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Symantec Corporation (NASDAQ:SYMC)

F3Q07 Earnings Call

January 24, 2007 5:00 pm ET

Executives

Helen Corcos - Vice President of Investor Relations

John Thompson - Chairman of the Board, Chief Executive Officer

James Beer - Chief Financial Officer, Executive Vice President

Analysts

Todd Raker - Deutsche Bank

Sarah Friar - Goldman Sachs

Adam Holt – JP Morgan

Heather Bellini - UBS

John Walsh - Citigroup

Philip Rueppel - Wachovia Securities

Phil Winslow - Credit Suisse

Robert Breza - RBC Capital Markets

Ed Maguire - Merrill Lynch

Kathleen Egbert - Jefferies & Co

Tim Klasell - Thomas Weisel Partners

Daniel Ives - Friedman Billings Ramsey

Gene Munster - Piper Jaffray

Presentation

Operator

Good day, and welcome to Symantec's Third Quarter 2007 Earnings Conference Call. (Operator Instructions) At this time, I would like to turn the call over to Ms. Helen Corcos, Vice President of Investor Relations. Please go ahead, ma'am.

Helen Corcos

Good afternoon and thank you for joining us. With me today are John Thompson, Chairman of the Board and Chief Executive Officer of Symantec; and James Beer, Executive Vice President and Chief Financial Officer.

In a moment, I will turn the call over to John. He will provide some comments on our fiscal third quarter 2007 results which ended December 29, 2006. He will then turn the call over to James who will provide some additional financial details. This will be followed by a question-and-answer session.

Today's call is being recorded and will available for replay on the Symantec Investor Relations home page at Symantec.com/invest. A copy of today's press release is available on our web site and a copy of today's prepared comments will be available on the investor's relations website shortly after the call is completed.

Before we begin, I would like to remind everyone that some the information discussed on this call, including our projections regarding revenue and operating results for the coming quarter and fiscal year, and projections of deferred revenue, cash flow from operations, amortization of acquisition related intangibles and stock based compensation 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 and include the risks associated with our expected adoption of staff accounting bulletin 108 in the fourth quarter of fiscal year 2007.

Additional information concerning these risks and uncertainties can be found in the company's most recent periodic reports filed with the SEC. Symantec assumes no obligation to update any forward-looking statements.

In addition to reporting financial results in accordance with generally 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 the investor relations website.

Now I would like to introduce our CEO, Mr. John Thompson.

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John Thompson

Thanks, Helen. As we discussed last week, our December quarter results were weaker than we expected, driven by a number of factors. First, in our data center management business we saw a higher than expected number of multi-year maintenance contracts which resulted in lower revenue, or recognized revenue. Correspondingly, we saw much higher deferred revenue for the quarter which will bode well for us over the next year or more.

Next, a number of our largest transactions carried unique terms and conditions or important services or new product content, both of which resulted in less period revenue.

Finally, we incurred higher than expected costs primarily associated with the negative impact of foreign currency and business process changes implemented during our system's consolidation.

Typically, December is a high renewal period for data center management group. This past quarter was no exception. Our analysis of the record number of multi-million dollar transactions booked during the quarter revealed a much higher proportion of deals that ended up in deferred revenue. Additionally, lower than expected new license sales, or some transactions with unique terms and conditions result in lower period revenue. An example of this might be a transaction for new licenses coupled with a multi-year maintenance renewal where we chose to offer installment payment terms as an alternative to deeper discounting of the important annuity revenue stream associated with the renewal of maintenance.

We think this is a natural maturation phenomena in some of our business segments. Therefore, we have recalibrated our financial model to account for a lower revenue yield per transaction as well as lower revenue growth rate assumptions for some of the more mature markets we address. It is conceivable it will take two or three more quarters for the effects of this to flow through our P&L.

