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Symantec Corp. (NASDAQ:SYMC)

Q310 Earnings Call

January 27, 2010 5:00 pm ET

Executives

Helyn Corcos - VP IR

Enrique Salem - President and CEO

James Beer - CFO

Analysts

Perry Wong (for Heather Bellini) - ISI Group

John Difucci - J.P. Morgan

Kash Rangan - Merrill Lynch

Sarah Friar - Goldman Sachs

Phil Winslow - Credit Suisse

Todd Raker - Deutsche Bank Securities

Rob Owens - Pacific Crest Securities

Reed in for Brent Phil – UBS

Brad Zelnick - Macquarie Research Equities

Katherine Egbert - Jefferies & Company

Brian Freed - Morgan, Keegan & Company, Inc.

Daniel Ives - Friedman, Billings, Ramsey & Co.

Steve Ashley - Robert W. Baird

Tim Cossel - Thomas Weisel Partners

Robert Breza - RBC Capital Markets

Operator

Good day and welcome to Symantec's third quarter 2010 earnings conference call. Today's call is being recorded.

At this time, I would like to turn the call over to Ms. Helyn Corcos, Vice President of Investor Relations. Please go ahead.

Helyn Corcos

Thank you and good afternoon. Thank you for joining our call to discuss fiscal third 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 discuss how Symantec executed during the quarter. Then James will provide highlights of our financial results as well as discuss our guidance assumptions as outlined in the press release. This 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 Relation’s website at Symantec.com/invest. A copy of today's press release and supplemental financial information are also posted on our website, and a copy of today's prepared remarks will be available on the website shortly after the call is completed.

Before we begin, I’d like to remind you that we will review our non-GAAP financial results focusing on year-over-year constant currency growth rates unless otherwise stated in the prepared remarks.

Sequential growth rates are based on as reported basis. For the December 2009 quarter, the actual weighted average exchange rate was $1.48 per Euro and the end of period rate was $1.43 per Euro, compared to our guided rate of $1.47 per Euro.

For the December 08 quarter, the actual weighted average rate was $1.32 per Euro and the end of period rate was $1.39 per Euro. We’ve included a summary and reconciliation of the year-over-year growth rate in our press release tables and in our supplemental information provided on the website. Given the rapidly fluctuating exchange rate environment, I’d like to remind everyone to apply the rules of thumb provided on our October 28th call as a guide to estimating the impact of currency fluctuations on our financial metrics.

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 quarter contain forward-looking statements. These statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in the statements. Additional information concerning these risks and uncertainties can be found in the company's most recent periodic reports filed with the SEC. Symantec assumes no obligation to update any forward-looking statements.

In addition to reporting financial results in accordance with generally accepting accounting principals 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 in the press release and on our website.

And now I would like to introduce you to our CEO, Mr. Enrique Salem.

Enrique Salem

Thank you, Helyn, and good afternoon, everyone. I'm very pleased with the solid execution by our team during the December quarter. Our focus on a few priorities enable us to achieve better than expected results.

We also benefited from a stabilizing economy and a moderate IT budget flush.

The continued strength of our consumer business along with our sales and product initiatives and our Enterprise security and compliance portfolio drove the strength of our results of this quarter.

Looking across the geographies, Europe generated strong bookings. The Americas saw continued demand in the government sector and Asia was driven by strength in China and Australia.

We also saw a rebound from customers in the financial services vertical worldwide.

Sales activity continue to improve as the sales force effectively utilized the broader Symantec portfolio to take advantage of up-sell and cross-sell opportunities.

During the quarter, 39% of our deals over a million dollars included sales from both our security and storage segments.

Our focused sales initiatives implemented over the last few quarters are starting to have a positive impact on our execution. Numerous competitive deals with companies in various industries and countries around the world.

Our security compliance business benefited from selling solutions rather than just point products. Data loss prevention and compliance solutions posted double digit bookings growth this quarter.

Barkley’s, a global leader in banking and asset management, signed a multi-year contract spanning our product portfolio. The deal allows Barkley’s to reduce cost by decreasing their vendor count, standardizing technology across multiple business lines, simplifying complex IT processes and taking advantage of both our on-premise and hosted solutions.

This is one of the many examples which illustrates that hosted services is an opportunity for us across Enterprises of all sizes.

In addition, we expand our security partnership with another global financial institution to include our data loss prevention, compliance, and end point security sweeps.

Our focus on various mid-market product and channel initiatives is also beginning to produce encouraging results.

We are receiving positive product feedback and higher net promoter scores from our customers and partners positioning us well for the future.

A recent CRN review praised a latest release of Symantec end point protection for being well tailored to small business customers.

Partners, including Ingram Micro, Tech Data, CDW, and Insight recognized us for delivering programs and resources that are helping them to grow their businesses.

