Good day, and Welcome to the Symantec's Fourth Quarter 2010 Earnings Conference Call. At this time, I would like to turn the call over to Ms. Helyn Corcos, Vice President of Investor Relations. Please go ahead.
Good afternoon, and thank you for joining our call to discuss fiscal fourth quarter and fiscal year 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 Relations website. A copy of today's press release and supplemental financial information are posted on our website. And a copy of today's prepared remarks will be available on our Investor Relations 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. Sequential growth rates are based on our recorded results. For the March quarter 2010, the actual weighted average exchange rate was $1.38 per euro and the end-of-period rate was $1.35 per euro compared to our guided rate of $1.40 per euro.
For the March 2009 quarter, the actual weighted average was $1.30 per euro and the end-of-period rate was $1.34 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.
As we stated on last week's call, we will regularly provide a currency update following the end of each quarter. This will be posted on our website's Quarterly Results section. Given the rapidly fluctuating exchange rate environment, we encourage everyone to apply the rule of thumb as a guide to estimating the impact of currency fluctuations on our financial metrics once the quarter has ended.
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, contain forward-looking statements.
These statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in the statement. Additional information concerning these risks and uncertainties can be found in the company's most recent periodic report filed with the U.S. Securities and Exchange Commission. Symantec assumes no obligation to update any forward-looking statements.
In addition to 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 in the press release and on our website. And now, I would like to introduce our CEO, Mr. Enrique Salem.
Thank you, Helyn, and good afternoon, everyone. I'm pleased to report another quarter of solid results. It's a great way to end the fiscal year. We started this fiscal year with a clear set of priorities. And as I looked back over the year, I'm proud of what we've accomplished. I'm pleased with the progress we've made in revitalizing our Security business, moving customers to the next generation data protection, driving the commoditization of IT infrastructure and expanding our Cloud-based offerings.
We also made significant progress using technology across our business to develop unique, integrated solutions that make cross-selling our products much easier for our sales team.
Now I'll spend some time discussing the highlights from this last quarter. Our Consumer business generated another quarter of robust growth, reflecting strong go-to-market partnerships. Our results-oriented relationships enabled us to acquire consumers and grow our business aggressively. We focused on replacing the competition and structuring positive financial deals for both Symantec and the partner.
We entered into a significant new partnership with Samsung, shipping Norton Internet Security on their netbooks, and Norton Online Backup on their netbooks and notebooks worldwide. In addition, Fujitsu signed the exclusive agreement to ship Norton products globally on their consumer and commercial PCs. We now have partnerships with nine of the top 10 OEMs with our security products. We continue to expand our partnerships with our online backup offerings and have partnerships with six of the top 10 OEMs, five of which we signed during the last year.
Our new eCommerce solution is also helping us to acquire and retain more customers. We're very thorough in the development of our eCommerce platform and we now have access to much richer information about our customers. We're also benefiting from the ability to quickly make improvements to address the unique needs of each customer segment and we have already seen an increase in OEM trialware conversions. We expect to complete the transition to our in-house eCommerce platform by the end of the June quarter.
We continued to successfully upsell customers from Norton AntiVirus and Norton Internet Security to Norton 360. We're excited about the new version of Norton 360, which became available in February. And is already winning awards around the world, including PC Magazine's Editor's Choice. Norton 360 now includes our reputation-based technology which has earned us the top spot in rigorous industry tests, such as AV-Comparatives. Norton 360 remains the industry lightest and fastest all-in-one security suite with an integrated tuneup feature that keeps a PC running like it's new.
Customers using backup in Norton 360 or using our stand-alone Norton Online Backup product, now have the ability to access their data from iPads, iPhones and Android devices. Symantec now hosts 56 petabytes of data for 12 million customers. We are the undisputed global leader in online backup.
Moving on to our Enterprise business. Surveys report that customers value the breadth of our portfolio and prefer to work with a single vendor. During the fourth quarter, 49% of our deals over $1 million included sales from both our Security and Storage segments. This continues to build on the positive progressions we've seen from 27% in the September quarter and 39% in the December quarter.
During the quarter, we also generated strong sales with companies in the financial services, telecommunications and the government sector. TSYS, a leader in electronic payment services selected Symantec for endpoint protection, data loss prevention, net backup with deduplication, and business critical services.
The Australian defense department purchased our Control Compliance Suite and Business Critical Services supporting over 90,000 endpoints and 5,000 servers. Also, a large global telecommunications provider chose Symantec for Storage Foundation HA, enterprise vault, NetBackup and our Control Compliance Suite.
Our SaaS business, Symantec Hosted Services generated record revenue and posted double-digit growth. Our solid performance spanned all geographies and all customer sizes, including noteworthy strength from the SMB segment. We saw increased adoption of our hosted services within the Symantec customer base. For example, Ford signed a multiyear contract to protect over 150,000 users.
During the March quarter, 134 hosted services deals came from the established Symantec relationships. And we added more than 100 new partners to our SaaS distribution network. Additionally, our Symantec Protection Suites now include hosted mail and web security as add-on options.
Finally, our new Symantec hosted Endpoint Protection offering is currently in beta test and we are receiving very positive feedback. We expect this offering which brings together our expertise in Endpoint Security and SaaS to be released this quarter.