Now I'll move to the expense side of the equation. Overall, we consider the business process changes implemented with the systems consolidation important to scaling our business and lowering our cost over time. Systems changes such as these certainly don't come without issues and we may have had more than our fair share of them with this set of changes where we incurred higher expenses than planned and loss some revenue opportunities during the quarter.

There were several areas where we had to absorb additional labor and administrative costs. For example, we had to duplicate processing of some documents in order to complete transactions or records, as well as manually manage the SKU process for some of our partners around the globe. In addition, our enterprise support cost increased as we fielded that many more calls with longer than normal hold times.

Administrative challenges in our services business contributed to some lost revenue as we were not able to obtain the required data to support revenue for the period. Process problems affected the quality of the data which hampered our ability to recognize the revenue. However, we believe the major technical and process issues are now behind us.

With a disappointing quarter behind us, we are moving to better align our expenses with our new revenue expectations. As such, we plan to implement several expense reduction initiatives which James will explain in more detail in a minute. We believe these actions will result in annualized cost savings of approximately $200 million.

Also today we announced that the board of directors has authorized another $1 billion share repurchase program. Over the past eight quarters we have repurchased nearly $6 billion worth of our shares. As you can see, we remain committed to using our cash to drive growth and long-term value for our shareholders.

With that, I would like to shift the discussion to some of the important highlights of the December quarter. During the quarter, we booked a record 389 transactions valued at more than $300,000. In addition, we booked a record 112 deals worth more than $1 million, a 22% increase over the December 2005 period. In addition, nearly 80% of the transactions over $300,000 included multiple products or services. If anything, this suggests our sales force consolidation is clearly behind us and the teams are starting to build stronger relationships with our customers around the world.

In the December quarter, our security and data management group posted its biggest revenue quarter ever, growing 3% year over year and over 7% sequentially. Our End Point security solutions which include our Enterprise Antivirus and End Point compliance products posted record revenue for the quarter and grew modestly year-over-year.

Our policy compliance solutions, which helped customers manage in a rapidly changing governance and compliance environment, continued to receive strong market acceptance. The products posted double-digit year-over-year gains and continue to be a key element in our growth of our service business.

The consumer business grew 24% year over year and was the bright spot for the December quarter. Normalized for the ratable model change last year, this segment grew 19% year over year. Growth in this segment continues to be driven by our electronic distribution channels, new sales and marketing initiatives as well as new product launches.

With Microsoft's entry into the consumer security market, our objectives were to out-innovate them and improve the quality of every customer interaction with Symantec. On the innovation front, the fruits of our efforts are reflected in the numerous accolades that our 2007 versions of both Norton Internet Security and Norton Antivirus continue to receive around the globe. We continue to leverage our many years of security expertise to distance ourselves from both new and old competitors. We also continue to receive positive feedback on Norton Confidential, a new category-defining product for consumer transaction security; and the beta version of Norton 360 as well. Norton 360 is expected to launch by the end of March and we are already prepared to ship our Vista versions.

On the business model side, we offered an attractively priced multi-year subscription to our consumers with the expectations of ensuring their loyalty in the face of new competition. Based on changes in the competitive arena, including one here being a non-factor in the market, it became clear that we no longer need to offer such attractive prices for multi-year subscriptions. While we expect multi-year subscriptions to continue to be an element in our consumer business, the auto renewal implementation should be a more significant factor in the loyalty equation.

Additionally, our consumer business model now allows us to deliver unique and innovative technology enhancements to our customers at any point in the year, regardless of product cycles. Current subscribers to both Norton Internet Security and Norton Antivirus are eligible to receive a new technology we call Sonar which leverages technologies from our acquisition of Whole Security. Unlike other heuristic technologies, Sonar delivers an unprecedented level of zero day detection that automatically makes a determination of a threat and takes action without prompting the user to make a decision.

With several new Norton-branded products hitting the marketplace this quarter, we have plans for several exciting promotions. These promotions are focused on strengthening our position in the marketplace and driving awareness for Norton Confidential, Norton 360 and our Vista compatible solutions.

