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Executives

Helyn Corcos - VP IR

Enrique Salem - President and CEO

James Beer - CFO

Analysts

Todd Raker - Deutsche Bank

Sarah Friar - Goldman Sachs

Kash Rangan - Merrill Lynch

John Difucci - JPMorgan

Philip Winslow - Credit Suisse

Rob Owens - Pacific Crest Securities

Brent Thill - Citigroup

Adam Holt - Morgan Stanley

Walter Pritchard - Cowen & Company

Aaron Schwartz - Ladenburg Thalmann

Brian Freed - Morgan Keegan

Michael Turits - Raymond James

Daniel Ives - Freedman Billings Ramsey

Steve Ashley - Robert W. Baird

Tim Klasell - Thomas Weisel Partners

Symantec Corp. (SYMC) F1Q10 (Qtr End 07/03/09) Earnings Call July 29, 2009 5:00 PM ET

Operator

Good day and welcome to Symantec's first quarter 2010 Earnings Call. Today's call is being recorded. At this time I would like to turn the conference over to Ms. Helyn Corcos, Vice President of Investor Relations. Please go ahead madam.

Helyn Corcos

Thank you Tom. Good afternoon and thank you for joining our call to discuss fiscal first quarter 2010 financial results. With me today are Enrique Salem, Symantec's President and CEO, and James Beer, Symantec's Executive Vice President and CFO.

In a moment, I will turn the call over to Enrique. He will start with a few comments about our quarterly activities and results, then James will provide financial and operational details, as well as discuss our guidance as outlined in the press release. Then will be followed by a question and answer session.

Today's call is being recorded, and will be available for replay on Symantec's Investor Relations website. A copy of today's press release and supplemental financial information are available on our website and a copy of today's prepared remarks will be available on the Investor Relations website shortly after the call is completed.

Before we begin, I’d like to remind you that our June 2008 period results included 14 weeks of activity versus the normal 13 weeks of the June 2009 quarter has. We outline the specific financial details of the extra week for you in our press release and supplemental information. Let me briefly review this with you.

Non-GAAP revenue for the June 2008 quarter included approximately $75.0 million of a one-time benefit and non-GAAP earnings per share included approximately $0.03 of a one-time benefit generated from the extra week. Non-GAAP deferred revenue included a one-time negative impact of approximately $5.0 million from the extra week. We will exclude the impact of the extra week when comparing our June, 2009 guidance and results to the June 2008 results.

Next, we will review our non-GAAP financial results focusing on constant currency growth rates, unless otherwise stated. For the March 2009 quarter, the actual weighted average exchange rate was $1.37 per euro and the end of period rate was $1.40 per euro, compared to our guided rates of $1.30 per euro. For the 2008 quarter, the actual weighted average rate was $1.56 per euro and the end of period rate was $1.58 per euro.

For revenue and operating expense purposes, current and comparative prior period results for entities reporting in currencies other than the U.S. dollar are converted into U.S. dollars at actual exchange rates in effect during the respective prior periods.

For deferred revenue, results are converted into U.S. dollars at the actual exchange rate in effect at the end of the prior period. We have included a summary and reconciliation of the year-over-year growth rates in our press release tables and in our supplemental information available on the website.

Given the rapidly fluctuating exchange rate environment, I’d like to remind everyone to apply the rules of thumb provided as a guide to estimating the impact of currency fluctuations on our financial metrics. It's important to note however, that these rules of thumb will move around based on the actual currency fluctuations and the mix of our revenue and expenses.

Although the divergent currency moves in the yen and the British pound versus the euro impacted revenue and expenses during the June, 2009 period, we are not making adjustments to our rule of thumb at this point. We will evaluate the fluctuations during the September period and provide an update next quarter.

Moving on, 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 stock-based compensation for the coming quarter contains forward-looking statements.

These statements involve risks and uncertainties that may cause actual results to differ materials from those set forth in the statement. Additional information concerning these risks and uncertainties can be found in the company's most recent periodic reports filed with the U.S. Securities & Exchange Commission.

Symantec assumes no obligation to update any forward-looking statements. In addition to reporting financial results in accordance with generally accepted accounting principles or GAAP, Symantec reports non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP results, which can be found on the press release and on our website. And now, I'd like to introduce our CEO, Mr. Enrique Salem.

Enrique Salem

Thank you, Helyn and good afternoon, everyone. Our ongoing focus on expense management resulted in earnings per share within our guided range. However, as of some our enterprise customers focused their spending on shorter term contracts, this resulted in reduced new license revenue in the period.

Therefore, we ended our first quarter with lighter than expected revenue, but with a stronger deferred revenue balance. Deferred revenue remains strong as customers continued to renew their maintenance contracts. During the quarter, we focused on a small number of priorities and we laid the ground work to drive improved execution during the second half of the fiscal year.

However, as our customers focus on purchasing fewer new licenses, this has put pressure on our ability to hold margins steady during the June quarter and has impacted our view of operating margins for the remainder of the fiscal year. In line with historical seasonal patterns, we expect our business to deliver better results during the second half of our fiscal year versus the first half.

