Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Symantec (NASDAQ:SYMC)

F1Q11 (Qtr End 07/02/2010) Earnings Call

July 28, 2010 5:00 pm ET

Executives

Enrique Salem - Chief Executive Officer, President and Director

James Beer - Chief Financial Officer and Executive Vice President

Helyn Corcos - Vice President of Investors Relations

Analysts

Adam Holt - Morgan Stanley

Katherine Egbert - Jefferies & Company, Inc.

Brent Thill - UBS Investment Bank

John DiFucci - JP Morgan Chase & Co

Neil Herman - Soleil Securities Group, Inc.

Shaul Eyal - Oppenheimer & Co. Inc.

Philip Winslow - Crédit Suisse AG

Edward Maguire - Credit Agricole Securities (NYSE:USA) Inc.

Philip Rueppel - Wells Fargo Securities, LLC

Daniel Ives - FBR Capital Markets & Co.

Rob Owens - Pacific Crest Securities, Inc.

Todd Raker - Deutsche Bank AG

Richard Williams - Cross Research

Ventsi Stoichev

Operator

Good day, and welcome to Symantec's First Quarter 2011 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the call over to Miss Helyn Corcos. Please go ahead.

Helyn Corcos

Good afternoon and thank you for joining our call to discuss fiscal first quarter 2011 financial results. With me today are Enrique Salem, Symantec's President and CEO; and James Beer, Symantec's Executive Vice President and Chief Financial Officer.

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 at www.symantec.com /invest. 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 financial results focusing on year-over-year constant currency growth rates unless otherwise stated. Sequential growth rates are based on as reported results. For June 2010 quarter, the actual weighted average exchange rate was $1.26 per euro and the end-of-period rate was also $1.26 per euro, compared to our guided rate of $1.35 per euro. For the June 2009 quarter, the actual weighted average rate was $1.37 per euro, and the end-of-period rate was $1.40 per euro. We've included a summary of the year-over-year constant currency and actual growth rates in our press release table and in our supplemental information.

As a reminder, we will 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 environment, we encourage everyone to apply our rules 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 statement. Additional information concerning these risks and uncertainties can be found in the company's most recent periodic reports filed with the U.S. Securities 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 metrics. Investors are encouraged to review the reconciliations 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.

Enrique Salem

Thank you, Helyn, and good afternoon, everyone. I'd like to start off by highlighting our key priorities for fiscal 2011. These priorities are: extending beyond the PC in consumer security, growing license sales, expanding the adoption of our SaaS offerings and simplifying the customer and partner experience. While we made progress in some of these areas during the June quarter, a number of enterprise deals slipped due to a longer than expected customer procurement cycles driven by continued cautiousness among IT buyers. In particular, this affected our Storage Management results. With that said, we are confident that these deals have not been lost to competitors, as in fact, we have closed many of them in July.

Having said that, highlights for the quarter included strong results in our Public Sector business and continued strength in DLP and SaaS. In addition, we are beginning to reap the rewards of our new backup solutions and are pleased with the steady growth in the Consumer business. The integration of PGP and GuardianEdge is off to a great start with customers excited with the addition of new encryption offerings to our portfolio.

We’re pleased with the year-over-year growth in public sector deals for state, local and federal governments. We signed a multi-year contract with the U.S. Marine Corps who chose to use NetBackup with their Enterprise IT Services program. In addition, SESCAM, a Public Health Care Department in Spain, signed a multi-year contract spanning across our Endpoint Security, backup storage and service offerings.

Our recent acquisition of GuardianEdge is resonating well within the government sector due to the adoption of standards-based solutions and increased regulatory encryption requirements. This positions us well for the federal government fiscal year and in September.

In our Enterprise Security segment, we continue to do well in a large and mid-sized enterprise market segments. In particular, customers are adopting DLP, which generated another strong quarter of double-digit growth. Our DLP solution continues to shift the focus of security from simply locking down the infrastructure to protecting the information itself. As a result, we are leveraging our relationships with CISOs to sell our data protection suite along with our endpoint security, management and compliance suites. Customers are increasingly turning towards vendors that offer complete security solutions versus point product tools. Our suites enable customers to protect completely, manage easily and control automatically the assets most crucial to their business. We’re seeing higher Net Promoter Scores as for our Enterprise Security suites driven by the recent improvement in customer experience and quality.

We continue to address the SMB market by increasing our focus with our channel partners. For example, we have expanded our small business specialization partner program. More and more small business customers are increasingly adopting managed services to reduce upfront licensing costs and operational expenses. As a result, we expanded our service prior program, enabling our partners to offer customers a monthly subscription. This licensing model aligns with the way these partners do business with their customers.

The Symantec Hosted Services business posted strong, double-digit revenue growth. Our performance was driven by Hosted E-mail Security and newer products such as Web Security. In the last 12 months, we grow our customer base by 50% and we remain the clear leader in this fast growing market by gaining share from our competitors around the world. In May, we launched our internally developed Symantec Hosted Endpoint Protection solution. The early response from our customers has been very positive do to its ease of use and lighter footprint on the endpoint. Our hosted Endpoint Protection solution was jointly developed leveraging the combined answer please enterprise, consumer and hosted services teams. We will continue to expand our portfolio by delivering additional hosted services such as Data Loss Prevention and archiving. I'm pleased with the progress we’re making in this part of the business.