Turning to our services business, we continue to see strong traction in the services business, particularly when coupled with new license sales and with sales of our newer technologies. As I mentioned earlier, the actual performance of this group was better than the reported numbers suggest. Late in the December quarter, we acquired a U.K.-based professional services firm called Company I. Company I expands the capability of our consulting services group to help clients manage IT risk and costs particularly in the data center. We believe this addition will help us to develop even stronger relationships with our customers as they focus on important cost and compliance initiatives over the next few years.

So while we are certainly not satisfied with our December quarter results, we have many of the foundational elements in place to produce a more predictably consistent business and that is the overriding focus of our team as we move ahead.

Now I will turn to James for details about our financials.

James Beer

Thank you, John and good afternoon, everyone. GAAP revenue for our December 2006 quarter was $1.313 billion. Non-GAAP revenue grew approximately 6% versus the December 2005 period to $1.324 billion. Foreign currency movements positively impacted non-GAAP revenue by almost $45 million in the December 2006 quarter as compared to December 2005. Sequentially, foreign currency movements had approximately a $7 million positive impact on revenue.

The December quarter's diluted GAAP earnings per share was $0.12. Non-GAAP diluted earnings per share for the quarter was $0.26. International non-GAAP revenue for the December quarter grew 7% versus the year ago period to approximately $665 million and represented 50% of total non-GAAP revenue.

The Americas grew 5%. Asia Pacific, including Japan, grew 11% and the Europe, Middle East, Africa region grew 5%. The EMEA region increased 7% from the September quarter. Excluding currency effects, EMEA revenue declined by 4% year-over-year.

Now I would like to move on to revenue by segment for the December 2006 quarter. Consumer revenue came in at $409 million. Up 24% versus the December 2005 quarter and up almost 4% sequentially. After normalizing the consumer business for the change in the business model whereby we now recognize revenue ratably, consumer growth was 19% year over year. Electronic distribution represented nearly 70% of consumer revenue and grew 35% compared to December 2005, driven primarily by strong activity from our online store subscription renewals and upgrades. From a product perspective Norton Internet Security revenue grew nearly 60% year-over-year and 10% sequentially and now represents approximately 60% of total consumer revenue.

Moving on to our enterprise segment. Security and data management revenue of $519 million grew by 3% over the December 2005 quarter. The data center management business generated revenue of $343 million, declining 8% from the December 2005 results.

Our services group generated revenue of approximately $53 million and represented approximately 4% of our total revenue. As we mentioned last week, the services business was negatively impacted by one-time administrative challenges as a result of the business process changes that occurred during the December quarter.

Non-GAAP gross margin was 82.9% for the December 2006 quarter. Gross margin was lower than expected, in part because our recognized revenue was lower than forecast, thus increasing the relative impact of the fixed costs imbedded within our cost of goods sold line. We also incurred higher enterprise technical support expenses as we added resources to address the business process changes associated with the conversion of our ERP systems. In the future, I expect that gross margins will be impacted by increases in OEM royalties in the consumer business and the expansion of our services activities.

Non-GAAP operating expenses were $759 million for the December 2006 quarter, consistent with our full year operating expense guidance of $3 billion. Foreign currency negatively impacted operating expenses by approximately $20 million as compared to December 2005. As with the gross margin line, our operating margin was also impacted by expenses incurred to support our ERP systems conversion. While the majority of these costs are behind us, we will be spending a modest amount of incremental money during the March quarter to remediate the handful of issues remain. Of course, these efforts will also consume a portion of our IT resources as we work to optimize the capabilities of our new systems and processes.