This is partly due to expectations that IT spending will improve in the December period, as customers spend to their annual budget targets. As such, we remain confident in our strategy and business plans, and will continue to focus on improving execution. Now, I would like to review the details of our results.

Let me start with our consumer business, a bright spot for us in this period. I'm pleased with the performance of our consumer business. They delivered 6% year-over-year growth and grew nearly 3% sequentially. We're widely recognized as having the best consumer products on the market.

Our Norton 2009 products have won over 130 awards globally. No other U.S. company has won more than a handful of awards for their comparable 2009 products. We're continuing to drive innovation. A clear example is our new 2010 products, which feature an original approach to protection called reputation-based security.

With this new capability, codename Quorum, we are able to utilize the unrivaled data from our extensive, global intelligence network to statistically infer the likelihood of an unknown application to be good or bad, even if we've never seen it before. PC magazine called the beta version of Norton Internet security 2010 record breakingly effective. It is clear that we're widening our technical lead over our nearest competitors.

The products are expected to ship in September. From a distribution perspective, we're continuing to be focused and thoughtful when competing for OEM business. This quarter, we strengthened some of our OEM relationships and added several new ones. We expanded our relationship with Sony in three key areas of their business.

First, Norton Internet security is shipping on all biosystems in the Americas. Second, Sony is offering North American customers a protection suite that includes Norton Internet security and Norton Online Backup. And third, Sony made its Norton Online Backup agreement global, expanding into two new geographies.

Also, HP is now shipping a 30-day trial offer of Norton Online Backup pre-installed on all consumer desktop and Notebook PCs worldwide. And finally, we started shipping Norton Internet Security on all Lenovo Think branded systems in an exclusive multiyear agreement. We believe our top-notch security products, combined with our strong partnerships will enable Symantec to experience continued success in the consumer market.

Now, I'll turn to our enterprise business. Let me start with our security business. We started shipping our SMB offering in May, but due to the ratable nature of our security business, we expect to see a gradual benefit on our top line as customers adopt this new offering. During the quarter, we focused sales and marketing resources specifically on the SMB market.

We create an SMB specialization in North America and plan to roll out a similar focus in EMEA and APJ regions during the September quarter. We launched an aggressive campaign in which we reached over 18,000 partners through technical training events, site demos and joint partner sales calls to educate and train our partners on our new offerings.

The initial feedback from our partners has been very positive. Account managers at major resellers such as CDW, praise our ease of installation, service and technical support. In addition, just as you've seen in our consumer business, initial reviews of our enterprise security solutions have been strong.

PC World recommended our products specifically for small businesses. Our end point management business posted sequential growth this quarter as we saw combined security and management deals. We expect to see strong activity during the second half of the fiscal year, when Asset Management Suite 7.0, the last component of the total management suite, is shipped.

Furthermore, we believe the upcoming launch of Windows 7 will benefit our business over time. We are well-positioned as we migrated millions of units in the past and have built best practices to make the upgrade transition smooth and cost-effective for customers.

Our Software to Service business posted sequential growth as the sales organization continues to build traction with these services. We're starting to leverage cross selling opportunities for Online Securities Solutions within the Symantec customer base. We'll continue to expand our portfolio with new SaaS offerings.

Moving on to the storage and server management area, with the continued pressure on IT professionals to do more with less, we've seen fewer new data center projects resulting in fewer new license purchases. Nonetheless, our value proposition remains strong, given our software's ability to work in a heterogenous environment.

Our software management tools allow customers to lower costs and get better ROI from their hardware infrastructure. As a result, our global pipeline for storage resource management is currently three times larger than this time last year. Our Stop Buying Storage campaign is filling this potential, as we help organizations significantly reduce or eliminate near-term storage purchases through the identification and reclamation of unused capacity and the implementation of thin provisioning.

We saw steady performance of our backup and recovery products during the June quarter. It is clear that customers see our commitment equipment to help them reduce data, minimize complexity and commodotize infrastructure. Through our Deduplication Everywhere campaign, Symantec is moving deduplication closer to information sources.

Integrating Deduplication Technology is already available in net back-up and enterprise vault, and will be available in the new version of Backup Exec later this year. We'll continue to develop advanced deduplication features through our OpenStorage technology APIs to provide an industry unique interface that allows our partners to integrate with our backup technologies.

Also this quarter, we're shipping a new version of NetBackup that extends our leadership into Windows Enterprise segment and supports Microsoft Hyper-V. In conclusion, we remain confident in our strategy and business plans and will continue to be disciplined in our actions. We're focused on delivering superior products with an emphasis on improving the customer experience.

We're being more disciplined in our selling approach by making improvements to the deal review and account planning processes. We've laid the foundation from approved execution during the second half of our fiscal year.

I'll now turn the call over to James to provide the financial details of the quarter.

James Beer

Thank you, Enrique. And good afternoon, everyone. Unless otherwise noted, please be aware that all of the growth rates I will be discussing have been adjusted to take account of currency effects and the extra 14th week of activity in the June 2008 period. GAAP revenue was $1.43 billion. Non-GAAP revenue was $1.44 billion, and declined 4% versus the June 2008 period. We saw fewer large transactions this quarter, as customers put the emphasis on maintenance renewals over committing to new licenses.