Now moving on to our backup and archiving business. Backup Exec posted double-digit bookings growth of year-over-year across all geographies. Backup Exec 2010 has been one of our strongest backup releases to date. There’s been more than 155,000 installations since its February release. Small and medium-sized organizations are excited about our simplify data management from integrated deduplication and archiving as well as virtual machine protection. We will continue to educate and engage our partners on the new features and benefits of the product.

Since the launch of NetBackup 7, we have seen more than 2,350 installations and over 12,000 customers are evaluating the product, representing approximately of 25% of the NetBackup install base. Customers value the improved storage efficiency with integrated deduplication, greater infrastructure utilization and faster recovery times, which reduces the total cost of ownership. We expect this release to benefit us in the second half of this fiscal year.

In the September quarter, we expect to ship a new version of our archiving product, Enterprise Vault 9.0. With this release, we plan to include support for Exchange and SharePoint 2010, enhance the deduplication and additional e-Discovery capabilities. These features will make it easier for our customers to adopt and standardized on our archiving solution.

Our Consumer business generated another quarter of solid growth driven by our award-winning products, superior user experience and multi-channel strategy. We continue to enter into agreements that are beneficial to both Symantec and our partners. As we announced in June, we are pleased to have extended our worldwide consumer security relationship with HP for another three years. This quarter, we expected our security OEM relationship with Toshiba to include Norton PC Checkup in the U.S., Australia and New Zealand. Norton PC Checkup helps customer become aware of PC performance problems and recommends possible solutions. This is an opportunity to up-sell our Norton Security, backup and remote service offerings.

Our PC Tools business achieved double-digit revenue growth this quarter. We are leveraging Symantec's extensive distribution network to distribute PC Tools worldwide. For example, PC Tools is now being sold in retail stores in France, Spain, Portugal and Hong Kong, taking shelf space from competitors. We also introduced PC Tools into the Japanese markets through a co-branded security solution with BBSS, a Softbank Group company, displacing our largest Japanese competitor.

We completed the transition to our eCommerce platform in June as planned. The performance from our online store is surpassing our expectations. We can tailor the user experience depending on where the customer acquired our product to maximize customer spend and improve close rates. I'm very proud of the team's strong execution on this very strategic initiative.

I'm pleased with the progress we've made since the close of the acquisitions of PGP and GuardianEdge in early June. Through the efforts of our integrated sales force, we exceeded our bookings expectations. The acquisitions generated revenues of $4 million and diluted EPS by $0.005, in line with our plans. Encryption is being sold by the combined sales force, and the integrated product roadmap is already complete. Customers and partners are responding well and I'm pleased with how we've executed so far.

The acquisition of VeriSign’s security businesses is on track to close shortly. I'm very excited about adding identity security to our portfolio as it strengthens our core value proposition in securing and managing information. By bringing together our security portfolios, we will be the only company capable to protect identities online and create hassle-free experiences for our consumer and enterprise customers. I look forward to updating you on this acquisition in subsequent quarters.

In conclusion, we remain confident in our strategy and vision of securing and managing information and identities. We are focused on delivering industry-leading products, integrated technologies and cross-selling the portfolio. I'm confident that we have laid the foundation for continued to improved execution in the September quarter. I'll now turn over the call to James to provide the financial details for the quarter.

James Beer

Thank you, Enrique, and good afternoon, everyone. In the June quarter, we saw strength in our Backup, Data Loss Prevention and public sectors sales. In addition, our Software-as-a-Service offerings posted double-digit growth. However, these positive developments were offset by the longer enterprise procurement cycles that Enrique referred to. Given the relatively high volume of our business that typically gets booked during the last week of a quarter, the additional time taken by some of our corporate customers impacted the June quarter's results. This buying dynamic was primarily a factor at some of our larger customers who typically buy products such as our storage management offerings.

GAAP revenue was $1.43 billion and increased 2% in constant currency terms versus the June 2009 period. U.S. dollar strengthened 8% against the Euro as compared to the year-ago period, reducing our international revenue as measured in U.S. dollars. As a result, foreign currency movements negatively impacted revenue growth by two percentage points year-over-year.

Net income was $284 million, resulting in fully diluted non-GAAP earnings per share of $0.35. The reversal of accrued interest related to the successful outcome in our Veritas 2000 to 2001 tax case added a one-time tax benefit of $0.01 to this quarter's non-GAAP earnings per share. Other one-time tax benefits recorded during the quarter generated another $0.005 of earnings per share benefit. Looking at our geographic results, international revenue of $711 million increased 3% year-over-year and accounted for 50% of total GAAP revenue. Revenue increased 2% year-over-year in each of our three geographies: the Americas; Europe, Middle East, Africa; and Asia Pacific/Japan.

Now I'd like to move on to our GAAP revenue by segment. The Consumer business had another strong quarter generating revenue of $473 million, up 7% versus the June 2009 quarter. With the launch of our eCommerce solution, our renewal and upselling efforts continued to perform well. For example, our Norton 360 revenue grew 22% versus the reported results in a year-ago period and accounted for approximately 40% of total consumer revenue. Our Enterprise business generated a total of 245 transactions valued at more than $300,000 each, down 6% year-over-year. 37 of these transactions generated more than $1 million, down 30% year-over-year. The lengthening procurement cycles that I mentioned earlier particularly affected the number of large deals closed this quarter.