Our consumer business maintained its momentum. Our 2010 Norton Internet Security and Norton Anti-virus products have gained tremendous market acceptance, winning more than 50 awards in the first four months of availability.

AV Comparatives awarded Norton Internet Security the best product of the year for its high detection rates, low system impact, and ease of use.

Our market leading products continue to drive very high customer loyalty scores. Our reputation based mal ware detection technology will be included in our 2010 Norton 360 products, which will ship in the March quarter.

The strength of our consumer products gives us a competitive advantage with partners of our customer channels, including OEM, ISP, online, and retail. This quarter we had several ISP wins, including a competitive displacement of Comcast to pride Security for its 15 million high speed internet customers.

We also benefit from strategic marketing initiatives and from the opportunity to cross-sell consumer services. This multi-year deal was driven by the quality of our products as well as our ability to leverage our Enterprise relationship with Comcast in their data centers.

We also signed a deal with Quest, another top global ISP, to offer security products to their high speed internet customers. This expands an existing agreement in which Quest offers its high speed internet customers automatic online backup.

Furthermore, in Europe, we renewed a multi-year agreement to provide security to Deutsche Telekom’s T-home customers.

Additionally, our Norton security scan solution will be available as a download through full partnerships this quarter.

In Asia, we continue to have partnerships with multiple motherboard manufacturers and expanded our relationship with MSI to include Norton internet security and Norton online backup.

We also won an agreement with Positivo, the largest OEM in Brazil.

In the retail channel, we further expanded our relationship with Staples.

We have seamlessly rolled out new e-commerce stores in all major markets around the world. The additional customer information we have already acquired is being used to develop enhancements and offers that will benefit our business both in the short and long term. We are on track to complete the transition on schedule.

Now moving to our cloud and saas-based offerings. We are pleased with the record bookings performance by the Symantec hosted services team this quarter. The strong results were driven by leveraging Symantec go-to-market network, which generated more than 75 deals during the quarter.

Our hosted services business now works with 1,800 partners. Additionally, we won multiple deals over a million dollars. This is indicative of what we’re starting to see with large Enterprises adopting hosted solutions.

Also during the quarter, we acquired Softscan, the privately held saas security leader in the Nordic region. This industry consolidating deal extends our saas security leadership

For the healthcare vertical, we launched a saas solution addressing hospitals’ growing need for storing medical images. We’ll also allow secure access to these images for affiliated and non-affiliated providers over the internet.

Other cloud initiatives including consumer online backup, now host over 45 petabytes of data for more than 11 million customers.

Our new cloud storage platform that supports saas services built on the Symatec FileStore architecture. FileStore is the latest and scalable file server technology that is now being used by customers to create their own public and private cloud infrastructures.

In our storage business, customers continue to buy licenses for only their current needs. We remain focused on leveraging partnerships to drive sales of our storage products.

Customers now have the option to select storage foundation and Symantec end point protection to manage and protect their cloud-based servers with Amazon’s EC2 cloud platform.

We signed creased adoption of next generation data protection in the Enterprise, resulting in solid growth for net backup.

Puredisk realized double digit sequential revenue growth as our de-duplication technology is a clear differentiator. Customers are pleased with Puredisk’s faster installation and more user friendly interface in the new 6.6 release.

Also, backup sales remain stable as a result of our focused marketing programs and strong partner relationships.

Earlier this week, we were pleased to announce the launch of Net Backup 7 and Backup Exec 2010, providing innovative solutions across all business customer segments. Both releases have integrated de-duplication technology so customers can store less data faster and save more money.

Symantec is the only company to provide multiple de-duplication options for our customers at the client, the media center, and with a variety of third party appliances through our Symantec open storage technology.

Customers participating in our first availability program are excited about the integrated de-duplication features and our market leading virtual machine protection capabilities for both the SMB and Enterprise segments.

Backup Exec 2010 now provides the SMB market an integrated archiving option powered by Enterprise vault.

Our software archive data from the backup data set rather than separately pulling data from the source. This approach is more efficient and reduces cost for our customers.

We expect these releases will benefit our cross-selling capabilities during the next fiscal year as we educate our customers and the channel on the benefits of these products.

During the quarter, we saw strong year-over-year revenue growth for Enterprise vault. Customers are using Enterprise vault to improve storage optimization by de-duplicating email and file server data. This reduces the backup size and in addition we are able to house long-term archives on cheaper storage tiers.

In conclusion, the December quarter illustrates the ongoing progress that we’re making. The sales team is diligently executing the productivity initiatives put into place earlier in the year and I’m especially pleased with the focus we have on selling our security and backup solutions to Enterprise and consumer customers.

We will continue to deliver product integration across the portfolio and have a healthy pipeline of new product releases, which we will be discussing with our customers in more detail at our user conference in April.