It's important to note that the U.S. dollar strengthened 12% against the euro as compared to the year-ago period, reducing our international revenue as measured in U.S. dollars. As a result, foreign currency movements negatively impacted non-GAAP revenue by 5 percentage point's year-over-year or by approximately $75 million. However, currency affects positively impacted revenue as compared to the guidance we provided on May 6th.

Had currency effects remained at our guided rate for the June quarter, non-GAAP revenue would have been $1.42 billion. In addition, to foreign currency effects, the June 2008 period had an additional $75 million of revenue from an extra 14th week of activity, whereas the June 2009 period consisted of the usual 13 weeks of activity.

Looking at our geographic results, international non-GAAP revenue of $722 million declined 5% and accounted for 50% of total non-GAAP revenue. Asia Pacific Japan was up 1% while the Americas and Europe Middle East Africa region declined 3% and 7% respectively. Now, I would like to move on to our non-GAAP revenue by segment.

The consumer business generated revenue of $453 million, up 6% versus the June 2008 quarter. Electronic distribution represented approximately 80% of consumer revenue. Results were driven primarily by strong activity from our subscription renewals, OEM partnerships and online channels.

Norton 360 accounted for more than 30% of consumer renew and grew 35% versus the reported results in the year ago period. The storage and server management group generated revenue of $553 million and declined 8% as compared to the June 2008 quarter driven by fewer storage management license sales.

Our security and compliance group generated revenue of $342 million and declined 4% year-over-year. We moved our software as a service offerings out of the services group, leaving our services business to account for 7% of total revenue. Services generated revenue of $96 million and declined 15% compared to the June 2008 quarter.

Turning now to margins, non-GAAP gross margin was 85.5% for the June 2009 quarter, flat as compared to the year ago period. Our non-GAAP operating margin was 28.5% due to a lighter than expected revenue in the June 2009 quarter versus the year ago period, operating margins were flat.

GAAP net income was $73 million for the June 2009 quarter. Non-GAAP net income was $285 million. The June quarter's fully diluted GAAP earnings per share were $0.09. Non-GAAP fully diluted earnings per share for the quarter were $0.34 within our guided range. The June 2008 quarter EPS of $0.40 included a $0.03 benefit due to the extra week of activity.

We exited the June quarter with approximately $2.2 billion in cash and cash equivalents. During the quarter, we spent $123 million to repurchase nearly 8 million shares as an average price of $15.59. Our net accounts receivable balance at the end of the June quarter was $619 million. Day sales outstanding or DSO was 39 days.

Cash flow from operating activities for the June quarter was $371 million, primarily driven by strong collections and expense controls. Excluding the impact of the 14th week in foreign exchange movements, operating cash flow grew 1% compared to the year ago period. GAAP deferred revenue at the end of June 2009 was $2.97 billion.

Non-GAAP deferred revenue reached $2.98 billion, up 2% compared to the June 2008 figure, and above our guided range. Foreign currency movements positively impacted non-GAAP deferred revenue versus our guidance. Had foreign exchange effects remain at the guided rate for the quarter, deferred revenue would have been $2.91 billion, still above the midpoint of our guided range.

Now, I would like to spend a few minutes discussing our guidance for the September 2009 quarter. We're assuming an exchange rate of $1.40 per euro for the September 2009 quarter versus the $1.49 per euro we experienced during the September 2008 quarter equivalent to approximately a 6% currency headwind.

Furthermore, please note that the end of period rate for September 2008 was $1.38 per euro, equivalent to approximately a 1% currency tail wind versus our $1.40 per euro assumption. Our guidance also assumes a common stock equivalence total for the quarter of approximately 820 million shares and an effective tax rate of 29.5%.

For the September 2009 quarter, we expect GAAP revenue to be in the range of $1.395 to $1.445 billion. Non-GAAP revenue is estimated to be in the range of $1.4 to $1.45 billion, as compared to revenue of $1.52 billion during the September 2008 quarter. At the midpoint of the guided range, we expect revenue to decline approximately 4% in constant currency terms.

GAAP earnings per share are forecasted to be in the range of between $0.14 and $0.16. Non-GAAP earnings per share are estimated to be between $0.32 and $0.34 as compared to $0.37 in the year ago period. At the end of the September quarter, we expect GAAP deferred revenue to be between $2.747 and $2.847 billion.

We expect non-GAAP deferred revenue to be between $2.75 and $2.85 billion, as compared to $2.7 billion at the end of September 2008. At the midpoint of the guided range, we expect deferred revenue to grow approximately 2% year-over-year in constant currency terms. We expect about 70% or approximately a $1billion of our September quarter revenue to come from the balance sheet.

In closing, we'll continue to stay focused on effectively managing costs. However, at the end of the June quarter, we saw more customers focusing their spending on shorter term contracts, which resulted in lower new license revenue and lower reported operating margins year-over-year for the quarter. This has both influenced our thinking around setting guidance for the September quarter and impacted our view of the full year.

As a result, we're now projecting our reported FY '10 operating margins to decline between 100 and 150 basis points, as compared to FY '09. And now, I'll turn it back to Helyn, so that we can take some of your questions.