With respect to our on-premise security solutions, data loss prevention and compliance achieved another strong quarter of double-digit year-over-year bookings growth. In April, we announced new versions of suites across our entire security portfolio. We also announced the release of our new security management console, Symantec Protection Center.
Symantec Protection Center integrates multiple technologies across our Security business to deliver a unified management console with role-based access control, single sign-on, superior cross-product reporting and integrated policy management.
In addition to the recent security releases, last week, we announced our pending acquisition of encryption leaders, PGP and GuardianEdge. Combined with our data loss prevention solution, we continue to lead the market in providing comprehensive, information-centric protection. Furthermore, with our March announcement of Data Insight, an internally developed technology created jointly by our storage and security teams, we'll be the only company that can deliver intelligent, policy-driven security solutions to give users access to the specific data based on information intelligence and ownership. Going forward, Data Insight and encryption will be key technologies leveraged across our security and storage portfolio.
Our Storage and Server Management segment reported improved results year-over-year. We're seeing early traction in the adoption of version 5.1 of Storage Foundation HA released in December 2009. This release enables organizations to capitalize on new storage technology, such as solid state drives and thin provisioning, while continuing to reduce costs and complexity through improved performance and consolidation. We have expanded the distribution of our FileStore solution beyond the Huawei-Symantec joint venture, recently signing OEM agreements with Fujitsu America and Xiotech.
This gives customers choice in how they want to deploy our scalable file server solution to handle demanding workloads and to build their storage Cloud infrastructure.
With information continuing to grow at unprecedented rates, our focus on next-generation information management couldn't be more relevant. Both NetBackup and Backup Exec posted solid, year-over-year revenue growth this quarter. In February, we released NetBackup 7.0 and Backup Exec 2010 and the response from our customers has been very positive. We're seeing high adoption rates for both products. There've been more than 1,000 customer installations of NetBackup 7.0 and more than 60,000 installations of Backup Exec 2010 since the release.
Customer adoption is being driven by the enhanced support for virtual environments and integrated deduplication features. Symantec is the only company that offers integrated deduplication at the client, media server and on third-party appliances through Symantec's open storage technology or OST program. The industry supports our deduplication solutions.
We now have 14 independent hardware vendors in the OST program including, Data Domain, Quantum and FalconStor. In conclusion, our March quarter results illustrate the ongoing progress we're making. And our new product releases position us well to take advantage of the improving economic environment.
With that, I'll turn the call over to James to provide you the financial details of the quarter. And then I'll provide you with some comments on what to expect in fiscal year, 2011.
Thank you, Enrique, and good afternoon, everyone. I am pleased to report that our ongoing focus on consistent execution led us to exceed our guided range for each of our key financial metrics, both on an as-reported basis and after adjusting for foreign currency. We closed the year with strong cash flow from operations, generating a total for the year of $1.69 billion, which clearly illustrates the resiliency of our business even during a challenging macroeconomic period.
Our balance sheet continues to be strong, providing us with significant financial flexibility. We exited the March quarter with over $3 billion of cash on hand, 60% of which is held on-shore. We also generated solid sequential and year-over-year growth in deferred revenue.
During fiscal year 2010, non-GAAP revenue totaled $6 billion, a decline of 3% from the previous year. Fiscal year 2010 non-GAAP earnings per share were $1.51, down 4% year-over-year. Non-GAAP operating margin was down 180 basis points to 28.6% due to higher OEM placement fees and the launch of our new eCommerce platform, which together accounted for 120 basis points of the decline.
The extra week of activity that occurred in the June quarter of fiscal year 2009 accounted for another 30 basis points of the year-over-year operating margin decline.
As we move into fiscal year 2011, we will continue to improve the efficiency of our cost structure, as well as redirect more of our spending to areas that offer the most potential for growth, such as the Consumer business and our hosted SaaS offerings.
Now I'll review the financial details of the March quarter. Non-GAAP revenue for the fourth quarter was $1.535 billion, flat versus the year-ago period in constant currency terms, and an increase of 3% on an as-reported basis. This quarter's revenue was driven by strength in our Consumer, Enterprise, Backup and Archiving, Data Loss Prevention and Hosted Services businesses.
Net income was $327 million resulting in fully diluted earnings per share of $0.40 for the March 2010 period. Several one-time tax benefits added $0.02 to this quarter's earnings per share.
During the quarter, the U.S. dollar weakened 6% against the euro versus the year-ago period, increasing our international revenue as measured in U.S. dollars. Foreign currency movements positively impacted revenue by $40 million or by three percentage points year-over-year.
Currency effects, however, negatively impact impacted revenue as compared to the guidance we've provided on January 27. Had currencies remained at our guided rate for the March quarter, non-GAAP revenue would've been $1.54 billion.
By geography, international revenue of $768 million represented 50% of the total and decreased 3% year-over-year in constant currency. On an as-reported basis, however, international revenue grew 3%. The Americas region grew 3% in both constant currency and on an as-reported basis, while Asia-Pacific Japan declined 1% in constant currency terms, but grew 5% on an as-reported basis. The Europe, Middle East, Africa region declined by 4% in constant currency and grew 2% as reported.