The Storage and Server Management group generated revenue of $524 million and declined 3%, as compared to the June 2009 quarter. We experienced fewer new license sales in our Storage Management business. However, our newly refreshed backup products performed well. Our mid-market product, Backup Exec, generated double-digit bookings growth as a result of the successful launch of the 2010 product. New releases of our enterprise-scale Net Backup product tend to be gradually adopted by data center managers over 12 to 18 months, although we are pleased with our early deployment results and with a positive customer reaction we've seen thus far.

The Security and Compliance group generated revenue of $340 million, equivalent to an increase of 2% year-over-year driven by strong growth in both Data Loss Prevention and Hosted Services. The percentage of Symantec Hosted Services bookings driven by referrals from the on-premise sales force increased sharply year-over-year.

Our Services business generated revenue of $96 million, an increase of 2% as compared to the June 2009 quarter. We have received positive feedback on our recently launched partner-led consulting program and we believe that our core software business will benefit from the resulting strengthening relationships with our partners.

Turning now to margins. Non-GAAP gross margin was 84.9% for the June 2010 quarter, down 30 basis points from the year-ago period. Cost of goods sold increased, as this line item now includes credit card fees driven by our new eCommerce store and also reflects our increased investment in offshore technical support centers.

Our non-GAAP operating margin of 26.5% in the June 2010 quarter was down 60 basis points year-over-year, driven by higher consumer OEM fees. Cash flow from operating activities for the June quarter totaled $335 million. Cash flow was negatively affected year-over-year by higher OEM fees and cash taxes.

We exited the June quarter with approximately $2.74 billion in cash, cash equivalents and short-term investments. During the quarter, we spent $362 million to acquire PGP and GuardianEdge. In addition, we spent $200 million to repurchase nearly 14 million shares at an average price of $14.49. We have $547 million remaining on our current board-authorized share repurchase plan. GAAP deferred revenue at the end of June 2010 was $3 billion, up 3% year-over-year.

Now I'd like to spend a few minutes discussing our guidance for the September 2010 quarter. We are assuming an exchange rate of $1.26 per Euro for the September 2010 quarter versus the $1.44 per Euro that we experienced during the September 2009 quarter, equivalent to approximately a 13% currency headwind. Also the end-of-period rate for the September 2009 quarter was $1.46 per Euro versus our $1.26 per Euro assumption, equivalent to approximately a 14% currency headwind.

Our guidance assumes a common stock equivalents total for the quarter of approximately 790 million shares and an effective tax rate, before consideration of any loss from our joint venture, of 28%. The acquisition of VeriSign's Identity and Authentication business is on track to close shortly. And therefore, we have already included approximately two months of revenue and contribution from the VeriSign assets in our guidance.

Thus, for the September 2010 quarter, we expect GAAP revenue to be in the range of $1.445 billion to $1.465 billion, as compared to revenue of $1.47 billion during the September 2009 quarter. We are expecting PGP and GuardianEdge to contribute $10 million and VeriSign's security assets to contribute $16 million to our September quarter revenue. Once again, these acquisition-related assumptions are already included in our revenue guidance.

We expect year-over-year revenue growth to be down 1% to 2% on an as reported basis and up 1% to 3% on a constant currency basis. GAAP earnings per share are estimated to be between $0.09 and $0.10, as compared to $0.19 in the year-ago period. Non-GAAP earnings per share are estimated to be between $0.27 and $0.28, as compared to $0.36 in the year-ago period. Our September quarter EPS guidance already includes $0.04 of dilution as a result of our three new acquisitions. Specifically, we are expecting VeriSign to dilute EPS by $0.03 and PGP and GuardianEdge together to dilute EPS by $0.01 in the September quarter.

We expect GAAP deferred revenue to be between $2.83 billion and $2.86 billion, compared to $2.9 billion at the end of September 2009. We expect deferred revenue to be down 2% to 3% on an as reported basis and up 2% to 3% on a constant currency basis. We expect approximately 70%, or $1.03 billion, of our September quarter revenue to come from the balance sheet.

In closing, we are very focused on quickly and successfully integrating our recently announced acquisitions while also executing on the growth opportunities inherent in our core business. We will continue to redirect our spending to areas with the best growth opportunities as we benefit from the various cost reduction initiatives that are driving additional efficiencies across the business. 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

[Operator Instructions]

Helyn Corcos

While the operator's polling for questions, I'd like to update you on a few upcoming events. We will be presenting at the Citi Conference on September 8. And we'll be reporting our fiscal second quarter results on October 27. For a complete list 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 go first to John DiFucci with JP Morgan.

John DiFucci - JP Morgan Chase & Co

Enrique, can you comment a little bit more on the Storage business? It’s not that there’s a lot of expectation out of that business, at least from field checks. And from what you were saying, you're getting a lot of traction or at least interest in your new products, both Backup Exec and NetBackup. It's probably the most important products likely you've seen in many years. At the same time, we haven't seen a positive growth out of this business in quite some time.