Helyn Corcos

Thank you, James. Tom, will you please begin polling for questions.

Question-and-Answer Session

Operator

Yes madam. (Operator Instructions). We also ask you that you limit yourself to one question and one follow-up today. That is star one at this time to ask a question.

Helyn Corcos

While Tom is calling for questions, I would like to update you on a few upcoming events. We'll be presenting at the Pacific Crest Conference on August 10th, at the Citigroup Conference on September 10th and at the ThinkEquity conference on September 16th. We'll be reporting our fiscal second quarter results on October 28th. For a complete list of our investor-related events and activities, please visit our events calendar on the IR website. Tom, we're ready for our first question.

Operator

Thank you. That question comes from Todd Raker with Deutsche Bank.

Todd Raker - Deutsche Bank

So, Enrique, if I look at the growth profile of Symantec today, clearly it's been disappointing, some of that is macro driven, but how much in your mind is competitive driven? And can you give us some insight in terms of where you think you stand competitively in the various business units and how we should think about kind of holes in the product portfolio or executional challenges going forward?

Enrique Salem

So, Todd, as I look at it, if I look at the consumer business, I'm pleased with how we did there. You know, the products are doing great. I mean we're widening our lead there. I mean, 130 awards for the Norton family of products. Clearly, I mean the very best on the market. And so I think we're doing well there. I think that team has put a beta out that is outstanding. I mean the initial review from PC Magazine is probably one of the best reviews I've seen in the last several years if not ever. So, I think that team is executing very, very well.

If I turn my attention to the enterprise business for a moment, and I look at large enterprise, I think what I see is our security business specifically end point, the current version of the SEP is doing well. I had a number of displacements in the quarter where we've replaced competitors. And I think that is continuing to do well for us.

I think the storage business in large enterprise, specifically we're definitely doing well. The most recent data from IDCU that was published in Q1 showed that we actually gained market share in Q1. That's the IDC data. And I think what we're seeing though is in large enterprise, that a lot of the contracts used to be a three-year kind of deal. We're seeing people buying licenses for one year at a time.

And so that's specifically putting pressure on the business. But, I do see that we're performing well in large enterprise around storage. And if I move to the mid market, we shipped SEP small business last quarter. I think that that has been received well by partners. I think there's more work to do in SEP in the SMB segment with the SEP product line to get it into the marketplace, and to drive the adoption.

And so, if I continue to see a place where we should see improvement over the next several quarters, it would be in the SMB segments. And that would be a place where I would tell you we've improved what we've got. Now, we've got to go close the business and I think you'll start seeing that results in a ratable nature given what I see the security business's current RevRec policy. So, my sense to it is, the biggest area for improvement that's in our control is in the SMB segment around our SEP offering and I think the products there, I think our partners and the reviews have been good. And now it's a matter of closing the business.

Todd Raker - Deutsche Bank

Okay. And one quick follow-up. What percentage of revenue in this quarter came off the balance sheet? I know you guys are guiding for 70% in the September quarter, but what was the metric this quarter?

Enrique Salem

That would have been just a little shy of a $1 billion or so would have come off the balance sheet.

Operator

And we'll take our next question from Sarah Friar with Goldman Sachs.

Sarah Friar - Goldman Sachs

Good afternoon. Two questions for you. Enrique, as you look at the pipeline and what you're seeing in the business, do you think you're at a point where you're starting to at least see a trough or more stabilizing? And then I have a follow-up just on the year margin guidance.

Enrique Salem

I think when you look at our pipelines, I think our pipelines right now, we definitely see the ability to support the guidance that we've given. My sense, Sarah, is as I look at IT spending, I do think people are still looking for the short term ROIs. I don't think that that's changed in anything that I've seen in demand. I do believe that at least in some of the discussions I've had, that we will see a year end budget flush. How meaningful it will be is yet to be determined, but I do see some strength going into the back half of the year. But again, I'm comfortable with where our pipe lines are right now for the current guidance that we've given.

Operator

And we'll take our next question from Kash Rangan with Merrill Lynch.

Kash Rangan - Merrill Lynch

Thank you very much. I was curious, if you could quantify SMB as a percentage of your security and compliance business unit just as to gauge how much of an incremental impact you could have with the SEP for SMB. Secondarily, if you look at the storage business, maybe that's where you're feeling most of the macro impact relatively speaking. We're hearing from other software companies that they're definitely starting to see some stability and potential signs of improvement. I was wondering if you guys are seeing that in a lagged way, you're not seeing that or perhaps you're seeing that but not quite confident that you want to talk about it on the conference call. Just give us some color commentary, as you look at the forward-looking tone of business and how some of the indicators might or might not improve. That's it for me.

Enrique Salem

So, Kash, on the first question, I would say roughly about 40% of the security and compliance segment is in the SMB. That's a rough number, and that will vary quarter-to-quarter. I think your comment is right on the storage and what we're seeing from a specifically kind of server sales, and how much incremental new demand is in the marketplace. I also think that in those agreements, customers historically, and when I say historically, prior to the last several quarters, had bought new licenses that were let's say for a three-year period.