Now, I’ll turn it over to James to provide you the financial results for the quarter.

James Beer

Thank you, Enrique, and good afternoon, everyone.

I am pleased to report that Symantec achieved better than expected third quarter results in each of our key financial metrics, both on an as reported basis and after adjusting for foreign currency.

During the quarter, the US dollar weakened 12% against the Euro versus the year ago period, increasing our international revenue as measured in US dollars.

Foreign currency movements positively impacted revenue by $63 million or by 4% points year-over-year.

Currency effects had no impact on revenue as compared to the guidance we provided on October 28.

Revenue for the third quarter was $1.55 billion dollars, a decline of 3% from the year ago period and increase of 5% sequentially.

Net income was $326 million, resulting in fully diluted earnings per share of $0.40 for the December 2009 period.

We are encouraged by the improvements in our license revenue and by the sequential stabilization of our maintenance revenues. In particular, we saw strong performance from our government verticals.

We are pleased with the favorable ruling we received from the US tax court regarding the tax assessment for 2000 and 2001. After evaluating the December ruling, we concluded that our previous accrual related to this matter exceeded our revised estimated incremental tax liability. As a result, we realized a one-time benefit to get net income of $78.5 million, equivalent to $0.10 of benefit to earnings per share.

On a non-GAAP basis, we recorded a one-time benefit to net income of $16.5 million, equivalent to $0.02 of earnings per share benefit.

The non-GAAP benefit is due to the reversal of accrued interest on the original tax assessment, which we’ve been recording since the Veritas acquisition. As a result of the judges ruling, we do not expect to make any additional cash payments related.

Now I’ll review the financial details of the December quarter. By geography, our international revenue of $793 million represented 51% of the total and decreased 5% the year ago period. The Asia/Pacific/Japan region grew 5%, while the Americas declined 2%, and the Europe/Middle East/Africa region declined by 9%.

Now, moving onto revenue by segment. The consumer business had another strong quarter, generating revenue of $478 million, up 3% versus the December 2008 quarter. Sequentially, revenue was up 3%.

This is the fifth consecutive quarter of year-over-year growth for the consumer group.

Electronic distribution represented approximately 80% of the unit’s revenue, while our award winning Norton 360 suite grew 41% versus the reported results in the year ago period and accounted for 36% of consumer revenue.

Across our Enterprise business, we generated a total of 460 transactions valued at more than $300,000 each, up 3% year-over-year, and up 65% sequentially. We generated 108 transactions worth more than $1 million, up 4% year-over-year and up 54% sequentially. All of our deals value up more than $300,000, 73% included more than one of our products.

Our Security and Compliance Group generated revenue of $372 million, a decline of 2% year-over-year and an increase of 7% sequentially.

We are pleased both with our security deal win rate and with the improvement we saw in cross-selling our various security products. In fact, eight of our top ten deals included multiple security offerings with D(?) prevention posting double digit year-over-year growth.

The store and serve management group generated revenue of $594 million, a decline of 8% year-over-year and an increase of $0.6 sequentially.

This year, our performance was driven by the continuation of the near term focused customer buying behavior that we have experienced during the last two quarters. In addition, the server market deceleration continue to put pressure on the storage business, particularly related to new license sales on the sun platform.

Our Services business generated revenue of $107 million, down 5% year-over-year, but up 4% sequentially.

Turning now to margins, gross margin was 86.5% for the December 2009 quarter, in line with the comparable year ago period.

Our operating margin of 28.3% was down 390 basis points year-over-year due to the higher OEM placement fees and the launch of our new e-commerce platform.

We expect to see the corresponding benefits of these investments during the next 12 to 24 months.

Now moving onto the balance sheet, we exited the December quarter with a cash position of approximately $2.6 billion.

Cash flow from operating activities generated $393 million in the December quarter. Our business continues to deliver strong cash flow from operations generating approximately a billion dollars to date this fiscal year.

During the quarter, we spent $121 million to repurchase $6.8 million shares as an average price of $17.76.

Days sales outstanding was 53 days.

Non-GAAP deferred revenue at the end of the December 2009 quarter was $3.065 billion, up 2% year-over-year on an FX suggested basis, and up 5% sequentially on an as reported basis.

Foreign currency movements negatively impacted non-GAAP deferred revenue versus our guidance. Had foreign exchange remained at the guided rate for the quarter, deferred revenue would have been $3.1 billion, exceeding guidance by a greater amount than the reported figure.

Now I’d like to discuss our guidance for the March 2010 quarter.

We are assuming an exchange rate of $1.40 per Euro versus the $1.30 per Euro we experienced during the March 2009 quarter, equivalent to approximately an 8% currency tailwind.

Also, the end-of-period rate for the March 2009 quarter was $1.34 per euro, equivalent to approximately a 4.5% currency tailwind versus our $1.40 per Euro assumption.