Enrique Salem

Well, John, you did talk about NetBackup and Backup Exec. We do have great releases there, and they are continuing to get broad adoption. I mean, 25% of the base in NetBackup is looking at the product. And so we're optimistic about what we're seeing there. When you look at the core storage management business, what we're seeing is a move in our customer base to try to build out what I'll call a more distributed or scale-out data center, where they're moving to use many commodity components, commodity storage, and that's where the technologies like FileStore become more relevant. And so we’re definitely seeing a move in the enterprise data center from what we’ve traditionally seen as what I'll say the bigger focus on bigger systems to a more distributed architecture. And that's why the FileStore capabilities becoming important. So you're right. We definitely have continued to see a softness in the sale of some of the traditional products.

John DiFucci - JP Morgan Chase & Co

Does that mean then that your product portfolio is just sort of outdated? And if you could just -- you mentioned that there were some deals that closed in July. Can you tell us how much they were worth?

Enrique Salem

Probably not in a position to really comment. We’ve closed a number of deals at the beginning of this month or through July. I think what's going on, John, is it’s really a move that we're seeing. And while we continue to do very well in a number of segments, we think that the future lies more in what we're doing with some of the new products with our Cluster File System and FileStore. The product portfolio, the largest companies in the world still depend on products like Storage Foundation and Storage Foundation HA. And my expectations are that, that will continue, and they’ll continue to use it in many of business-critical applications. The other thing that we're seeing that we're encouraged by, is then some of the new deployments of virtualization technology, VMware and others, they're looking to us to help drive the improved SLA or availability. And so that's going to help us with some of the clustering technologies and some of the new capabilities that we'll be shipping that will support that environment. So ultimately, it's really a shift, I would say, from the architecture and the data center to what I'll call a much more distributed scale-out architecture. And that's why we shipped some of the new products that we’re expecting to see some benefits as we go forward.

Operator

We'll go next to Phil Winslow with Credit Suisse.

Philip Winslow - Crédit Suisse AG

Just have a question on margin. Obviously, if you look at your guidance for Q2, a bit below where consensus was. How do you guys think about operating , especially kind of on a go-forward basis, I guess from two perspectives: one is just the recognition of the written down deferred revenue over time and then just really kind of on an organic basis too?

James Beer

What we said in the last couple of months is that as we look through the next three-year period, we would be able to drive operating margins to 30% driven by the core products. Now in the interim, certainly on a GAAP revenue basis, that's going to impact the operating margins that we're reporting because of this deferred revenue haircut. Now I think once we get to FY '13, we will have, in essence, got through the effects on operating margin of that deferred revenue haircut. And I would look for the three acquisitions that we’ve entered into recently to be added to operating margins at that time.

Operator

We'll go next to Brent Thill with UBS.

Brent Thill - UBS Investment Bank

Enrique, just in terms of the lengthening sales cycles and some of the deals that slipped, was there any common characteristics that you saw in terms GO? Was this a more enterprise-related versus SMB? Can you give us a little more color in terms of what you actually saw?

Enrique Salem

I think it’s the cautiousness we're seeing is bigger deals as those are going through more steps and it’s taking a little bit longer to get through that procurement cycle. I would say we saw it both in the U.S. and in Europe. So it's not necessarily one geography, we just see a little bit more cautiousness in the larger deals.

Brent Thill - UBS Investment Bank

I think you mentioned that you don’t believe there's any new competitive dynamic. It’s just a timing issue?

Enrique Salem

Yes. I'm not seeing anything new on the competitive front. And as I mentioned, some of those bigger deals, a number of them have already closed.

Operator

We'll go next to Sarah Friar with Goldman Sachs.

Ventsi Stoichev

Ventsi Stoichev for Sarah Friar. I had a quick question on geographies. I noticed that Europe was a little bit stronger than the U.S., and that’s a little bit in contrast to what we’ve seen from some other companies that have reported so far. What drove that? And do you expect that dynamic to remain the same during the next quarter or do you expect that to change?

Enrique Salem

Sure. If you look at the various geographies throughout Europe, one of the things that we saw was we definitely saw what we call central, which is Germany, Switzerland, that market, and what we call West, the French part of, actually performing well. That's what we saw in the June quarter. I would tell you that we're going to keep monitoring what’s happening in Europe, as there’s definitely a bit of a tone where people are a bit more cautious. And so we're monitoring it. But what we saw that drove our results was good performance by Backup Exec, quite frankly worldwide, including Europe, and then good performance in Central Europe and the Western or French part of Europe.

Ventsi Stoichev

What was the issue in the U.S.? Is it just overall the lengthening procurement cycle?

Enrique Salem

Yes, that's correct.

Operator

We'll go next to Todd Raker with Deutsche Bank.

Todd Raker - Deutsche Bank AG

Can you guys talk about on the consumer side from an operating expense perspective, where you stand in terms of the transition from Digital River onto your own platform? And how we should be thinking about kind of leverage and profitability in that business going forward? And kind of where you think growth will be at the back half of the year?