So, let's say that they were buying 1,000 new servers a year, they buy 1,000 agents for each of those second and third years. What they're doing now is they're saying I'm buying the agents for the current year and what I'm confident I'm going to deploy. So, that's the distinction that I think we're seeing in the difference. I think as far as demand, look, I think that as I talk to IT buyers around the world, they are definitely are interested in what we're selling. There's definitely demand.

And I think that there is probably more confidence on the buying side. I think calendar Q1 was a quarter where we definitely saw buyers being a little bit more anxious. I think they have become a little more confident in the ability of their businesses to perform. I think there's definitely continued interest in both the secure and storage businesses. So, maybe that's what you're seeing or picking is that there is a little more confident in the buyer than we have probably seen in the first two quarters of the calendar year.

Operator

And we do have a question from John Difucci with JPMorgan.

John Difucci - JPMorgan

Thanks. Just a quick follow-up there to Kash's question, Enrique, just so I understand this. So, people are buying less capacity. They're not buying future capacity. They're buying the next year's worth of capacity instead of the next three years' worth of capacity and because of that, you're seeing - it takes almost the same amount of costs other than the commission that you have to pay the salesperson. So, that's why that has a negative impact on margins. Do I have that correct? Because I didn't quite understand what you guys are talking about on the call until?

Enrique Salem

There's two components to it. I think you definitely hit, I think it is true. The expense structure will be nearly comparable. But, also you get a little bit less revenue yield, because you're basically saying you get the revenue for one year instead of getting revenue for years two and three. Because the way revenue recognition works is that if you get paid for the licenses, so let's say I buy the 3,000 agents for the three years, the 1,000 for each year, if that gets paid up-front, which is how customers have typically done it, we recognize that revenue in period. And so what it does is this effect of what we're seeing is the expense side of it is pretty comparable, and maybe a little bit different on commissions, as you said. But, the amount of license revenue in period is going to be a little bit lower.

John Difucci - JPMorgan

And just one thing, because on this same subject, a couple of times, both you and James mentioned it. I just want to make sure because it almost sounded like you were paying and talked about maintenance mix and it almost sounded like you were paying similar commission rates on maintenance renewals as new license, and I just want to verify that that's not the case.

Enrique Salem

There are differences in what we pay ultimately and it varies not only by license versus maintenance, it also varies on what we do per segment. So, there is definitely differences. So, if there's something there that we should dig into on the statement we made, we'll look back at that but there are definitely differences.

James Beer

And with the lower revenue that we reported in periods, absolutely came lower commissions.

John Difucci - JPMorgan

And just one quick follow-up. And it’s surely goes on with a couple of the other questions, too. Because I just want to be clear here. The numbers coming out here really do imply that Symantec hasn't seen a bottom yet, because it looks to me, anyway, on an organic constant currency basis that your growth rates have declined and they continue to decline and they actually continue to whenever yet even looks sort of like it is going to get worse. So, you get a little confidence in it but in fact it is even a little bit worse than that. So, I mean obviously you're trying to do some things to change the operations of the company and improve the efficiencies but we're not seeing that yet either. Just curious, are there some secular issues in some of your businesses that just - I mean you can control some of the things but there's just something you just can't.

Enrique Salem

We spend time, analyzing what were all of the different dimensions of the business by product line, by segment. And I do think, as we look at the current environment, I don't expect that people are going to start buying years two and three again any time soon. I just don't think that's going to be a big change. And so that's one thing I would tell you that I think will be consistent probably through this year. And maybe we'll see a little difference in December. But in general, I don't expect to see a change there in the September the quarter, because they're going to do what they did in June as far as the term of the agreement

John Difucci - JPMorgan

On that one point, because that's important. So that is in the guidance, but it wasn't I guess, in the guidance for the June period you had assume that they were going to continue to buy at I guess longer terms than they actually did.

Enrique Salem

Correct. Correct.

Operator

And we'll take our next question from Philip Winslow with Credit Suisse.

Philip Winslow - Credit Suisse

Hi, guys. Just a question back on license revenue. I guess that’s been an area of softness for a couple of quarters now. When you kind of look going forward, what do you think the license revenue growth rate is for the next couple of quarters and can we actually get back to the point of growing license revenue year-over-year and what do we really need to get that? Is it a turnaround in the small midsize business or is it some sort of stabilization in storage?

Enrique Salem

I think you're on the right point. I think we've got to see the SMB segment improve and I think in my earlier comments is that there is that there is a ratable nature to securities. So, as we start booking business in security, you'll see that in revenue over a period of time. I think that the other thing that is important for us to continue to do, to drive new license is we've got to do a better job, in my opinion, of cross selling the portfolio.

We're in every major account in the world and we've got to get more of the portfolio and so that speaks specifically to one of the priorities that I've set for our team, which is on the integration of our technologies, and so how do we bring Enterprise Vault and Net Backup together. How do we bring Enterprise Vault and Backup Exec together. Because, what that does is we can go back into the base and sell those products. And so my sense, at this point, is the thing that's going to help us drive improved license is more work in the SMB segment and better cross selling.

Philip Winslow - Credit Suisse

And then also, just a sales force efficiency perspective, obviously you have a sales force and sales for storage and storage but then also product specialists. Would you ever consider splitting that sales force back up, sort of allow Symantec in [various task] focusing on storage, and then one on security?