Now moving on to revenue by segment. The Consumer business had another strong quarter generating revenue of $483 million, up 6% year-over-year and 9% on an as-reported basis. This is the sixth consecutive quarter of the year-over-year growth for the Consumer group, driven by our success in upselling customers to our award-winning Norton 360 suites. Norton 360 grew 34% versus the reported results in the year-ago period and accounted for 37% of consumer revenue.
We were pleased with the strength across the Consumer business of both our electronic and retail distribution channels. Our Enterprise business generated a total of 371 transactions valued at more than $300,000 each, up 1% over year-over-year. 87 of these transactions generated more than $1 million, up 2% year-over-year. Of our deals valued at more than $300,000, 70% included more than one of our products, once again emphasizing the breadth of what we have to offer our customers.
The Security and Compliance group generated revenue of $364 million, a decline of 1% year-over-year, but up 2% on an as-reported basis. Data Loss Prevention, Endpoint Management and Symantec Hosted Services posted strong double-digit year-over-year revenue growth this quarter. We have been pleased by the boost given to our SaaS sales by the volume of business referred from our on-premise focused worldwide salesforce. We will continue to build out our portfolio of SaaS offerings during fiscal year 2011.
The Storage and Server Management group generated revenue of $578 million, a decline of 4% year-over-year and 1% on an as-reported basis. We are encouraged however by the stabilization of our storage products sales across all platforms. We have reduced our dependency on the Solaris platform, both by focusing on growth areas, such as Windows and Linux, and by strengthening our partnerships with IBM and HP.
OEM revenue from Sun-Oracle accounted for only $45 million during fiscal year 2010, equivalent to 5% of our Storage Management business.
Turning now to our Backup and Archiving businesses. After four quarters of year-over-year declines, Backup Exec posted revenue growth this quarter driven by strong customer demand for our Backup Exec 2010 release. Enterprise Vault and NetBackup posted double-digit and high single-digit year-over-year revenue growth respectively.
Some years ago, the Backup business saw a one-off increase in revenue at the time of a major product release, as customers not under our current maintenance contract made catch-up payments in order to access the new release. In more recent times however, we have seen an increasing customers renewing their maintenance contracts as a result of our including more meaningful features in each minor doc release, and improvements in our renewal process. As a result, during the fourth quarter, we did not see an increase to revenue related to catch-up maintenance payments, even though we rolled out major new releases of both NetBackup and Backup Exec.
Today, catch-up maintenance payments consistently account of between 1% to 1.5% of each quarter's revenue, and are driven by negotiations of large renewal deals that extend beyond the expiration of the previous maintenance contract, oftentimes as a result of our sales force working to cross-sell additional products into a particular customer.
Our Services business generated revenue of $110 million, up 6% year-over-year and 8% on an as-reported basis. While we are moving to a partner-led approach to selling Consulting Services, we do not expect a significant reduction in our Services revenue in fiscal year 2011. As a result of our relatively large backlog of bookings, which we will fulfill during the coming year.
Our new consulting strategy represents another commitment to our partners, which we believe will yield improved license sales over time as our partners focus upon Symantec's broad portfolio of solutions.
Turning now to margins. Gross margin was 85.1% for the March 2010 quarter, down 90 basis points from the year-ago period. Cost of goods sold rose, since this line item now includes credit card fees driven by our new eCommerce store. In addition, royalties paid by our Hosted Services business also grew in line with that group's stronger performance.
Our operating margin of 28.3% was down 160 basis points year-over-year, driven by higher consumer OEM fees and the launch of our new eCommerce platform. Cash flow from operations for the March quarter grew 16% year-over-year on an as-reported basis, driven by strong collections and lower tax payments.
Our cost reduction efforts also contributed to cash flow growth as we were able to more than offset the cash effect of increasing OEM fees and the build out of our eCommerce platform. This quarter, we spent $189 million to repurchase 11.2 million shares at an average price of $16.93.
In total, during fiscal year 2010, we returned $553 million to shareholders by repurchasing 34 million shares at an average price of $16.39. We have $747 million remaining on our current board-authorized share repurchase plan.
Non-GAAP deferred revenue at the end of the quarter was $3.22 billion, up 3% year-over-year in constant currency and 4% on an as-reported basis. Sequentially, deferred revenue was up 5% on an as-reported basis. Foreign currency movements negatively impacted non-GAAP deferred revenue versus our guidance. Had currencies remained at the guided rate for the quarter, deferred revenue would have been $3.25 billion.
Now I'd like to discuss our guidance for the June 2010 quarter. As we've discussed on our call last Thursday, we are assuming an exchange rate of $1.35 per euro in our FY '11 planning. Our guidance for this first quarter therefore, assumes this same rate versus the $1.37 per euro we experienced during the June 2009 quarter equivalent to approximately a 1% currency headwind. Also the end-of-period rate for the June 2009 quarter was $1.40 per euro versus our $1.35 per euro assumption, equivalent to approximately a 3.5% currency headwind. We will update everyone following the end of the quarter as to the actual FX rates incurred.
Our guidance also assumes a common stock equivalents total for the quarter of approximately 810 million shares and an effective tax rate before consideration of any loss from our joint venture of 27%. This figure contrasts with a full year tax rate assumption before consideration of any loss from our joint venture of 27.5%.