Enrique Salem

Let me take the first part and then I’m going to let James continue. So what we're really pleased about is that we have successfully completed that transition. When we announced it in October, we said we would be done by the end of June and now we've done that. And what we’re pleased about is that we now have complete control of the experience. And what does that mean? That means our ability to upsell to the suites, that it means the ability to cross-sell other capabilities. And so our ability to take over the whole experience is something that we’re very pleased about. With some of the details on the financials, I’ll let James take that.

James Beer

Yes. In terms of the expenses around the new eCommerce platform, our day-to-day operating expenses, if you will, our effectively in place. We've now fully transitioned. So the people running the platform are with us. Now we also, of course, have started the depreciation process of what we invested in the platform, so that will play out over the next three years or so. Net nettable [ph] of that is that in past quarters, we've talked about the eCommerce platform development being dilutive to margins. We're pretty much through that effect and we’d look for a positive impact on margins overall in the back half of this fiscal year.

Todd Raker - Deutsche Bank AG

And then just following up on the strength in Norton 360. If I look at that business, if you back out upsell, are you growing your Consumer business from a units perspective? I mean, it seems to me that the key driver here is upsell. Would that business be growing without the trade up to the suite side?

Enrique Salem

Well, the Consumer business is being driven by a couple of factors. I mean, the suites is a part of it. I think renewal rates we’ve talked about with regards to the Norton 360 product, when people use backup, we see improvements in the renewal rates. And then of course the other thing that we just talked about was the work around eCommerce platform. And so those things are driving the growth. So the combination of the move to suites, the better renewal rates and the move to the eCommerce platform are all benefits.

James Beer

And the other thing I would add to that, of course, is that we’ve got a wide variety of distribution paths for our Consumer business, both the range of OEM providers that we’ve further added to in the past quarter, as well as retail. So I think we’re unique in having this breadth of distribution.

Enrique Salem

And the other thing I’d just add on, just one last thought, is the PC Tools. We're definitely getting that out there a little bit more.

Todd Raker - Deutsche Bank AG

I guess my issue, I’m struggling with the fact that you guys got hit with a $0.02 impact in Q4 off of HP shipments. Same thing in the March quarter. And yet it doesn't look like the Consumer business is really accelerating and I would think that those units should be starting to transition into paid conversion.

Enrique Salem

Our expectation continues to be, and we monitor of those renewal rates very, very closely. And so there is that lag. We'll keep monitoring it. But 6%, I guess on a constant currency basis, I feel pretty good about a 6% year-over-year growth and our expectations are – and what we achieved was in line with our expectations.

Operator

We'll go next to Adam Holt with Morgan Stanley.

Adam Holt - Morgan Stanley

Maybe I'll just ask a quick follow-up to that question on the Consumer business. Obviously, there's a lag effect with consumer PC shipments in your business. As we’ve seen the consumer PC market accelerate for the last several quarters now starting to weaken a little bit, when do you think that tail would sort of peak for you all? And you think the recent weakness in the consumer market might actually start to impact your business?

Enrique Salem

So when you say that tail, the tail on the growth rate?

Adam Holt - Morgan Stanley

Right. So if you were to look at the PC market and the relative impact on your business, there's a little bit of the lag obviously. As consumer market accelerated and basically peaked in the spring, and now it’s starting to decelerate a little again, you all haven’t yet seen the peak impact of that acceleration. When do you think would you see that?

Enrique Salem

What you have to look at with the RPC business is you end up getting deferred revenue, and it's recognized ratably. So we've gone through and you look at the seasonality, it's pretty clear to me, December and March are the seasonally strongest quarters, tails off through going into the middle of summer and then we start re-accelerating as we get back to the holiday season. So that's consistent what we've seen every year. And so my expectation is you'll see the same thing again through this fiscal year. So it kind of slows a little bit as people go on holiday and then it picks up into the holiday season.

Adam Holt - Morgan Stanley

If I could just ask a follow-up on the license revenue in the quarter. And I apologize if I missed this earlier. But as you look at the number that's sort of down 17% year-on-year in Q1, could you walk through some of the relative impacts there? Obviously, the Sun business might have been a negative impact. But can you give us sort of what you thought were the different impacts on that? And how do you think about that turning around as you get a little bit deeper into an improved IT spending environment?

Enrique Salem

You did mention one of the components, which is we are still lapping the year-over-year impacts on the Sun business. And so I think we're getting to the tail end of that effect. I think we'll probably see that start leveling off, and then it's a matter of us, through our own sales force, driving those products into the breadth of platforms, whether it be Sun, Oracle-Sun, HP, IBM. And so our expectation is we're starting to hit the bottom of that effect. I think the other side of it is we continue to simplify, as you heard our Analyst Day, what Francis deSouza and his team are doing is creating a much simpler approach to our security solutions where you've got four suites. By simplifying the message which lines up to what customers are expecting, which is how do they get away from lots and lots of point products. That should also benefit us. So when I look across bottoming out on the Storage side; improvements in security; also the strength of the new NetBackup and Backup Exec releases; and then lastly, we did see double-digit growth in that SaaS business. So that combination of things should start seeing an improvement in new license growth.

Operator

And we’ll go ahead and go next to Daniel Ives with FBR.

Daniel Ives - FBR Capital Markets & Co.