Enrique Salem

I think that we're always look at what improvements we need to make and in the large enterprise, and the biggest customers in the world, we tend to really believe that you've got to have one account manager that's trying to work across the organization. That doesn't mean that there isn't an opportunity for - you called it splitting lanes, but having a group of people who just focus on security and a group of people that focus on storage. And so we're always looking at that. We've actually done a couple of tests recently that we've started to see if there is some improvements in overall sales productivity. But, it's something that we've done in very small areas. It is going to take us a little longer to determine if that yields inefficiency. So, I wouldn't expect anything like that as far as a change in this fiscal year, because these are the kinds of things that we have to measure very carefully. But, you're on the right theme, which is we're going to focus on how do we improve overall productivity at the company and how do we improve productivity in our sales and marketing functions.

Operator

And we'll take our next question from Rob Owens with Pacific Crest Securities.

Rob Owens - Pacific Crest Securities

Yeah, thanks. On the margin front, Enrique, you talked about five points in five years. And obviously this year is a bit of a reset, but is there still the focus around expense controls and revenue growth that should get you that type of target in your view?

Enrique Salem

So, Rob, I think at this point we absolutely believe that our goal as stated is 100 basis points of margin improvement per year. This year, I think you said it correctly, is that we're looking at a little bit different environment, and so the notion of 500 base points over a five-year period, starting from where we have currently set the expectations is what you should expect.

Rob Owens - Pacific Crest Securities

And then second, can you talk about the linearity in the quarter and just how it started versus how it ended?

Enrique Salem

Yeah, I think when you think about the linearity, this quarter tends to be fairly weighted toward the month of September, because specifically in Europe, you get significant holidays in both July and August.

Rob Owens - Pacific Crest Securities

I was referring to the June quarter. I'm sorry.

Enrique Salem

I'm sorry. I misheard you. So, in the June quarter, I don't think I saw anything dramatically different in the area. We keep very close eyes on that and I think the overall thing that I did see was what I had mentioned on the new license, but maybe James you have other data?

James Beer

You saw obviously the year-over-year decline on a constant currency 14th week adjusted basis for Storage and Server Management group. A higher proportion of sales in that group tends to come right at quarter end.

Rob Owens - Pacific Crest Securities

And with regard to that you talked about shrinking duration. But you guys think you're seeing any deferral in front of the major upgrades that are coming in the second half to the storage business?

Enrique Salem

You know, Rob, the field hasn't commented on that. We're prepared for the Windows 7 migration. But, I don't expect that to start until potentially a few months after the initial release. What I'm hearing from a few customers is the concept that they may not wait for Service Pack 1 and given the work that we've done historically with our Altiris technology, I actually expect us to be able to be in a great position to help customers with that migration.

Rob, I just want to go back on the first question you asked, just to make sure I'm clear is we're still saying that we're looking to drive 100 basis points of margin improvement on average over a five-year period, starting from this new reset point. And while this year, we're at the new levels that James described, that's our long-term goal.

Operator

And we'll take our next question from Brent Thill with Citi.

Brent Thill - Citigroup

Hey, Enrique. Can you just comment on the international markets, obviously important stream of half your revenue. Do you see Europe bottoming out in the second half of this year? Do you still predicting a tough second half for Europe?

Enrique Salem

Yeah, I think when I look at it, you've got the - U.K. as a very financial services dominated market and so I think that that's going to continue to be a difficult market. I've also seen outside of Europe, seen some weakness in Japan. That market has been fairly sluggish and I don't know how quickly that's going to turn around. But, I think the U.K. definitely will continue to be financial service driven and that market is not as healthy as we've seen in the past. And I think, Germany also has struggled and we'll see how quickly that can turn around.

Brent Thill - Citigroup

Okay. As a quick follow-up on the maintenance renewals, I think you said they were still strong, that now considering the shorter duration, is there more strain, as you go back to the renewal that you're seeing on some of the new cycles or is there really nothing new on the maintenance renewal side?

Enrique Salem

No, I'm pleased with the strength of the maintenance renewals. I think the price points and the actual renewal rate has actually been where I would expect, and has not changed from what we saw 12 months ago or in the June quarter of the previous fiscal year. The specific issue is more on the duration of new contracts.

Operator

We'll take our next question from Adam Holt with Morgan Stanley.

Adam Holt - Morgan Stanley

Thank you. Two questions about the consumer business. It sounds like you had a improved performance in the quarter, net the difficult comparison in currency. When would you expect to start to see the impact to some of the recent investment on the OEM side? And then secondarily, does the more conservative operating margin guidance include more aggressive investments in OEM deals or is it principally due to the revenue production?

Enrique Salem

Yeah, I think let me comment on the first. I think that we continue to work on the improvements, Adam, in the consumer business. I mean I think that team is product side strong and you should expect to continue to see us improve, what I would call the overall performance of that business on the financial side.

But it is very ratable. So, everything that we do in consumer takes obviously a little bit longer to materialize, but I'm pleased with that performance. I think your comment about operating margins, I think what we're planning for really is the current environment, what you saw in licenses. And we wanted to make sure that we took into account what we saw in the previous quarter.