As we mentioned last week, beginning in fiscal 2011, we will discontinue reporting Symantec's revenue and deferred revenue on a non-GAAP basis. This change will make our disclosures more consistent with our peer group. As such, today, we are providing revenue and deferred revenue guidance for the June 2010 quarter on a GAAP-basis only.
In addition, we expect the previously-announced acquisitions of PGP and GuardianEdge to close during the June quarter. We have assumed that the two acquired companies will add a total of less than $5 million to our first quarter revenue. Thus, for the June 2010 quarter, we expect GAAP revenue to be in the range of $1.48 billion to $1.50 billion, as compared to revenue of $1.43 billion during the June 2009 quarter.
We expect revenue to grow by approximately 3% to 5% year-over-year on both an as-reported and constant currency basis. Please note that we are expecting GAAP revenue from PGP and GuardianEdge to total $50 million to $55 million for the September through March quarters of FY '11.
GAAP earnings per share are estimated to be between $0.16 and $0.17 as compared to $0.09 in the year-ago period. Non-GAAP earnings per share are estimated to be between $0.35 and $0.36 as compared to $0.33 in the year-ago period, up 6% to 9% on an as-reported basis. We have included $0.005 of dilution in our June quarter EPS guidance is a result of the two acquisitions.
Please note that we expect PGP and GuardianEdge will together drive an additional $0.01 of dilution in the September quarter and another $0.005 of dilution in the December quarter. We expect the acquisitions to be accretive to our non-GAAP operating results starting in the March 2011 quarter.
We expect GAAP deferred revenue to be between $3.06 billion and $3.09 billion, compared to $2.97 billion at the end of June, 2009. We expect deferred revenue to grow 3% to 4% year-over-year on an as-reported basis and 4% to 5% on a constant currency basis. We expect approximately 70% or $1.04 billion of our June quarter revenue to come from the balance sheet.
In closing, we were encouraged during the March quarter by the improvement in our year-over-year revenue and deferred revenue performance, which reflected our initiatives to further improve execution and focus on areas of greatest growth potential. In addition, our cash flow generation continues to be robust. We are working to develop this momentum in fiscal year 2011 as we focus on a clear set of priorities. And now, I'll turn it back to Enrique to provide an update on our FY '11 objectives.
Thank you, James. And now what I'd like to do is take a moment to discuss our focus areas for this coming fiscal year.
Customers are challenged by increased complexity in risk. Data volumes are still growing at more than 50% a year, while the threat environment is becoming much more targeted. Customers want to expand the use of virtualization and understand how they can take advantage of software delivered as a service.
In addition, customers are dealing with the consumerization of IT and the implications of users bringing new devices into the organization. And they are managing too many point products and want to work with fewer vendors.
During fiscal year 2011, we will build upon our 2010 accomplishments by helping our customers simplify how they manage and secure their information. Our goal is to enable customers to focus on running their businesses, instead of worrying about costly breaches and system failures that put their information at risk.
We plan to do this by building on the progress we made in the Security business by offering more solution suites, new encryption capabilities and improved centralized management. By extending our success in the Consumer Security business to protect critical information on devices beyond PCs; by helping customers adopt SaaS and appliance solutions in their environments; by driving innovation and technology advancements to more effectively back up and manage information; by enabling customers to reduce costs by commoditizing their hardware infrastructure; and by standardizing and automating more of our processes to simplify and improve the way customers and partners interact with Symantec.
Our customers live and work in an information economy, and protecting information is essential. No matter which devices or applications are being used. We continue to focus on delivering solutions that allow customers to trust that their information will be there when they need it. And trust that it's only available to those who should have access. Enabling trust is crucial to accelerating the information economy, enabling customers to take advantage of emerging technology trends and enabling individuals and organizations to operate confidently in an information-driven world.
These efforts position us well to be the vendor of choice in helping enterprises and consumers secure and manage their information on any device across both the Enterprise and Consumer segments and in the Cloud better than any other competitor. You will hear more about our focus areas during our Financial Analyst Day on May 27. And with that, I'll turn the call over to Helyn, so she can start taking some of your questions.
Thank you. Gwen, will you please start polling for questions?
While Gwen is polling for questions, I'd like to update you on a few upcoming events. We will be hosting our Financial Analyst Day on Thursday, May 27 in New York. Registration is required to attend, so please make your reservations as soon as possible. In addition, we'll be presenting at the Bank of America Merrill Lynch Conference on June 3. And we'll be reporting our fiscal first quarter results on July 28. For a complete list of our investor-related events, please visit our events calendar on the IR website. Gwen, we're ready for the first question.
We'll take our first question from John DiFucci with JPMorgan.
John DiFucci - JP Morgan Chase & Co
Enrique, what's implied in guidance regarding PC unit sales for the June quarter? And was the consumer momentum this quarter, did that result from any change in consumer attach rates or that was it just strong follow through from what was strong December quarter shipments?
What you're seeing, John, is that the products that we built are absolutely the best, and they're being just so well received in the marketplace. And what you're definitely seeing is the discussions we've had around the increased investments in OEM placement fees, meaning that we're shipping -- more units are being shipped, and we're being able to convert those units very effectively. The other thing is with the new eCommerce platform, we are seeing, given the visibility that we have into -- what the customer is doing is they come to the site, we are starting to see an improvement in some of our renewal rates as customers are coming into the side in our conversion rates. So it really is benefiting from a combination of the investments we've made in the OEM and also the improved renewal rate.