It is worth noting that sequentially $1.40 per Euro assumption is equivalent to a currency headwind for both revenue and deferred revenue, something we haven’t experienced during this fiscal year.

Specifically the sequential revenue headwind is equivalent to approximately 5% and the deferred headwind is equivalent to approximately 2%.

Our guidance also assumes a common stock equivalence total for the quarter of approximately 819 million shares and an effective tax rate of 28%.

For the March 2010 quarter, we expect non-GAAP revenue to be in the range of $1.51 to $1.525 billion as compared to revenue of $1.488 billion during the March 2009 quarter.

At the midpoint of the guided range, we expect revenue to increase by approximately 2% year-over-year on an as reported basis.

Non-GAAP earnings per share are estimated to be between $0.36 and $0.37 as compared to $0.38 in the year ago period. Approximately $0.02 of dilution is related to the projected increase in consumer OEM unit shipments, which results in higher placement fees.

Clearly, higher-than-expected PC unit shipments bodes well for our consumer business.

We expect non-GAAP deferred revenue to be between $3.175 and $3.205 billion as compared to $3.083 billion at the end of March 2009.

At the midpoint of the guided range, we expect deferred revenue to grow 3.5% year-over-year on an as reported basis.

We expect 65% or $993 million of our March quarter revenue to come from the balance sheet.

In closing, I’d like to emphasize that, while we are pleased with our revenue and deferred revenue performance in the December quarter, we will continue to focus intently on our cost structure as we work to offset the near term PNL impact of the growth in our consumer OEM fees.

And now I’ll turn it back to Helyn so that we can take some of your questions.

Helyn Corcos

Thank you, James. Gwen, will you please begin polling for questions?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions)

Helyn Corcos

While Gwen is polling for questions, I'd like to update you on a few upcoming events.

We will be presenting at the Goldman Sachs conference on February 23 and at the Morgan Stanley conference on March 4.

We will be reporting our fiscal fourth quarter results on May 5th. In addition, please mark your calendars for Symantec’s financial analyst day on May 27th. We will be sending out information shortly. Also, we encourage you to attend our annual customer user conference during the week of April 12 in Las Vegas.

For a complete list of all of our investor related events, please visit our Events Calendar on the IR website.

Gwen, we’re ready for our first question.

Operator

We’ll take our first question comes from Heather Bellini with ISI Group.

Perry Wong (for Heather Bellini) - ISI Group

This is Perry Wong for Heather. Just hoping to ask a quick question about the EPS headwind due to an improving PC shipment environment. Should we think about it for the March quarter in the same framework that you provided for the December quarter?

Enrique Salem

Yes, that’s right. We talked in December about $0.02 cents worth of dilution from OEM fees. Came in a little ahead of that, but I would offer the same guidance for the March quarter.

Operator

We’ll go next to John Difucci - J.P. Morgan.

John Difucci - J.P. Morgan

James, other than the consumer headwind, is there anything else, especially given it looks like the corporate security business was stronger than at least we had modeled. Just curious, is there any other timing of expense versus revenue actually hitting operating expenses a little higher than expected, especially that sales and marketing line.

James Beer

Really, the OEM fee issue is the driver here. The other thing I would point to of course is the new consumer e-commerce platform. While we’re very pleased with its performance and so forth, that also is dilutive to the PNL in the near term.

John Difucci - J.P. Morgan

Enrique, on the storage business, that continues to be I guess a little bit better than it was, but still continues to be somewhat weak. I’m just curious, is there any reason that we should anticipate that the new versions of the backup products would cause some purchase delays here. How much of that business is impacted by what’s been going on at Sun and could that sort of soften going forward?

Enrique Salem

When you look at server sales, that is something directly tied to what we see in the storage and server business and I do think as you get clarity around the Sun Oracle merger, I think that will help to stabilize the Solaris platform. So that combination should provide stabilization.

Now the two new releases, Net Backup 7 and BE 2010, our expectation is the new Puredisk capability should be something that will get quick adoption based on the need for de-duplication reducing the amount of storage that people have to manage. I do expect BE 2010, given that the new capabilities to get a lot of folks to move forward with that upgrade process. So Puredisk and BE 2010 should do very well for us and then over the long term, my expectation is we’ll start seeing the migration from the Net Backup 6 platform to 7, but I do expect a stabilizing storage business for us, given the server sales and the new releases.

John Difucci - J.P. Morgan

In the storage business, have people sort of hesitated in anticipation of these new products coming out or do you think business just sort of is what it is and you hope to see an uptick with these new products?

Enrique Salem

I think on the BE platform, you will get folks waiting for the new version, as soon as we do our channel notifications, because you know a lot of that product goes through our channel partners and so given the upcoming relief, there’s always a little bit of a slowdown or lag in the sale of a new product.