As mentioned last week, we are taking several actions to manage our expenses consistent with our expectations for revenue. We have effectively frozen new hiring although we were not applying this measure to our research and development groups based in India and China. Our plan to expand these operations remains in place as we look to broaden our access to engineering talent on the worldwide basis. We will also reduce our current employee cost base by 5%, with an emphasis on minimizing the impact felt by our core engineering and customer facing teams. We will also lower our spending on contractors, consultants and travel-related expenses as well as continue our facilities consolidation activities around the world.

The savings goals of our business process reengineering teams and our ongoing continuous cost improvement initiatives will also contribute to the attainment of our annual savings target of $200 million. Only a modest amount of these savings are expected to impact the results of our March quarter. In fact, we expect operating expenses to increase sequentially as we incur new calendar year driven costs such as certain payroll tax and 401K matching contributions.

GAAP net income was $114 million for the December 2006 quarter. Non-GAAP net income equaled $248 million. Symantec exited December with a cash and short-term investments balance of almost $3 billion.

Earlier this month we completed our previously announced plans to repurchase $2.5 billion worth of our shares. In summary, we purchased a total of 142 million shares at an average share price of $17.59. As John mentioned, today we also announced a new authorization to repurchase up to $1 billion worth of our shares. Our net accounts receivable balance at the end of December 2006 quarter was $743 million. Days sales outstanding or DSO was 51 days, in line with normal seasonal trends for the business.

Cash flow from operating activities for the quarter is expected to be between $430 million and $440 million. This is lower than cash flow from operations of $521 million in the December 2005 quarter, primarily due to a one-time tax refund received in the December 2005 quarter related to a prior year Veritas tax return.

GAAP deferred revenue at the end of the December 2006 quarter was $2.46 billion. Non-GAAP deferred revenue at the end of the quarter reached a record $2.49 billion and grew $500 million or almost 25% as compared to the December 2005 quarter and grew $238 million versus September 2006. Foreign currency had a positive impact of approximately $36 million on the September deferred revenue balance. We expect about 61% or approximately $770 million of our March quarter revenue to come from the balance sheet.

Now I would like to spend a few minutes discussing our guidance. In summary, we are reaffirming the guidance we provided on Tuesday, January 16. Given the current business environment and exchange rate of $1.27 per Euro, our forecast for the March quarter and FY07 are as follows: GAAP March revenue is estimated between $1.24 billion and $1.27 billion. Non-GAAP revenue is estimated between $1.25 billion and $1.28 billion. GAAP earnings per share are forecasted between $0.04 and $0.06. Non-GAAP earnings per share are estimated between $0.18 and $0.20. We expect fully diluted common stock equivalents to be 965 million shares.

As I mentioned earlier, the impact of the cost savings initiatives that we outlined today is expected to be modest in the March quarter and has been taken into account in the guidance we are reaffirming today. It is possible, however, that there will be a restructuring charge related to the cost savings efforts that could affect GAAP earnings for the March quarter.

For the full year we are continuing to forecast GAAP revenue of between $5.08 billion and $5.11 billion. Our non-GAAP revenue guidance is expected to be between $5.13 billion and $5.16 billion. We expect GAAP earnings per share to be between $0.36 and $0.39. Non-GAAP earnings per share continue to be projected between $0.92 and $0.95. We expect fully diluted common stock equivalents for fiscal year 2007 to be 991 million shares.

We are reaffirming non-GAAP deferred revenue for FY07. Specifically, we expect deferred revenue to be in the range of $2.60 billion to $2.65 billion. Lastly, we expect cash flow from operations to be of the order of $1.5 billion.

With that, I'll hand the call back to Helen.

Helen Corcos

Thank you, James. Tom, will you begin polling for questions? (Operator Instructions) While Tom is polling for questions I will like to announce that Symantec plans to attend the following upcoming conferences: Thomas Weisel Partners on February 6, Goldman Sachs on February 28, and Morgan Stanley on March 5. For a complete list of our investor-related events, please visit our event calendar on the Investor Relations website. Tom we are ready for our first question.