With the September quarter, are there any one-time OEM payments baked into the number?

Enrique Salem

I don't know of any one-time payment that we are expecting…

James Beer

It would be a run rate type OEM activity.

Daniel Ives - FBR Capital Markets & Co.

Okay, so you're saying the $0.04 from the acquisitions is the only, well say like one-time type of things that we weren't seeing three months ago?

James Beer

Yes. I would say that I would expect OEM cash fees as well as OEM OpEx to be up year-over-year. So that's certainly a pressure point for us in the short run.

Daniel Ives - FBR Capital Markets & Co.

I know you're not giving guidance, but how should you think about operating margins rest of the year?

James Beer

Well, in terms of the operating margin and just again, to really focus on what I was saying earlier about the three-year look. Clearly, this year, we've got $0.11 of dilution that is going to be driven from the three acquisitions. And that's very much a function of this deferred revenue haircut that we've been talking about. We'll get through that process in the next couple of years. We'll have fully lapped that effect, if you will. And so I think the acquisitions will be improving operating margins at FY '13 and that the core will be driving a 30% operating margin at that time.

Operator

We'll go next to Philip Rueppel with Wells Fargo.

Philip Rueppel - Wells Fargo Securities, LLC

You talked about the slowdown or the deal slippage at the enterprise level. Implicit in your 2Q guidance, are you sort of lowering your expected deal close rates on those big deals or on big deals in general? I guess another way to ask it is, do you expect sort of a similar selling environment to continue through Q2?

Enrique Salem

That is my expectation and that’s what’s figured into our guidance, is that what we saw – I’m pleased with having closed some of the deals that we were targeting in June. But as we go through this quarter, I expect that the procurement cycles will remain about the same. We come through the summer, and so that's planned into our guidance for the September quarter.

Philip Rueppel - Wells Fargo Securities, LLC

Sort of shifting to the SMB area, you had sort of talked qualitatively about some progress you'd made there, especially in the Security side. Could you give us a little color on that segment of the business in Q1?

Enrique Salem

So when you look at the products in that segment, Backup Exec and Symantec Endpoint Protection, Symantec Protection Suites are the key products. We continue to make good progress with the launch of Backup Exec and the adoption of the suites is continuing in the SMB segment in security suites. Obviously, we continue to look at opportunities to reach more of that segment. As you know, it's very diverse. But we definitely have continued plans. And I made comments, one of the things that we're doing is specializing our partners. Because what we found is the more specialized they are, the more effective they are, especially in that SMB segment. And so we’re going to continue to do that and my sense is that will continue to drive better performance for the security products and better performance for storage and backup products. Last comment, we shipped the new product, Symantec Hosted Endpoint Protection. That is a hosted version of our Endpoint Security technology. And the initial feedback on that has been very good and that serves that SMB segment very well. So this is another addition to the segment that I think will help improve, continue to improve performance.

Operator

We'll go next to Heather Bellini with ISI Group.

Unidentified Analyst

This is Ryan Leaf [ph] in for Heather. Just had a quick question about the enterprise markets. Last quarter, you guys mentioned that you didn’t see any net pricing or pricing pressures or any changes in the deal size. Are you guys seeing any changes there? Are you seeing more of pricing pressures?

Enrique Salem

Well one of the things that we monitor very carefully is discounting. And what our results are showing is we do not see any increased pressure to further discount our products. And so comparable to previous quarters, no increased pricing pressure. And my expectation is that we are now reached a stable state from a pricing perspective.

Unidentified Analyst

And in terms of the average of deals size, are people still opting for one-year deals, as opposed to…

Enrique Salem

Correct. Yes, they are.

Operator

We'll go next to Shaul Eyal with Oppenheimer.

Shaul Eyal - Oppenheimer & Co. Inc.

With respect to the weakness, any specific verticals you guys have seen it in or it was broad-based?

Enrique Salem

I made comments about strength in the public sector and governments around the world. When you look at the verticals, there continue to be a number of verticals that continue to perform well. We definitely have seen a more cautious tone that's fairly global, meaning U.S., Europe and across verticals, with the best performance really coming from the public sector.

Shaul Eyal - Oppenheimer & Co. Inc.

Kind of just maybe more of a – I don’t know how you guys want to address the answer to the following question. But what kind of a strategic thinking – how’s the board thinking about strategic direction? Is the board happy about how the business has been progressing over the past couple of quarters? Apparently, the Storage business is kind of lagging and you want to pull it two steps back [ph]. What's kind of the internal thinking?

Enrique Salem

When we did our Analyst Day, is we spent some time sharing what we see the future of IT, what it looks like, and our expectations for that future. And so we’ve shared that with our board, with all of you. We'll continue to iterate on what are the capabilities, what are our opportunities for monetizing that vision. And so our expectations are that we've set a direction for our company that takes advantage of where we are very strong and then outlines what our expectations are. Because things like consumerization, that is the big trend that Symantec is uniquely positioned to take advantage of given the size and scale of our Consumer business. And so when we talk to our board, what we do is we paint a complete picture that says here's the strengths of our portfolio, here's the potential weaknesses and where there’s some level of risk, and then here's where we're going with the company. And the reception that I've gotten externally -- and I was with the CIOs around the world, I was in Europe two weeks ago, met with a number of CIOs here in the U.S. over the last month, and they understand our vision. They see that this notion of protecting information, protecting people, securing identities, they're very encouraged by where we're going with the company. And I think that's what's important right now, is to execute against the current product offering and sell what we've got, but also start moving towards the direction that this new vision has outlined for Symantec.