Operator

Your next question comes from Sarah Friar - Goldman Sachs.

Sarah Friar - Goldman Sachs

Firstly, I was wondering if you see any difference in SMB and enterprise level across geographies?

James Beer

I think it’s similar around the world. I would tell you as we look at the global landscape, there’s definitely been similar characteristics. The Europe, Middle East, and Africa region maybe a little bit weaker, but in general very similar the world.

Sarah Friar - Goldman Sachs

Enterprise level as well?

James Beer

Similar characteristics. What I would say what we saw is China and Australia I think are the stronger geographies. We definitely saw financial services improvements. I think that the public sector in the US and Americas did well in the government sector.

Sarah Friar – Goldman Sachs

How does the upcoming Backup product improve the company competitively and elaborate on new features and what do you expect the product cycle to be?

James Beer

A couple of things that are important to our customers is we want them to not think about backup and archiving separately. We want them to look at that as one integrated capability. So instead of having to perform a backup on let’s say an exchange server and then do a separate archive, what we’ve done is to optimize the process and we’re uniquely positioned to do this. What you’re able to do is basically archive off of the backup data set. That makes the utilization of the exchange server much more efficient and so that example of bringing together archiving and backup is an important thing that we’ve been talking about, because it simplifies deployment, better utilizes the recourses.

The new capabilities and the integration of the market leading archiving technology starts to provide greater differentiation for both of those market leading products.

Operator

Your next question comes from Phil Winslow - Credit Suisse.

Phil Winslow - Credit Suisse

On the last conference call, you mentioned a program in a couple regions looking at specialization of the sales force between security and storage. I was wondering if you could give us an update how that’s going.

Enrique Salem

When you look at what we’re doing, we’re always going to keep evaluating looking for potential improvements and I think as we look at the selling process, we’ll make minor refinements, but at this point I don’t plan to make any big changes to the sales structure as we go into fiscal year.

During the December quarter, you saw great performance utilizing the current structure and I’m very happy with those results. So I think at this point it’s going to be to continue to look at what refinements we can make, but don’t expect any big changes as we go into fiscal year 2011.

Phil Winslow - Credit Suisse

Interest and other income has been moving around a little bit quarter-to-quarter, what would your expectation be for the March quarter?

James Beer

My expectation will be modestly improved. We’re going through an accounting process change with joint venture. That’ll drive about $1.5 million dollars worth of benefit into the March quarter.

Aside from that, I would expect a continuation of what we’d seen in recent quarters.

Operator

Your next question comes from Kash Rangan - Merrill Lynch.

Kash Rangan - Merrill Lynch

The sizes of the Enterprise deal, it’s been growing well. Seasonality?

Enrique Salem

What you want to look at is one of the stats I called out in my comments is we’re starting to see better cross-selling of the portfolio. 39% of the deals above a million dollars had products from both our security segment and our storage segment. That’s what I think is starting to drive some of the success in the large enterprise or in the larger deals.

We’ve been talking about for the last year further integration of our technologies. When you look at what we’re doing with products like Net Backup and archiving, that’s just an example. You’ll be hearing more from us at our user conference about how we’re leveraging our DLP technology more broadly. So it’s really about integration, enabling us to cross-sell across the entire portfolio.

The other thing is the ability to work across the consumer business and the Enterprise business. If you look at the Comcast deal, our great relationships with Comcast and the data center enabled them to have a very favorable view toward Symantec that was very supportive of the work we did on the consumer side. And so, when you look at what we’re doing is we’re starting to get leverage across the portfolio and also across business segments.

Operator

Your next question comes from Brad Zelnick - Macquarie Research Equities.

Brad Zelnick - Macquarie Research Equities

Enrique, in the consumer business, in years past it was Symantec’s goal to grow the consumer business at or better than the overall market rate and obviously there’s been a lot of unforeseen disruptions since then, but at this point, given you have greater visibility to consumer bookings than we do, can you give us any sense of how you believe you’re performing relative to the market and what you expect the trend will be going forward? Also, any updates on your relationship with HP?

Enrique Salem

What we’re seeing is that across the channels, the Comcast deal, the Quest extension, the Positivo deal, we’re starting to get a lot of performance across all of the various channels and what’s differentiating us is we’re incredibly pleased with how well the products are doing.

Winning 50 awards in four months, that’s almost becoming to us like second nature. That’s unheard. We win every award now with our consumer products. And so, from our perspective, the ability to have the best products on the market is allowing us to go across the channels. And so, as James has mentioned, one of the places that you are going to see benefit is while the OEM fees have gone up and there is a lag between when the OEM goes up and the bookings come in and the radible revenue materializes, so there’s definitely a lag there, but we are encouraged by the cross channel and some of the things we’re seeing given the product capabilities.