And understand that we are expecting those increased units shipments to flow through to increased OEM fees year-over-year. So I'd be expecting around $0.015 of dilution driven in the OpEx as a result of those increased OEM fees.
John DiFucci - JP Morgan Chase & Co
And James, that $0.015 of dilution, that's for next year?
No, that's in the June quarter.
John DiFucci - JP Morgan Chase & Co
And just a quick follow up, James, for you, you said you're going to complete the transition to the in-house eCommerce platform by the end of June. I'm just curious what's the impact on operating margins, all else equal? I'm realizing there's a lot of things happening as far as operating margins, but as you complete that transition, which should we be looking at just from that impact?
Well, I would expect that because of the ratable nature of the consumer model that the move to the in-house platform would continue to have a negative effect on operating margins in fiscal year '11. So it's going to obviously become less of a financial issue as the quarters go by, and we see more top line benefit driving from that conversion to the in-house platform. But I would assume it net, net will be dilutive in the fiscal year.
We'll go next to Phil Winslow with Crédit Suisse.
Philip Winslow - Crédit Suisse First Boston, Inc.
You know that the Oracle acquisition of Sun has closed and you touched on this a little bit earlier. What do you expect the impact to be to your storage line item? And then just one follow-on question on that too, when you look at the small- and mid-sized business market, any changes that you're seeing there this quarter relative to maybe last year?
When we think about the SMB Market segment, what we're seeing is that the new product, Symantec Endpoint Protection Small Business edition, the additions of suites which make it easier for both our partners and our customers to take advantage of our products is absolutely having a positive effect, and we are seeing the SMB segment improve. Some of that is a combination of market and then our improvement in execution. I think with regards to the first question on Oracle and Sun, what we believe now is that given the uncertainty around the acquisition, my expectations is that we should see Sun server sales start stabilizing, and then we'll continue to do the job that we've always done which is driving the attach of Storage Foundation, Storage Foundation HA, NetBackup and other products on that platform because we still have a -- our products are clearly the best on the platform. And I'm confident that we'll continue to be successful there. I think what you're also seeing is that we've also started to spend more time on some of the other non-Solaris platforms such as the Windows platform, Linux, and we've got great partnerships with both IBM and HP. And so that gives us more diversified revenue stream for our core storage products, and so I'm feeling very good about that transition and I'm pleased with where we are.
We'll go next to Walter Pritchard with Citi.
Walter Pritchard - Citigroup Inc
Enrique, just a question for you on the NetBackup 7 and what you're seeing there. It sounds like you're not seeing it being modified through catch-up payments on maintenance, but you did see that growth there. I'm wondering is it just the reduction in server unit shipments and growth in data centers now and that's revenue growth? Or are you starting to see obviously success in the upsell of deduplication and other options on that product?
You're right to say that because we've been doing such a good job of keeping people current, and that's a discipline here at the company. It's really driven by the add-on options. People looking at PureDisk, taking advantage of the support we have for virtual environments. The product is fantastic from a quality perspective. The early returns, and I've talked to a number of very large customers that are using NetBackup 7, has been outstanding. And if you remember when we shipped NetBackup 6, the adoption was much slower, we did a number of updates. And so at this point, it's really driven by some of the new options and support for some of the new capabilities. The integration with archiving is being well received. It's also important to note we did a new release of Backup Exec that's also doing well. I think I made a comment that about 60,000 people have already installed the new version of Backup Exec 2010. And so if you look at both NetBackup and BE, they're both being very well received in the market place.
Walter Pritchard - Citigroup Inc
And then, James, just a quick clarification on the margin side. You gave us some guidance for the June quarter. I'm wondering if you could just help us out in fiscal '11, should we expect that operating margins can expand? And should we expect them to expand back to like in fiscal year '09, you were right around 30%? Should it be able to get back to those levels with some of the headwinds you mentioned?
Well, as Enrique and I have been laying out, we're pleased with the momentum that we have going into fiscal '11. And at the same time, we're going to maintain absolute focus around cost efficiency across our business. I'm pleased with the progress we've made between sales and marketing, R&D and G&A right across the business in the last year, and we're going to absolutely continue to focus for improvements in all of those areas. That said, I think it's also going to be important that we make sure that we're funding the parts of our business that have the highest growth opportunities available to them. So that's areas like the Consumer business, our SaaS businesses and our Appliance business as well. So that'll be how we'll approach fiscal year '11.
And we'll go next to Brent Thill with UBS.
Brent Thill - UBS Investment Bank
Enrique, just on the new consulting strategy, you mentioned that the hope is to increase license fees. Can you just give us a sense of what changes you've made? And how disruptive is this to the next year, to the model? Or is it just, in your opinion, just a tweak to the model?