Operator

We'll go next to Michael Turits with Raymond James.

Unidentified Analyst

This is John Dorose [ph] for Michael. You mentioned strength in the public sector this quarter. Some other IT vendors out there are expecting some weakness in the federal vertical and the September quarter. Are you baking in any softness from the private sector into your guidance for September?

Enrique Salem

We just finished our business reviews for the September quarter last week. We had presentations that covered all segments. We look at plans and forecasts. We looked at pipelines. And so at this point, we've taken into account more the pipeline view and our expectations for the public sector. And we think that, that's all baked into our guidance. The other part that's important is with the acquisition of GuardianEdge, that is a product that’s done very well in the public sector and that's now added to our portfolio. And what it does is when you take a small company and you add it to Symantec where buyers, especially the federal government where we have a lot of great relationships, there’s going to be more confidence in working with us than working with a small company. And given the certifications they have and the capabilities, that is a plus for us in the public sector. And so we feel good about our ability to achieve our forecast in the public sector.

Unidentified Analyst

Just one more on the go-to-market strategy. I know previously you’ve tested out separating Storage and Security. With the weakness in Storage this quarter, is there any looking at maybe going back to that?

Enrique Salem

What we have done is our sales force continues to have a flying formation or alignment that matches up to the products in the portfolio. That's when we deal with the largest enterprises where the Enterprise segment. When we go down to smaller customers, I've been talking about this specialization in the partner community. And so we’re going to continue to do that. No now we've got partners who are very good on our Storage Management products. We have partners who are very good on our backup products, very good on our DLP products. So what we're trying to do is drive much more specialization that will allow better results, we think, across the product portfolio. And as far as our sales force, I'm comfortable with how we go to market with our own people.

Operator

We'll go next to Ed with CLSA.

Edward Maguire - Credit Agricole Securities (USA) Inc.

Back to the enterprise Storage Management business. You commented that you're seeing cycle lengthening, but I’d appreciate if you could provide just some color on your overall pipelines? Have the pipelines change, have closed rates change or are we seeing what had been more of just-in-time approach to purchasing -- focusing on larger deals that take longer to get through the pipeline?

Enrique Salem

When you look at the overall picture, the pipelines are as robust as they've been. I haven't seen a change in the ratios. Given the procurement component and the extra approvals and some of the discussions that have gone on, we did see a slight change in the close rate for some of the bigger deals. When you look at the other segments, SMB, we didn't see that, for example, in products like Backup Exec and some of our suites. So it would be more pipeline ratios seem to be appropriate. We do see a little bit close rates in the larger deals decreasing a little bit. And then we also, our expectation is that, that will continue in this quarter.

Edward Maguire - Credit Agricole Securities (USA) Inc.

On the consumer, will you track the conversion of trial to paid? What are the dynamics in that market for your OEM relationships? Are you seeing fairly consistent conversion rates?

Enrique Salem

When you look across the board, we track that very closely. And at this point, nothing that is unexpected, especially as we go into the summer period. Obviously, we're always looking forward to the holiday season and then at the beginning of the New Year. But so far, we tracked it carefully and we haven't seen any bigger changes there.

Operator

We'll go next to Rob Owens with Pacific Crest.

Rob Owens - Pacific Crest Securities, Inc.

Question on the consumer fronts again. I think you said you were happy with roughly the 6%, 7% constant currency. Do you expect any acceleration there, just from the standpoint that you talked I think at your Analyst Day about a high single-digit three-year CAGR. So is that coming down more to the mid-single digit range here? And also on the consumer front, what are you seeing out that the freemuim vendors in the marketplace right now?

Enrique Salem

So Rob, just to be clear, it is 7% in constant currency and 6% as reported. Sorry if I -- I just want to clear in that number. When you look at the marketplace, this level of growth, plus or minus anyone quarter, it’s going to move around. So I think we are in the right range. That's 7% plus or minus is probably around right. Could be a little higher, could be a little lower. When we look at the freemuim market, we haven't seen any dramatic changes in that marketplace, and quite frankly, we’re pleased because you take the PC Tools offerings and what we’ve done, which was our initial strategy, is we’re better positioning PC Tools to go after the more price-sensitive, buyers, to go after the freemuim or lower-cost solutions or offerings. And so we've got that combination and we think we’ve got the mix about right, right now with our high-end premium Norton product and then PC Tools at the low end. And we think that’s going to combat the freemuim vendors. The other thing I commented on is that we now have PC Tools also available in many of the markets where the freemuim vendors have historically done well, not just emerging markets, but parts of Europe. So I think that will also help.

Rob Owens - Pacific Crest Securities, Inc.

Apologize if I missed it. What is the tax rate guidance for Q2 and/or for the year?

James Beer

So for Q2, the tax rate guidance is 28%. That's before any consideration of losses around the JV.

Operator

We'll go next to Neil Herman with Soleil Securities.