Now, to the HP deal, I don’t have anything new to report. Clearly, we’re always looking at all of the different OEM deals. We stand by what we always said – we’re not going to do deals that don’t make economic sense for Symantec. We’re not dependent upon any one partner. I mean we’ve got such a broad distribution capability. HP, quite frankly, is just another OEM.

Brad Zelnick - Macquarie Research Equities

James, how would you characterize your assumptions for guidance? I know in the prepared remarks you spoke about customers continuing to purchase just for their current needs, but if you can characterize guidance relative to the past couple of quarters.

James Beer

We’re not expecting there to be any significant uptick in the IT budgets for our customers. We’re looking for some modest improvement of 2009, which was obviously a particularly weak year for IT spending. So I would say our guidance is consistent with that theme of modest improvement.

Operator

Your next question comes from Rob Owens - Pacific Crest Securities.

Rob Owens - Pacific Crest Securities

Enrique, could you expand a little bit on your consumer backup. I think you mentioned 11 million customers. Are those all paying customers or some of those trial and what’s the paying total right now?

Enrique Salem

The way you want to look at is the biggest driver of the 11 million is what’s in Norton 360. It’s the biggest component. That basically brings and improves the ability to renew Norton 360. What we get is an improvement in renewal rates. We have four of the top five OEMs are using the online backup as a part of their offering. So some of those units are trial that over a period of time we look to convert to paying customers. Backup is doing two things. One, because we can operate unique capability, landing lots of OEMs and ISPs. Two, it definitely improves the retention rate on Norton 360.

James Beer

We’re very pleased with that product and the price premium it affords us over Norton internet security.

Rob Owens - Pacific Crest Securities

In your prepared remarks, you called out both government and energy as strong verticals. Can you expand on that? This being the federal government’s first fiscal quarter, what did you see there? Better than expected?

Enrique Salem

You definitely are benefiting from the focus on cyber security and the range of threats that are out there, I think the federal government is absolutely, given the President’s comments in May about the importance of protecting the critical infrastructure of the US and his view that we were under attack, I think that’s putting a lot of emphasis in the public sector on this notion of cyber security.

The second point is given the concern about insider or external threats, there’s definitely a focus on information assurance or protecting information and so that combination of how do you protect critical information, how do you protect against cyber threats, I think voted very well for our public sector business.

Operator

We’ll go next to Brent Phil – UBS

Reed in for Brent Phil – UBS

James, I was wondering if you could give us a sense where you see further efficiencies in your cost structure to offset the higher OEM placement fees.

James Beer

I think there are opportunities for us across our organization to continue to focus on our cost structure. That’s very much our message internally. So we very much will maintain that focus and momentum during the coming year.

So no change in perspective there and I don’t think we’re running out of ideas at all. We have plenty of things to work on. That said, clearly the OEM fees, because of this timing dislocation between when we pay the OEMs and when we actually receive a ratable revenue is going to be putting pressure on the operating margins, no question.

Operator

Your next question comes from Todd Raker - Deutsche Bank Securities.

Todd Raker - Deutsche Bank Securities

On the consumer side, can you guys give us a sense how should we think about the economic model and is the revenue opportunity per customer equivalent to the OEM or traditional retail model?

Enrique Salem

Each channel has a different set of economics. I think you want to think about the customer lifetime value and our opportunity to bring on a customer in any part of our portfolio and then cross-sell them through Norton internet security all the way to Norton 360. Each channel has different economics. What we focus on though is what’s the total value of that customer for a multi-year period.

So while maybe a little more expensive in one channel than the other, our goal and we look at it by channel, by partner, what is the CLB.

Todd Raker - Deutsche Bank Securities

So if I step back and look at the consumer business more from a holistic perspective, if I look at OEM preload, which I think is viewed as the most natural way to capture a customer, are you seeing OEM preload as a percentage of the consumer business?

Enrique Salem

It’s actually flattening out. We’re seeing some of the alternative channels, for example, some of the work we’re doing with PC tools, which is more of an online lower price point product as a changing dynamic. So I definitely would tell you OEM has flattened out, given that the top ten OEMs total share is not growing in any significant way. And so that percentage of customer acquisition in OEM is flattened now.

Todd Raker - Deutsche Bank Securities

I want to understand the Sun situation a little bit better. Should we be thinking about the Sun relationship just going away and going to zero? I mean any sense what Oracle’s doing to do on the storage side?

Enrique Salem

I think when you look at it, it’s still a little bit too early to say what Oracle will ultimately do, but you’re definitely seeing the spark platform has been slowing for some time and I think the uncertainty of the transaction I think accelerated what was happening on the spark platform. I expect that there’ll be a continuing relationship with Oracle on the various Sun products. The maintenance steams generate very healthy and positive cash flow for us and expect that to definitely continue.