Question-and-Answer Session

Operator

Our first question today comes from Todd Raker - Deutsche Bank.

Todd Raker - Deutsche Bank

John, I was hoping you could give us a little bit more insight on the consumer business. Very nice acceleration of 19% growth here. What are your expectations here as we move into March, any impact expected from 360 as that begins to hit the market. Also, you mentioned OEM royalties as potentially having a negative impact on gross margin. Could you give us more insight into what's driving that?

John Thompson

First off, the impact of Norton 360 in the March quarter will be minuscule. As I said in my planned comments, we don't expect it to ship until March, probably near the end of March and therefore it won't have much affect, if any at all, on the quarter's results.

We think the business is very solid and it's on the strength of just a tremendous job both the engineering team as well as the sales and marketing teams have done around the world. This '07 is a far superior product to anything that we have ever delivered. We think that's reflected in the uptick we saw in the December quarter and hopefully that will continue through March.

On the OEM royalty front, as the importance of security becomes more apparent to consumers, and it becomes even more apparent to our OEM partners, they would like a larger share of the revenue that is generated by us and others on their platforms. Because that is an important source of new customer capture, we think we have to continue to play in that space and hence we will have to adjust our expectations around gross margin yields in order to have the opportunity to capture new customers through the OEM channel.

Todd Raker - Deutsche Bank

Has there been a renegotiation within the HP relationship or can you update us as to the status there?

John Thompson

Our relationship with HP is very, very solid. Very solid. I will just leave it at that.

Todd Raker - Deutsche Bank

Again on the 360 side, I guess my question was further out. Do you think it potentially changes the growth trajectory of the consumers business as you look beyond the March quarter?

John Thompson

I think it has the potential to do that, Todd, because it will be a higher-priced product than the Norton Internet Security product. So as customers make the choice at renewal time or at point of purchase to buy Norton 360 versus NIS, we certainly should expect to get the price yield that's associated with the differential between the two products.

Now that being said, we also recognize that it takes a long time for our current base of users to migrate to the latest technology suite that we deliver. That was the case as people migrated from NAV to NIS and while we would hope that would accelerate NIS to Norton 360, our planning assumptions are not based on that.

Operator

Ladies and gentlemen, just because we would like to get everybody's questions answered today, if you would just limit yourself to one question and one follow-up we would appreciate it. We will go next with Sarah Friar - Goldman Sachs.

Sarah Friar - Goldman Sachs

Good afternoon, guys. James, a question on the cost side. To understand a little better, can you give us a sense of how much was extraordinary in the quarter? It is more as you project forward into the March guidance, if we look at where we were before on cost based on your prior guidance and then where we have to go today to get to your current guidance for March, I almost have to add new cost into the OpEx line. I would assume, if anything, you would be cutting back. Could you give us more clarity there?

James Beer

Certainly, Sarah. The changes that I articulated a little earlier will really have a very modest impact in the March quarter itself, just given the timing of movements and so forth. So we will expect to see increased OpEx numbers in the March quarter versus the December quarter as a result of, in essence, the new calendar year starting off, additional payroll-related contributions, those that I mentioned in the call notes. But also, obviously during the December quarter we were very much on track with our OpEx plan generally towards that $3 billion figure, and so part of that plan was to hire some folks. We will see the carry through of those people coming on board during the March quarter as well.

Sarah Friar - Goldman Sachs

As a follow-up on your cost reduction, not much impact in March, but then how quickly would you hope you have that $200 million of savings done by?

James Beer

Well, we are obviously still very much going through our detailed planning for FY08, and as we evolve our thinking on the cost side we are continuing that work. So once we have that completed, we will certainly look forward to giving you our sense for how the first quarter of the fiscal year '08 will look.

Sarah Friar - Goldman Sachs

But do you expect that you will do this quickly -- like a short, sharp shock -- or is this something that will take a full year to enact?