Neil Herman - Soleil Securities Group, Inc.

Could you talk a little bit about the competition in the Storage and Server space vis-à-vis EMC, if you're seeing any significant changes there? You had also mentioned that one of your goals is obviously license growth. Could you kind of give us a sense as to your hopes, expectations in terms of getting back to year-over-year license revenue growth?

Enrique Salem

When we look at the competitive-like [ph] marketplace, we are doing very well. We are gaining share in the backup market. As you can see, Backup Exec has done well; NetBackup has done well. And so from our point of view, obviously, looking at the deals that we're closing there across all competitors, we are gaining share the backup space. What we are doing, though, is we’ve got to make sure that we take advantage of this move to data deduplication and our new offerings. Our NetBackup appliances are now shipping. And so to that will continue to help us in that more pliant deduplication marketplace. But we are gaining share in the backup space. When you talk about the new license growth, it really is a matter of executing across the portfolio: driving more DLP, driving the new solutions from backup, driving the Software-as-a-Service opportunity. And so to get that back in place, those things I just outlined have to become a larger total percentage of the overall business. And that’s what we're seeing as we see double-digit growth in both DLP and Software-as-a-Service. Now they’re coming off a smaller base, but as that continues, that should be a positive towards new license growth.

Neil Herman - Soleil Securities Group, Inc.

Is the transition to SaaS, do you think, having an impact on license revenue growth? Are you finding customers are choosing to move in that direction as opposed to the historic license purchases?

Enrique Salem

We definitely are seeing a move towards more subscription-oriented buying. And when you look at that number and some of my comments, I talked about the offerings we’re making to our partners where they can sell more of a subscription model. So we definitely see a shift towards more subscription-oriented businesses than what I call the tradition, just pure license maintenance business.

Operator

We'll take our next question from Katherine Egbert with Jefferies.

Katherine Egbert - Jefferies & Company, Inc.

Same question that Neil just asked, but on the Security side. Can you talk about competition this quarter? Run rate? How often did you see McAfee or Sophos or some other vendors thing?

Enrique Salem

We're doing great in the bigger deals where we're competing on security front, we're doing very, very well. And it's really a matter of looking at the whole portfolio, because we've got a set of products that match up to a number of competitors, McAfee trend and others. And then they've got some products that are not consistent with us. And as we go into the new product lines, the encryption and now the identity security that comes from the VeriSign acquisition, we’ll again have some other capabilities that are different and differentiating from a number of our traditional competitors. One thing I'm very pleased about is we're seeing Symantec Protection Center, SPC, not only get reviewed well, but customers are very pleased with its capabilities, its user interfaces reporting versus EPL. And that’s been another big positive for us, as that was one of the concerns customers had several years ago.

Katherine Egbert - Jefferies & Company, Inc.

Did you talk about Altiris? How did that product do everything with Windows 7 upon us that you could be seeing some good uptake there.

Enrique Salem

I didn't make any specific comments on the Altiris Suite. The full suite’s available. We shipped the last components just recently. We’ve got an update coming out. And you’re right. A number of our customers are using it for the roll out of Win 7. And Win 7 in the enterprise, that process is starting and we expect that to continue, quite frankly, for the next 24 months or so.

Operator

We'll go next to Richard Williams with Cross Research.

Richard Williams - Cross Research

Could you give us a little bit more color in terms of the geographies for the deal slippage? Was that specific to any one geography?

Enrique Salem

What we saw was specifically around the U.S. and Europe is where we saw some of the deal slippage.

Richard Williams - Cross Research

Anything in the SMB space?

Enrique Salem

The volumes of deals in SMB space are very, very high. So from a close rate perspective, we didn't see any changes there. And Backup Exec, quite frankly, did well. So nothing really that I can report or comment on in SMB.

Richard Williams - Cross Research

Then just the weakness we heard from other software vendors reporting recently that the last few days of June, they saw large deals just disappear. Is, I guess, similar to what you saw?

Enrique Salem

We saw the longer procurement cycles. I don't know if they disappeared for us. It's just a matter of they pushed into the new quarter and a good percentage of them have closed. So I can't say that they've disappeared. We had a very detailed conference call and planning sessions that we've done over the first three weeks of July to make sure we were tracking those deals. And I don't know of any of the larger deals that we were tracking that completely disappeared. They're all there.

Richard Williams - Cross Research

Any grouping by industry?

Enrique Salem

Yes. Across the verticals, we're in so many verticals that it's hard to say one vertical saw a bigger change than the other. The positiveness came from the public sector, state and local; continued to do well.

Operator

And there are no other questions at this time. I'd like to turn the conference back over to Enrique Salem for closing remarks.

Enrique Salem

Well, thank you, everyone, for joining our call today. While we saw some challenges in the June quarter, we remained focused in our key priorities for this fiscal year. The consumer and enterprise products we offer are more capable and valuable to our customers than ever before. And our recent acquisitions strengthen our product portfolio, enabling us to better serve customers. I look forward to speaking with you again soon. Thank you very much.

Operator

Thanks, everyone. That does conclude today's conference. We thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Symantec F1Q11 (Qtr End 07/02/2010) Earnings Call Transcript
This Transcript
All Transcripts