James Beer

I just add to the first question, Adam, that the OEM arrangements that we've won in this past quarter that we noted and in the previous quarter as well, we have a very good batting average in the last couple of quarters in particular. They'll start to help us in the back half of this fiscal and then in the first half of the following fiscal year. So, the HP deal continues to perform well for us, obviously they've been taking share from Dell in recent times. And so we, continue to be pleased by the performance of that arrangement and that's been more of a driver of current performance.

Operator

And we'll take our next question from Walter Pritchard with Cowen & Company.

Walter Pritchard - Cowen & Company

Hi, James. Just wanted to go back to the comment around the shorter term licenses driving part of the shortfall. I'm wondering first of all that was something that was seen both across security and storage or just security.

Enrique Salem

I would say it was a type of both of the businesses. So, we're seeing customers really taking the attitude that they'll spend on what they need for their more immediate needs. That's very much driven by budgetary constraints and those are impacting really all aspects of the IT department.

Walter Pritchard - Cowen & Company

Got you. And then just relative to the accounting treatment on those licenses, I mean, they sound a bit to me like term licenses given that customers are buying multi-years and that's their option. But, yet it sounds like you take that up-front. My impression was the vast majority of your license revenue is actually perpetual in nature. And I guess just trying to understand the accounting treatment and then how widespread this type of licensing is within the base year of your license revenue.

James Beer

You're right. We're generally talking about perpetual licenses. There are just in these smaller deals that Enrique has been referring to. They're just fewer of them, and so there's less take in period revenue. License commitments on a per user or a per server basis.

Operator

And we'll take our next question from Aaron Schwartz with Ladenburg.

Aaron Schwartz - Ladenburg Thalmann

Good afternoon. I just wanted to substantiate the comments you made about the pipeline in the license outlook. As you start to convert that pipeline of revenue and as the revenue environment gets a little more favorable, should we expect your model to become increasingly ratable, if you have some success in bundling transactions?

James Beer

There may be some trend towards that but any movement there would be relatively gradual based upon the scale of our overall business.

Aaron Schwartz - Ladenburg Thalmann

Okay. And the second question I had was on the Altiris business, if you could just help us out in numbers of walking through the mechanics of that? Are most customers that have already purchased that current with the maintenance, so they wouldn't have to re-license the product around Windows 7 or does that have a lower maintenance attach-rate, where this would create a product cycle for you?

James Beer

As I look at it, I'm pretty sure that our maintenance agreements around Altiris are consistent with the rest of our business. And so, I don't think I see anything that would indicate that customers would not be on maintenance. Now, we shipped the Client Management Suite and Server Management Suite for Altiris at the end of the March quarter. And so, we're just at the very beginning of what I would call the upgrade cycle to the 7.0 product. The other comment that I made today is that we still got one more component, the suite to ship that will complete the Total Management Suite. And so, my expectation is that we're still just at the beginning of that upgrade cycle.

Aaron Schwartz - Ladenburg Thalmann

Okay. And that should accelerate with the Windows 7 release?

James Beer

I think that will motivate people to absolutely make sure that they're current and can use the new tools to do the migration.

Operator

And we'll take our next question from Brian freed with Morgan Keegan.

Brian Freed - Morgan Keegan

Thanks for taking my call. You guys have talked a fair bit about growing the SMB side of things. Can you talk a little bit about the impact of both gross and operating margins from a shift more towards a channel centric model and kind of what are your targets for business direct versus indirect outside the consumer side of things.

James Beer

Well, the channel's always been a really important part of our overall distribution picture. And I would characterize what we're really speaking about here as getting back to the type of strength that we had in this domain 12, 18 months ago. So, I don't think that there will necessarily be a material shift around the margin profile of the business overall. I think we can do better in SMB now that we have our new product out there as Enrique said earlier generating very strong reviews, ease of installation is of particularly important aspect for small, medium size businesses, obviously.

So, I think we've got some share to win back. We can do that with the new product that we have, and as we build that share, then clearly, that should help our margins to some degree. But, I think we're more returning to where we were in a competitiveness standpoint 18 months ago.

Brian Freed - Morgan Keegan

Okay. And do you have any specific targets for that mix over time?

James Beer

The mix between the direct and SMB?

Brian Freed - Morgan Keegan

Between direct and chance driven.

Enrique Salem

I think when you think about our business, at this point, my expectation is that we are going to see an increasing percentage of our business go through the channel. And that's my expectation, that's the message that we've communicated internally and externally to our partners. And the reason is that given the breadth of our portfolio and some of the things that we are doing at this point, I'm convinced that our partners become increasingly important and that means that we'll see more business going through our channel.

Operator

We'll take our next question from Michael Turits with Raymond James.

Michael Turits - Raymond James

Hey guys two questions. One on revenue, one on cash flow. On the revenue side, I just wanted to take another shot at second derivative question. Since some other tech and software companies seem to be seeing an easing of the declines or slight improvement, and you didn't, it got worse this quarter. Is it clear that your worsening is from macro or do you think it is worse than a competitive situation?