What we did, Brent, was in October of last year, we went and spoke at our partner engagement. We talked about our approach to leveraging our partners much more broadly across our business. As you know, we've got a portfolio that has a number of great products in it. And what we wanted just to make sure that our partners start specializing in specific parts of our portfolio, because we think that's going to be the best way to make sure that our customers can be successful. So what we did as we entered the new fiscal year, as we extended that program and the reception, quite frankly, by our partner community has been outstanding. Today, we're three partners announced some of the new things that they're doing to support the direction that we're taking. And as I think about the efforts given that focus from the partners, I think now a matter of making sure that the partner community is well-engaged with the entire Symantec sales force. That process is going well. We've been having a number of internal discussions, people understand the direction. Our customers understand the direction. And so I think so far from an overall reception in the marketplace, I'm pleased. I think people are doing and acting in the way we behave and ultimately, should make us much more scalable, because it would allow us to deliver solutions more broadly around the globe as partners are fully enabled to deliver the solutions into the marketplace.
And I think it's probably worth just re-emphasizing what I mentioned in my prepared remarks about the during, the coming fiscal year, we don't expect that to be a very significant reduction in our services revenue. We've got a large backlog business that we will fulfill during the coming year. So that will flow through to revenue during the coming year. And I mean that there's very little impact to the P&L of our Services business overall in fiscal '11.
And we'll go next to Kash Rangan with Merrill Lynch.
Kash Rangan - BofA Merrill Lynch
For a couple of quarters, we've been seeing the OEM fees really impact your sales and marketing. I'm wondering what is the timeline to get the conversions to benefit your revenue line item going forward? In other words, when do you start to see the revenue and operating leverage from the investments that you've made the last couple of quarters? And as a follow up, I'm wondering if there is any lag at all between what's happening on the Server Market and your Storage business, especially given that you've had the two new product updates, if you will? Is there any follow through that we could expect on the kind of those product releases and what's happening on the server market as to your go-forward business?
Kash, when you look at the investments we've made in the OEMs, what we look at is it takes probably about five months from the time that we pay the fee to the time that an end-user has the opportunity to convert and then you see a ratable revenue recognition, which takes, as you know, over the life of the contract, in most cases, 12 months. And so from a revenue perspective, some of the investments we made in the December quarter, we're starting to see the opportunity to convert those units in the June quarter, but that's literally just a conversion. And then you take the revenue from that conversion point forward. When you comment about the lag or the notion of server shipments, definitely, server shipments have a positive impact on our business. And what you want to look at is again, there is a lag. People buy the server, and then they think about whether they do from a file system perspective, what do they do from a backup perspective and again, there is that time lag, but both or positive for Symantec. And my expectation is the investment we've made in consumer so far is paying off both on the product side and on the go-to-market side. As you saw with the sixth consecutive quarter growth that we've shown in that business.
And I'd just add that as Enrique was describing the accounting model there associated with OEM fees, of course, they start to show up in terms of the deferred revenue balance, and that's been one of the important reasons for the relatively strong deferred revenue results that we were able to put out this past quarter and reflective of the guidance that we offered for June.
Kash Rangan - BofA Merrill Lynch
Just to clarify, you continue to see momentum going forward from the NetBackup Backup Exec updates, right? It's not a one-quarter benefit that you got but it should continue to benefit your business in the June quarters from a quarter beyond?
Yes. We expect the new product releases to continue to benefit the business going forward.
We'll go next to Sarah Friar with Goldman Sachs.
Sarah Friar - Goldman Sachs Group Inc.
First, James, it feels like the business is stabilizing on many fronts. And as that occurs, should we start to assume that earnings growth and cash flow growth align again? Because they've -- a little off-kilter for the last couple of years.
Well, one of the challenges here in seeing tight alignment is around the OEM fees and another is around taxes, obviously. So I think there are always going to be quite large dislocations between those in any one quarter. Now over a longer period of time, obviously, those things start to even out. So as we look to the next year or two, yes, I would look to see some sort of overall trend line there coming closer together.
Sarah Friar - Goldman Sachs Group Inc.
And then Enrique, it's good to hear the commentary on the SMB segment beginning to return to spending. Do you have any sense of pent-up demand on two fronts? One, you had some issues with the enterprise security products a little while back, particularly on SMBs. You clearly got the new upgrade around Backup Exec. So as you get back fixed and upgraded combined with their willingness to spend, does that feel like a bigger area of opportunity right now?
Absolutely. I think that as the SMB segment comes back and you hit it, the strength of both Symantec Endpoint Protection and Backup Exec, some of the new functions that are integrated into both, the other thing to look at in that segment, given the work we've done in Symantec Hosted Services, that should also benefit us as the SMB segment recovers. So there's a number of different things that we can do to better serve that market. And then lastly, from a go-to-market perspective, given the changes that we've been making and the support we're getting from our partner community, that should fare very, very well for us.
We'll go next to Todd Raker with Deutsche Bank.
Todd Raker - Deutsche Bank AG
One can you talk about the competitive implications of McAfee's DAT file issue? And then secondly, you guys mentioned that as your SaaS business is growing, you're incurring more royalties? How should we think about that as that business scales, the impact on gross margins overtime?
Todd, could you re-ask your second question?
Todd Raker - Deutsche Bank AG
As the SaaS business grows, you guys commented royalties, you're seeing more royalties, and it's impact gross margin slightly. Can you give us some insight overtime as SaaS scales, what the impact on gross margin should be overtime?