Todd Raker - Deutsche Bank Securities

Should we think about on the storage side, (?) impact of, your Q1/Q2 starting to see that business accelerate, is it meaningful enough that we should start seeing an uptick?

Enrique Salem

I would tell you it flattens. I don’t know that you’d see a different projectory only because, again, it just depends what’s happening with how big and how many new units are shipped and you also have the maintenance base, which is fairly substantial.

Operator

Your next question comes from Katherine Egbert - Jefferies & Company.

Katherine Egbert - Jefferies & Company

My question is on the Alteris products. Can you talk about how the upcoming Windows 7 cycle might be catalyst and how you expect that to play out?

Enrique Salem

Our expectation is if businesses start migrating to Windows 7, because we haven’t seen yet a big move yet to Windows 7. We definitely are seeing a lot folks tested in the Enterprise space, but given the Symantec and the Alteris products have been the main way, the primary way that customers have migrated, definitely expect that to be a benefit, but we won’t see that until probably some point in our fiscal year 11 and my best estimation would be that post the summer months, back half of the fiscal year, is when you’re going to start probably seeing some of the benefit in that migration.

Katherine Egbert - Jefferies & Company

Can you give us some more color on the Comcast and the Quest deals?

Enrique Salem

With Quest, it started with our strength in the online backup business that have allowed us to expand in the security products and with Comcast, they clearly saw the great performance of our products, the quality of the products, plus the relationship they were enjoying with us in the data center that drove our ability to expand into being the provider for the 15 million internet users at Comcast.

As far as the go forward model for us, what we’re very focused on is given the strength of our products, we want to get more units into the marketplace and so we are absolutely working across all of the different channels to get as many of the 2010 products into the marketplace.

Katherine Egbert - Jefferies & Company

Are these two deals fully expenses now? Meaning do you only have the revenue share portion left?

James Beer

In terms of Comcast and Quest? Just getting started with these deals. Comcast is not a placement fee type arrangement. That’s an arrangement where we get paid a royalty based on the number of customers that take up our products.

So it’s a different accounting structure to the placement fee structure.

Quest is a backup offering. So we have not done the placement fee arrangements with our online backup OEM partners. So those are more so on a revenue sharing arrangement.

Operator

Your next question comes from Brian Freed - Morgan, Keegan & Company, Inc.

Brian Freed - Morgan, Keegan & Company, Inc.

If you look at the joint venture, can you talk a little bit about the size of that joint venture at this time and the growth rate as well as where you see the impact of the bottom line trending?

Enrique Salem

When you look at what we’re doing in the joint venture, it’s definitely something where the company Huawei, HS, has commented on a bookings model that represents about $300 million in bookings. What we’re doing is we’re accounting for it, as James described in the other income line, and so we’re continuing to track that and it’s stayed pretty constant. I don’t expect that to go up or down. Now what we’re pleased by is the notion that the product portfolio is getting very strong. I mean everything from network attached storage devices to solid state technology, security appliances. I think it’s a nice complement to what we’ve been doing in the software service or host business and software business.

So we’re pleased with where we are with the joint venture. Obviously we continue to track that very carefully and we’re comfortable with the investment level that we’re currently making.

Operator

Your last question comes from Daniel Ives - Friedman, Billings, Ramsey & Co.

Daniel Ives - Friedman, Billings, Ramsey & Co.

Enrique, what surprised you in the quarter in terms of just customer buying behaviors?

Enrique Salem

I think the one comment I would make is financial services. I think global financial services, globally financial services companies came back a little stronger than I would have expected. That would be the one comment I would make. Everything else tracked pretty much as I would have expected.

Operator

We’ll go next to Steve Ashley – Robert W. Baird

Steve Ashley – Robert W. Baird

Can you give us an update with what’s going on with the SPS/SMB product that shipped in May?

Enrique Salem

We definitely are seeing the bookings improvement. The comments we’re getting from customers and partners are very positive. The technology is definitely suited for that segment, which is one of the things that we want to address with the product. Now our partner loyalty scores are going up as a result of the capabilities of the product. So overall, we are starting to see a benefit and I think we’re seeing it in the bookings benefit. You’re starting to see a little bit of the benefit on the as reported revenue and that’s part of the reason for the improvements in the security and compliance segment.

James Beer

I was quite pleased with the sequential bookings performance.

Steve Ashley – Robert W. Baird

Just turning to the consumer business, the backup part of it. I understand that you are now at four of the top five OEMs and maybe HP was maybe the first one. Are you seeing that contribute to new bookings in the consumer business and have you started to market that to the install base?

Enrique Salem

It’s still a very small part of the overall consumer business on a standalone basis. As far as how we market the product, we see backup as a way of acquiring new customers and then upselling them in two directions. One, selling them more storage. Two, trying to cross-sell them to our suite products, whether it be Norton internet security or Norton 360.