Enrique Salem

I think from a competitive perspective, we're in a good position, I'm very pleased. As I speak with our team, I definitely get the sense that people are very confident in the portfolio. We are seeing license weakness as we've talked about, and it's really driven by the duration of what people are going to buy right now. So, I would say it's best product we've had in a long, long time. And you know, the stop buying storage campaign, which drives sales of our storage resource management tools is building a very good pipeline.

Michael Turits - Raymond James

And then, the question on cash flow, the maintenance is stronger than new license and deferred was actually pretty good this quarter. So, how should we think about what will happen with cash flow for the year? You would think that would look slightly better than what we would see on the income statement. I know you're going to have a higher cash tax rate, but ex that higher cash tax rate, can you give us any sense of direction on how cash flow might hold up last year to this year?

Enrique Salem

Well, clearly, the impact of lower license activity that we've been discussing thus far this afternoon, also feeds through into cash as well. Obviously, cash is always going to be lumpier from one quarter to another. But, as we were mentioning, customers are under their own budgetary constraints and they're buying more for their immediate needs, and so I think there will be a linkage between that thought and cash flow.

Operator

We'll take our next question from Daniel Ives with Freedman Billings Ramsey.

Daniel Ives - Freedman Billings Ramsey

Can you just speak to the second half. You talked about re-acceleration and growth. And just talk about what's your profile we've seen on the top, as well as on the margin, where is Symantec sequentially throughout the year.

James Beer

Sorry, I want to make sure I'm clear on the question. The profile.

Daniel Ives - Freedman Billings Ramsey

Yeah, just you talked about second half re-acceleration. So, how should we think about, it ramping after we get through next quarter?

James Beer

I think the way I look at it, and the way we've been thinking about it is we think that there is clearly - our business is seasonally driven into the December quarter and then we go into the March quarter which is our fiscal year end. And so, that's one of the things we're expecting. We're also expecting that the macro economic environment will still see a good year end budget flush, which we saw last year. So, I expect that to happen again.

Enrique Salem

Yeah, I would say that the March quarter is generally relatively flat versus the December quarter. It's the December quarter where we tend to see a more significant ramp up sequentially, both around top line revenue, around the margin generation capability, therefore as a company the two are clearly very much linked.

Daniel Ives - Freedman Billings Ramsey

And just to get margins?

Enrique Salem

So, again, margins, I would expect them to be building sequentially between the September and December quarter, and then March to December, much more of a flatter to down. In this last year, we saw down sequentially between December and March, and I wouldn't be surprised to see the same type of pattern this year.

Operator

We'll take our next question from Steve Ashley with Robert W. Baird.

Steve Ashley - Robert W. Baird

Just like to ask about the information management business. First of all, how that performed relative to your expectation. And if that business was also impacted by the license duration phenomena that hit the storage business?

Enrique Salem

Yeah, I think when you look at our business, the position that we have in the information management back-up and recovery is continuing to do well for us. Customers are continuing to move to the disk-based capabilities, our pure disk offering is doing well. We're also seeing that deduplication is very top of mind for customers. The work that we've done to move it closer to what people are trying to back up, so closer to the source, I think is proving to get people very interested in that technology.

Now, there is the exact same impact because people buy and customers buy the backup agents and they're buying backup agents for their various servers. And so that definitely has the same impact that we talked about on the storage side.

Steve Ashley - Robert W. Baird

Great. And then just maybe lastly, a housekeeping question, James, do you know what the FX impact was on operating expenses year-over-year?

James Beer

Year-over-year? That would have been of the order of $50 million if I'm remembering that correctly. We can confirm that for you.

Helyn Corcos

Tom, we're ready for our last question.

Operator

Yes, madam. And that question comes from Tim Klasell with Thomas Weisel Partners.

Tim Klasell - Thomas Weisel Partners

Okay. First question has to do with just a housekeeping one. How did Backup Exec do during the quarter since it's a more of an SMB focused product?

Enrique Salem

I think that when you look at it across the geographies, I think it was consistent with the last quarter, what we've seen. And you know, my expectation is we're in an upgrade cycle for that product as we go into the integration of some of the archiving capabilities. But, I haven't seen anything that's concerning NBE.

Tim Klasell - Thomas Weisel Partners

Okay. Glad to hear the maintenance renewals remain strong but are you seeing customers want to see shorter payment periods, particularly for the large maintenance contracts. For the maintenance, or let's say a large net back-up, three-year maintenance contract. Are you seeing them wanting to pay on an annual basis or seeing any impact there?

Enrique Salem

Well, maintenance is usually paid for on an annual basis, anyway so nothing really has changed in that regard, and we've been very pleased really with our collection statistics of various credit profiles with our customers.

Well, thanks, everybody for joining us on the call today. We've clearly laid the ground work to drive improved execution and we're going to continue to focus on tight expense management. We are excited about the new products that we'll be shipping later this year. And some of the improvements and some of the products specifically are the consumer 2010 products, Backup Exec 2010, NetBackup 7.0 and the Altiris Total Management Suite. I look forward to providing you another progress report next quarter. Thank you very much.

Operator

This does conclude today's conference call. We appreciate your participation. You may disconnect at this time.

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Source: Symantec Corp. F1Q10 (Qtr End 07/03/09) Earnings Call Transcript
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