James Beer

I think there will be different timelines associated with different elements of the program, if you will. One of the things that I referred to was the fact that we have identified and in place business process reengineering teams that will continue their work as the next few quarters unfold, to identify better ways for us to do business day-to-day consistent with the new scale of the organization. I think that would be an example of benefits that would flow into our P&L over time.

At the other end of the spectrum, obviously we have effectively frozen new hiring. That had already been done a little while back. So the benefit of that obviously would start to flow in more swiftly. So it will be a balance.

Operator

We will take our next question from Adam Holt - JP Morgan.

Adam Holt - JP Morgan

I apologize, James I'll just ask one more question on the expenses. Understanding you are still doing your planning and working through the numbers, would you expect that a high level for OpEx to be up, flat or down next fiscal year?

James Beer

Well, a little early to give you too much of a sense for that, Adam. But obviously I think we have come out today with a pretty clear statement of intent in terms of the $200 million goal. That gives us a lot of work ahead of us and we were very serious about getting on with it as quickly as we can.

Adam Holt - JP Morgan

If I could shift gears for a minute back to the revenue side, John, maybe a question for you on some of the changing mechanics around the Veritas business. You noted a couple of trends that are impacting that business, or at least did in the December quarter. A change in the payment terms, more multi-year contracts. As you look out over the next 12 to 18 months, do you see the growth trajectory of that business changing materially? Or do you just have to work through a cycle of some of these longer-term contracts that began to anniversary, maybe a year from now?

John Thompson

That's a great question. I think this is a business model shift for a component, major component of the Veritas business where historically there had been a much more tight focus on new license sales and short-term maintenance effect that was motivated by the compensation plan. We are much more focused on building a long-term relationship with customers and locking in, if you will, a payment stream over a longer period of time and then using that as a base to sell new technologies and new products that we would introduce in our portfolio.

So I don't expect that the data center management group is going to have a huge uptick in revenue growth any time soon. I think what's going on is a natural recalibration as we look at the compensation models as well as the selling elements, if you will, that we have given our sales force to use.

Adam Holt - JP Morgan

If you look at what was unique around the December quarter, obviously this snuck up on us a little bit. Is it just the fact that it was such a high period of renewals that you saw all of a sudden or this is something that's been happening slowly over a couple quarters and all of a sudden it was magnified by the percentage of renewals?

John Thompson

That's exactly the point, Adam. I think when we look back now over the last three quarters we beat our forecast, our internal forecast, quite handsomely in the June quarter. We barely met the low end of our guidance in the September quarter and as we look now at September quarter, we can start to see the early signs of a problem that got amplified or magnified yet again in the December quarter.

The December quarter is a historically high quarter for renewals in that particular segment of our business and when we came into the quarter, we had different yield expectations based upon a year ago data. By the way, that wasn't the case this year.

So it will take us, as I said in my planned remarks, probably two or three quarters to work this through the system and then we will get on a more steady state run rate from a both licensed bookings as well as maintenance billings perspective.

It's a very solid business and we need to manage it for what revenue it will produce, but more importantly what cash and earnings it can produce.

Operator

We will take our next question from Heather Bellini - UBS.

Heather Bellini - UBS

Thank you. I was wondering if you could give us an idea how much of the shortfall was related to the revenue recognition that you commented on? Then I guess going back to Sarah's question, could you give us a little bit more clarity because you run the risk of having people assume you will have $200 million in costs taken out of your P&L in fiscal year '08. Could you give us a sense of what you feel comfortable saying you will be able to take out by June? Give us some clarity how you would like us to model this?

James Beer

To the first question, I would say the majority of the revenue surprise was driven by the recognition items that John was --

Heather Bellini - UBS

On the Veritas side?

James Beer

Yes. As to the cost picture, I hope I have been clear in saying that there will be a very modest impact in the March quarter and that impact was already taken into account when we put out our guidance last Tuesday.

Heather Bellini - UBS

Right, that's understood.