Let me take the first one. So when you think about the DAT issue that you referenced, what's happened right now in the marketplace is our customers obviously are -- there's concern about what happened. A number of companies and businesses were impacted, a number of consumers, and so it's clearly giving us an opportunity to have conversations with those customers around not just the point security product but the entire security suite that we've got in place. And so it's been really more an opportunity to have conversations with customers who may not currently be using our product and look at a more holistic strategy. Because it's not about replacing a point product, it's about introducing the suite offerings, and quite frankly, the breadth of what we can do for a lot of these customers. So it's really giving us an opportunity to go back into those accounts and have good conversations.
And on the second point, our cost of goods sold were up $16 million year-over-year. Right around a quarter of that was driven by the Symantec Hosted Services royalties that I referred to. And I would expect that to behave very much like a variable cost as Hosted Services, as SaaS grows, that line will grow.
We'll go next to Heather Bellini with ISI Group.
This is Perry Huang for Heather. I was hoping to ask a quick question on currency and guidance. I believe guidance assumes $1.35 rate for the euro, what seems to be a bit higher than current levels. Are there other factors we should be thinking of in terms of the currency impact?
Well, we talked on the call that we did last week around the Guardian Edge and PGP acquisitions that we had used $1.35 in our planning for the full fiscal year '11. And that's right in the middle of the trading range that the euro-dollar has been at over the last year or two. Now, so we're going to use the same rate, $1.35 for the first quarter. We're only a few days later from this past Thursday. And obviously, we will update everyone as I mentioned at the end of the quarter as to what actually happened. And then, you also have the rules of thumb, so I think everyone should have the tools needed to be able to adjust FX in line with the reality of what the markets are creating. And obviously, that situation has been more volatile in the last two or three days in particular. But all of that aside, I think it's important to focus on the fact that we run the business on a constant currency basis as we think about where to invest, where to emphasize and so forth, and so that's really the key here. And we'll just keep you updated in terms of what's happening on the foreign exchange markets and what impact that will have on our reported results.
We'll go next to Adam Holt with Morgan Stanley.
Adam Holt - Morgan Stanley
I had a couple of questions about the Consumer business. And Enrique, I think you noted that both renewal rates had improved and you were also seeing improvement in attach rates. And obviously, you've done nice work on that over the last several years, improving both of those elements. How much more room do you think you have to drive up renewal rates in consumer and attach rates? And then I guess the other question would be, to what extent did an increase in average selling prices played a role in the strong Consumer business this quarter, given the mixed shift towards 360?
As we look at the renewal rates and the attach rates, there's always going to be opportunities to make improvements, and you see us doing that, for example, on the eCommerce platform. You see us doing some new things with the consumer products as far as how do we more effectively move customers and continue to move them through the product range. So from the point product to the suites, we're still continue to have success on that. We've got premium editions of 360. We shipped the new version. So we absolutely believe that there's more room to work on both the renewal rates and the attach rates, Adam. And I think you'll continue to see my team get focused on that. They did a great job in the previous fiscal year, and I definitely believe there's more that can be done there. Adam, you had two parts to your question, renewals and attach, and then there was the second piece? The price increases. So when we look at prices, that is a factor, but as you know, the increases have become much smaller and there's not a lot more that can be done there. It's more a matter of how do we get everybody to the higher-end suite, which is the Norton 360 product which has the highest right price point, that's going to be the more significant benefit.
Adam Holt - Morgan Stanley
You called out the OEM business related to Oracle. Is your assumption over the next year that, that business just stands at current levels? Oracle's made some comments that -- then they deemphasize it. Or are you assuming, should we be modeling that this business change this trajectory?
I think we are absolutely thinking about that business where we're not going to depend on Oracle and anything that they're doing while we think that it'll stabilize Sun server shipments. It's more about what our team will do working through both our partner community and our large enterprise sales force to go after the opportunity through our own go-to-market activity, so I'm not going to be dependent on Oracle.
We'll go next to Neil Herman with Herman Advisors Soleil Securities.
Neil Herman - Soleil Securities Group, Inc.
Could you talk a little bit about any changes you're seeing in the competitive environment? Actions by your competitors with respect to security? One of your competitors last week had indicated that some of their deals have slipped. And I'd love to get some of your perspective on maybe how they're reacting or what perhaps is being done differently from a competitive perspective?
In the Security market, look, we've been very focused. When we set out in the fiscal year, we laid out a very clear set of priorities. And one of those priorities that we set out was we were going to put a great team in place around the Security business. We were going to continue to work on delivering suites. We are going to focus on improvements in the SMB segment, and I think what you're seeing right now is that work is, it's working. I mean it absolutely has had the benefits that we expected. Now clearly, there's more work to do. We still see an opportunity to go to the broader range of our suites. We did some new things in data loss prevention where we added in the ten fiber list, something that we call Data Insight which is a clear differentiator that Symantec is uniquely positioned to deliver given our strong background in storage. And so what I look at is our go-to-market and the quality of our products in the securities base is rapidly improving, and I expect that to continue. From a competitive perspective, I would tell you that we have been gaining a lot of large wins. We're tracking the numbers of nodes that we're winning on a quarterly basis across all three geos. That number's continuing to increase. I haven't seen anything different. We've got a number of different competitors, and some of our competitors are geographic based, some of them are segment based. But ultimately, what I feel good about is our team is doing a great job in the security space and making progress. But there's more work to do in fiscal year '11, and that's why it'll continue to be a focus. We extended our portfolio with the new PGP and Guardian Edge acquisitions, and so I think we're in a very strong position for fiscal year '11 in the Security business.
