go somewhere in some country in some closet somewhere in the world you will find some sales rep who had not quite found his or her way, but in the main, this is an issue that is behind us. We have completely integrated our sales force. They have a responsibility to cover a single or in some instances multiple accounts. They have the full Symantec product portfolio at their disposal. They are supported by a management team that has been managing the full Symantec portfolio since we closed the transaction last July, and they are further supported by product, services and solution specialists that understand the details in a given product area.

So while I think there has been much ado about this transition and this change, I think Tom Kendra and his regional leadership team around the world did an absolutely phenomenal job to make sure that it was not only flawless in its execution but it was flawless in its deal flow impact for the quarter.

Phil Rueppel - Wachovia Securities

Given that deal flow and the preponderance of large deals that we saw, is that the kind of thing that we should expect, obviously with variation?

John W. Thompson

Well, we certainly hope so. I do not know how to forecast how deals will come through the pipeline, but I think our forecast for the year is reflective of strength in our business. James outlined what the forecast is in his earlier comments.

Phil Rueppel - Wachovia Securities

Thank you.

Operator

We will take our next question from Ed Maguire with Merrill Lynch.

Ed Maguire - Merrill Lynch

Good afternoon. Could you talk about patterns you may be seeing with maintenance renewals, particularly on the enterprise side, given the jump in deferreds?

John W. Thompson

Maintenance renewals for both traditional security and availability products are very, very strong. They underpin the importance of those products in the infrastructure that our customers have built.

You cannot very well back up a series of files or data sets with one product and then decide by the way, I am not going to renew the maintenance, because then you do not have the capability to bring that data set or file back into the operating environment.

You cannot very well have an anti-virus client running on a desktop and not renew the subscriptions associated with the updates for the most recent attack pattern that might have occurred in the marketplace.

We tend to focus very strongly at point of renewal at not just getting the renewal done but trying to upgrade or cross-grade other products into the portfolio.

So for back-up exec, we want to try to get back-up exec 10D, the new capabilities that are there. For Norton Antivirus or Symantec Antivirus product, we want to try to get the client security product that is a more feature-rich, price-rich product into the marketplace.

So the teams have several options that they can execute on at the point of renewal, and we think that is a terrific way to go about this.

Operator

We will take our next question from Gregg Moskowitz with Susquehana Investment Group.

Gregg Moskowitz - Susquehana Investment Group

Thank you. John, I’m wondering if you could address how back-up performed in the quarter, both for 10D and net back-up? Then, in the enterprise antivirus market, was the annual growth this past quarter pretty consistent with what you have seen recently, or was there any variance there?

John W. Thompson

We do not talk about specific product performance in a quarter, but I think it would be fair to say this is a very challenging compare on the Veritas or availability side of our business, because of the fifth quarter incentives that were put in place during the March quarter of 2005 within Veritas.

Back-up exec continues to be the market leader, bar none, by a huge, huge margin. So we do not have any reason to believe that we ceded or lost any market share during the most recent June quarter.

On the enterprise antivirus side, the top-end of the marketplace continues to be very tight and fairly well-saturated, and so every renewal is a very challenging transaction with customers as we engage and our competitors engage.

At the mid-market, there continues to be some opportunity there for sure, but as you have noted, or one of your colleagues noted earlier, their channel checks suggest that there might be some aggressive pricing going on, although we did not see a material change in pricing during the quarter.

The environment is pretty good. We have a great product portfolio. We have leadership capability. We will just keep on keeping on.

Operator

We will take our next question from Robert Stimson with WR Hambrecht.

Mr. Stimson, your line is open. Please pick up your handset or press your mute button. Sir, we are not able to hear a response. We will go on to our next question from Kevin Buttigieg with A.G. Edwards.

Kevin Buttigieg - A.G. Edwards

Thank you. Just on the geographic performance, I heard your comments during the prepared remarks, but it has been a couple of quarters now that the U.S. growth has been relatively flat, or certainly seen a significant degree of out-performance in growth coming from the Asia-Pacific region. I was wondering if you could expand on what is behind that relative performance.

John W. Thompson

I think it is a function of the maturity of the various markets and our penetration of those markets around the world. If you look at both the Symantec portfolio and the historical Veritas portfolio, we have had very strong penetration in the U.S., with far less penetration in regions of Europe or regions of Asia-Pacific, hence you are going to see stronger growth numbers coming out of those parts of the world. Our budgeting cycle and planning process acknowledges that as we set the targets for the various teams.

Typically, Europe will lag the U.S. in terms of penetration anywhere from 12 to 18 months. Typically, APJ, or Asia-Pacific and Japan will be 24 to 28 months in a lag. Hopefully we will be able to sustain the capabilities of growth in those regions and introduce new functionality into the Americas to get it growing equal to our planned expectations.

Kevin Buttigieg - A.G. Edwards

I do not know if you mentioned this or not, James, but the operating cash flow performance in the first quarter? I did not quite catch it, if you did.

James A. Beer

We have not finalized the operating cash flow statement yet for the quarter, but we are estimating that it is in a range of between $340 million and $360 million.

Kevin Buttigieg - A.G. Edwards

That is for the first quarter?

James A. Beer

Yes, this quarter just finished.

Kevin Buttigieg - A.G. Edwards

Okay. That is fine. I thought that was a reference to the second quarter cash flow.

James A. Beer

No.

Kevin Buttigieg - A.G. Edwards

Thank you very much.

Helyn Corcos

Lisa, we have time for one more question.

Operator

Our final question today comes from Chris Hovis with Morgan, Keegan.

Chris Hovis - Morgan, Keegan & Company

A couple of quick questions for you. One, given the shift that we are seeing in the enterprise towards more of info and risk management mentality, I thought for a while that services need to become a bigger part of your offering, and potentially could become a growth driver. Can you comment on whether or not you think you can build that internally, or is that an area you might have to go out and make a sizable acquisition?

John W. Thompson

Services is an important part of our solution strategy, and if you reflect on one of the transactions, actually two of the transactions I talked about, both of them had very, very important services components in order to make the products work and realizable in the environment that our customers have created.

We would view services as an area of investment for our company. That being said, it is not clear to me that there are a lot of sizable, to use your phrase, transactions out there to be done. We think it is more important that we have both skill and geographic coverage in the solution areas that are important to us around security, storage management, data center management, if you will, and those are the places that we will certainly continue to look, but they are likely to be small, boutique firms to the extent that we find something that we want to do.

Chris Hovis - Morgan, Keegan & Company

Thank you. If we look at the September guidance, it implies a pretty decent ramp in year-over-year growth. Is that solely due to confidence in the business, easy comps, or a combination of all of the above?

John W. Thompson

We certainly have enormous confidence in our business, but we also have the benefit, quite frankly, of getting to more normal compares. We have a combination of moving to a point of comparability in our ratable model for the consumer business and we have the strength of our fiscal second-half that is always strong for Symantec.

Operator

That concludes our question-and-answer session. I would like to turn the conference back to Mr. Thompson for concluding remarks.

John W. Thompson

I want to thank everyone for joining us on the call this afternoon. I want to particularly thank Team Symantec. They prove once again that by staying focused on execution, we can deliver a very solid quarter. I am proud of our team and I am particularly proud of our results. Thanks very much.

Operator

Ladies and gentlemen, this concludes the Symantec conference call. We thank you for your participation and you may disconnect your phone lines at this time.

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Source: Symantec Q1 2007 Earnings Conference Call Transcript (SYMC)

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