James Beer

So hopefully there is no confusion on that. Obviously we will work to provide you with FY '08 first quarter guidance as swiftly as we can, but we have to complete our work to be able to do that in a sensible fashion.

Heather Bellini - UBS

Can I ask you a follow-up then in regard to the cost cutting, the head count reductions that you mentioned. Are those going to be faster then? Do you have a sense when those would be initiated?

John Thompson

Heather, I think it's best for us to announce issues like that to our people first as opposed to in an earnings call with important constituencies, but clearly our employees deserve to hear it first.

Heather Bellini - UBS

Okay, great. Thank you.

Operator

Your next question comes from John Walsh - Citigroup.

John Walsh - Citigroup

Good afternoon, guys. If we look back at the headcount additions over the last several quarters, headcount is up about 10%. As we talk about the cost side that you already articulated, I'm trying to match that up with maybe some high level view of where do you think revenue can grow by next year on this bigger base of customers? Again, the fact that you bulked up the overall employee base, which I assume a lot of it flowed into the distribution and sales channel.

James Beer

Well, certainly trying to project the revenue for fiscal '08, again, very tough to do that given than we haven't gotten through our planning cycle yet. So I am afraid I will have to defer any specifics there.

Obviously we are pleased that we have been able to very successfully integrate our sales force and that is very much evidenced, I would argue, in the large deals statistics that we have articulated. Indeed, we have seen a very reasonable expected level of attrition and we have been able to add some very important resources to the sales function. I certainly feel that we have a sales force that is very well-positioned for the future. I think it will be a little premature for us to comment on specific revenue projections for fiscal '08, particularly given what we have seen in this December quarter and obviously we have spent a lot of time sorting through that in recent days and weeks. We will be applying that knowledge to our projections that will be able to offer with you shortly.

John Walsh - Citigroup

Just to follow-up under this deferred revenue, if you look at the deferred revenue growth on a year-over-year basis, can you give us a sense of what is due to these new contract arrangements that you talked about upfront versus the normal buildup, especially from the consumer side? Maybe a breakout between the consumer and non-consumer side contribution.

James Beer

What I say is that on the consumer side, because we have now lapped the year point in terms of the change to the ratable recognition model, we have now built up what you might call a steady state amount of deferred revenue on the balance sheet. So now going forward you would expect that volume of deferred revenue to grow somewhat consistently with the organic growth rate of the business.

So I don't think you should expect large increases in deferred revenue as we have seen during the last three quarters or so while that buildup on the balance sheet was occurring. The strong buildup of deferred in the December quarter very much driven by the enterprise side of our business.

Operator

We will take our next question from Philip Rueppel - Wachovia Securities.

Philip Rueppel - Wachovia Securities

Great. Thanks very much. You gave us a little bit of an update on Norton 360. Can you also at least give us some perspective on Hamlet? Is that on schedule as you had outlined in the past? Will there be a beta? Given that it is not, compared to Norton 360 with its ratable model, when that does hit the market would we expect more of an initial revenue spike or will that also be something that plays itself out throughout 2008?

John Thompson

First off, Hamlet is doing very, very well. I just reviewed today some feedback from a customer who is trying it in a pre-beta experience. Given the feedback there, I'm quite encouraged. So it is still on schedule. It is due to be cut to the marketplace or released to the marketplace mid-year. Now, this is an enterprise-class product. So it will follow the normal enterprise licensing conventions that we have had for all of our end point security technologies. Many of our customers signed contracts that give them the right to upgrade to the new release and some of them will offer or choose to take new features in Hamlet at an incremental cost and that could boost new license sales. Think about this more in the context of a normal enterprise license agreement, not the consumer ratable revenue model.

Philip Rueppel - Wachovia Securities

Okay. But there will be new features that would be not included, I would assume, in some existing enterprise maintenance contracts, though. It sounds like some of them will just be typical upgrades?