Steve Ashley – Robert W. Baird

Lastly, obviously a lot of talk in the news about these Chinese attacks on 34 US companies. What might that mean to Symantec and what kind of products might benefit from those kinds of things going on, if any?

Enrique Salem

First and foremost, it really reinforces the messages that we’ve been talking about to our customers, where attacks are going to become very, very targeted. The bad guys, whoever they are, are going to figure out that it’s much more effective and efficient to go after specific individuals or businesses. That’s what we have been saying and that’s what you saw in this attack. I expect that to continue to increase and more than anything what it’s done is it’s raised awareness for some of these cyber threats and these targeted attacks.

From our product portfolio perspective, range of our technologies would absolutely detect that threat today. Some of our new technologies, our reputation-based technologies, our intrusion prevention technologies, so there’s a whole range of things that could be utilized to detect the threat.

The second part of it is – what are people targeting ultimately is information. Whether that information is intellectual property in the form of source code, customer data, credit card data, we can absolutely use our data loss prevention products to better monitor and make sure that these types of threats and attacks don’t or aren’t capable of stealing propriety or confidential information.

So it’s really both on the direct protection, mal ware detection, and other capabilities like that and then also on protecting the information with our market leading DLP products.

Operator

We’ll go next to Tim Cossel – Thomas Weisel Partners

Tim Cossel – Thomas Weisel Partners

First on the e-commerce platform, how is the progress going there? Can you give us any idea of when that turns into being a tailwind rather than a headwind on margins?

Enrique Salem

We’re very pleased with where we are. I mean we’ve been rolling out new stores around the world very efficiently. We monitor it. We’ve got a very clear set of metrics that allow us to see how they perform. And so we’re pleased with where we are. It’s definitely on track. Some of the big benefits that I’m most pleased with is our ability to react more quickly to changes that we want to make. The ability to gather information that allows us to better target customers to specific products. And so my sense is a couple of comments. One, we’re on track, and second, it’s absolutely going to have a positive effect over time on our ability to retain and upsell customers.

James Beer

I would expect it to be this coming December quarter that would be the first quarter in which the platform will be accretive.

Tim Cossel – Thomas Weisel Partners

With Oracle Sun and of course Cisco and EMC and several of the others out there trying to sell the complete stack, they’re also advertising storage management capabilities. How do you think that affects your business?

Enrique Salem

What you want to do is – why do people go to the Symantec? What they’re trying to do is make sure they don’t get locked into a vertical stat or into one vendor and quite frankly, all of these situations, they absolutely do not have an impact on our ability to sell our backup products.

We’re seeing, given the new backup features, we definitely are seeing strengthening of the opportunity and a lot of demand for those products. So while we definitely see these, those stacks are trying to lock you in. They’re trying to basically say you have to use our approach and most large companies understand the importance of having some amount of flexibility and because we offer them that choice, we can help them to commoditize some of the underlying hardware, we’re definitely seeing people move to using our storage management products.

Helyn Corcos

Gwen, looks like we have time for one more question.

Operator

We’ll take our last question from Robert Breza - RBC Capital Markets

Robert Breza - RBC Capital Markets

Enrique, if you just pull back and look at consumer business overall, wondering if you can kind of just summarize for us what you’re seeing. Is it really what’s driving the business is the PC tools sub-segment of market strategy, the OEM relationships, the online backup. Obviously there’s a lot of different moving parts to the strategy. If you could summarize it for us, that’d be helpful.

Enrique Salem

I’d summarize it this way. One, we’ve got the very best products on the market and in a tech company it starts with products. Two, I think we’ve taken a multi brand approach where it allows us to basically use different products or different brands in different segments and we did see PC tools showing double digit growth. So that’s just saying that pretty clearly our ability to serve customers across the ranges of price points is important.

Then lastly, we’re not depending on any one channel. I mean we go OEM. We go online. We go through retail and we’ve got strength in all of those different channels. So I would tell you it’s a combination of great products, having a dual brand strategy, and being able to leverage the breadth of our distribution in channels.

So those three things are what are really making the difference to our consumer business.

Operator

And that concludes our question-and-answer session. I'd like to turn the conference back to Enrique Salem for closing remarks.

Enrique Salem

Thank you, everyone, for participating on our call this afternoon. I’m very proud of our team and the results that they delivered in the December quarter. I’m definitely confident that the strength of our portfolio and the areas we’ve chosen to focus on are absolutely allowing us to continue to execute against our plans and deliver what we think is appropriate for this business. Thank you.

Operator

That concludes today's conference. We thank you for your participation.

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Source: Symantec Corp. Q310 (Qtr End 12/31/09) Earnings Call Transcript
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