And we'll go next to Brad Zelnick with Macquarie.
Brad Zelnick - Macquarie Research
Enrique, in the past you've talked about in the downturn, enterprise customers' willingness to purchase forward and they were being a lot more conservative. I guess the question would be whether or not that you're seeing a return to more normal purchasing trends? And just also on that note, from an execution standpoint, you've also in the past talked about opportunities to improve your execution in enterprise sales. Where are you in that continuum? And what does the opportunity look like going forward?
First question, no change in buying behavior. I think since the enterprise customers, while they may be buying more servers, they are buying what they need for what they can clearly forecast. And so I don't see any of the kind of pre-buying or any meaningful change in pre-buying. With regards to execution, across every area of the business, there's still continued opportunity to improve. And you should expect that the business leaders are all looking at their areas. We definitely have made progress in our go-to-market both in marketing and sales, but there'll continue to be opportunities to -- and I wouldn't underestimate that comment that James and I both have been talking about, how we can leverage our partners. Partners are a significant part of our business. While we have a large sales force, the combination of the improvements we've made on internal execution on partner enablement, some of the updates to Consulting Services and doing all of those combined will help our overall go-to-market execution.
Brad Zelnick - Macquarie Research
But just on that point, it seems like it's a great opportunity, but I imagine with that, there also comes some risk. Can you maybe also just comment a little bit about how your plan and your process mitigates that risk of moving things more to the channel?
When you think about that, it really is a matter of -- we went through a detailed process. We started this effort in October, and the partner reception was outstanding. We extended that effort starting in the new fiscal year, we went through and thought about what's the enablement we have to do for the partners. We need to make sure that we have specialized partners. It's not about if somebody's greater in that back up, I wanted to be greater than that back up, and we were making sure that they have the intellectual property and the tools and the training to be successful. So we've done a very detailed effort to make sure that the partners are ready. But ultimately, our sales force, both in large Enterprise, Enterprise segments, is still with their account managers having direct interaction with the customer. And so, the goal here is to really bring the partners in to help deliver the overall solution to the customer, and the feedback so far has been very good.
Brad Zelnick - Macquarie Research
Enrique, any updates on meaningful consumer relationships, OEM partners, ISP partners? Maybe you can talk a little bit about the pipeline, any status updates there?
At this point, I don't have anything else to be honest. Some of the comments from the call are on Samsung and Fujitsu. I'm pleased nine of the top 10 OEMs are using our Norton products. We've been making great progress on the backup side. And so overall, I have nothing new to report, but definitely pleased with what the OEM team has been doing. And I think the approach that our consumer OEM team, as far as the relationship building that they've done, is working for us.
We'll take our last question from Rob Owens with Pacific Crest.
Rob D. Owens
Enrique, with the return to growth on the top line, why shouldn't we be thinking about margin expansion as you move throughout fiscal 2011? Is it increased PC shipments and kind of the consumer dynamics with potentially some renewing relationships that might weigh against that?
I think that's exactly right. What we're seeing is that the Consumer business is definitely doing well. We're seeing PC shipments improve, and so that's part of the equation. And I also think that as you look at our business, we will continue to look at the cost structure and what improvements we can make. But overall, as the top line grows, it does make it easier to be able to improve margins. But right now, I'm very focused on the things that have worked which are continuing to look at the Security business, the Backup business, the SaaS business, and some of the things I commented on, the new efforts in Appliances where we're going to have new appliances shipping over the next 12 months, that I think will be a benefit our customers.
Rob D. Owens
And then second, from an enterprise perspective, are you seeing interest from your customers in helping manage mobile devices at this point or is that still a relatively nascent market?
It's a nascent market from what they're looking at, but you're absolutely on the right point. I made a comment about the consumerization of IT where consumers are bringing new technologies, more devices, and I absolutely believe that there's a lot of interest. At our Vision Conference a couple of weeks ago, we had a roundtable with a number of CISOs [chief information security officers] and heads of infrastructure. And it was very clear that there all trying to figure out what is the way to embrace some of these more consumer-oriented devices and technologies. And for Symantec, it's a positive, because when you have got kind of diversity or you've got some fragmentation, given our roots and our focus on hydrogenation, it's a plus for us. And so at this point, a lot of efforts, both in consumer and in enterprise, are looking at how do we deliver information protection capabilities that means both backups and security for non-wintel-based devices. And so those mobile devices are really clearly seeing a benefit or they're seeing a growth there an opportunity for Symantec.
All right. Well, at this point, what I'd like to do is just give you a couple thoughts. We closed our fiscal year achieving better-than-expected results on all of our key financial metrics. Sales activity continued to improve. And as the team utilized the broader Symantec portfolio, we were able to take advantage of a number of cross-selling and up-selling opportunities. We drove continued improvement in our execution.,, And our results are clearly showing that, which position the company well for fiscal year 2011 as we focus on making it simpler for our customers to secure and manage their information. I'd like to thank you all, and have a good afternoon.
Thank you everyone. That does conclude today's conference. We thank you for your participation.
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