John Thompson

Exactly.

Operator

We will take our next question from Phil Winslow - Credit Suisse.

Phil Winslow - Credit Suisse

Hi, guys. Just a couple quick questions. For the December quarter where did license revenue actually end up coming in at? When you all do look to the March quarter here, obviously you had a big variance in data center management. When you think about the March quarter and sequential growth rates here, what are you baking into this guidance on the top line?

James Beer

Well, we don't have the specific answers to those questions that we can share with you. So I would say generally with the data center management group as we think about this coming quarter we are not expecting any significant reversal of the theme that we saw in the December quarter. So I think that's consistent with what John was talking about with regards to one of the earlier questions.

Phil Winslow - Credit Suisse

On the license side of this quarter, any sense there up down, sequentially et cetera?

James Beer

Again, we are not going to get into the specifics in that regard, but clearly there was a focus during the quarter on the enterprise side on the maintenance side of the ledger and that was a big part of what saw the deferred side of our revenue picture increasing very nicely and not having the recognized revenue come through in the manner with which we expected.

John Thompson

I think, Phil, in the main we would have to acknowledge that we have to get a little better balance between new license and maintenance renewals. Certainly better balance than we saw in the December quarter. Tom and the geographic leaders certainly understand that and are appropriately focused.

Phil Winslow - Credit Suisse

Along those lines, how do you compensate for a license sale versus a one-year maintenance sale versus a multi-year?

John Thompson

It's too complex to explain here. Suffice it to say, our sales teams are given an opportunity-based quota at the beginning of the year. So it reflects the full value of what we think the revenue yield can be out of a given account. They have a relative compensation plan based upon that opportunity. That would be the most general statement to make about it. Then there are all kinds of ups and downs and what have you. Generally it's opportunity-based and it is a relative compensation plan.

Operator

We will take our next question with Robert Breza - RBC Capital Markets.

Robert Breza - RBC Capital Markets

Good afternoon. I was wondering if you could talk about some of the enterprise business on the security side, knowing that the data center management is under challenges, what kind of catalyst do you see to grow that business? Is it a combination of bringing in some of the recent acquisitions, getting into more deals? What do you see as driving the revenue growth?

John Thompson

On the security and data management side, that business quite frankly had a very solid quarter. It is much more stable now with its sea legs under it compared to where it was let's say two or three quarters ago. There are areas of that particular business that are very promising, compliance which is a combination of what we do around the old ESM product and our BindView acquisition. Very, very strong quarter. Our End Point solutions, particularly those around End Point Access Control. That is a portion of the Sygate technology and it will be rolled into Hamlet which I discussed a little bit earlier.

Our enterprise Vault solution is doing very, very well. Continues to be the market-leading solution for helping customers manage their mail environment and we have expanded that to include a broader range of capabilities. Underneath all of this, what we got are a couple very large businesses around backup and enterprise AV that are large and have much, much lower growth rates. What we have to do is look to funnel our investment both sales, marketing and engineering more into products that we have in our portfolio that have inherently higher growth rates to see if we can't offset, if you will, some of the decline or mitigate some the decline, associated with the more mature product areas.

Robert Breza - RBC Capital Markets

Just to follow-up, you talked about Bright Mail and we saw Cisco buy Iron Port; are there any other changes that you are picking up there from the competitive perspective on maybe some of the newer products?

John Thompson

I think everyone sees the whole compliance arena as the high growth area. There is no competitor in the security space or quite frankly in the systems management space that hasn't cloaked themselves in the compliance mantra. We were fortunate that we are not only cloaked, we are cloaked with great products as well. So we think that's an area of terrific opportunity. Cisco is not there but the likes of IBM clearly are. We don't lack for competitors in the market.

Robert Breza - RBC Capital Markets

Thank you.

Operator

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

Ed Maguire - Merrill Lynch

Yes, good afternoon. In looking at the change of business model that has resulted in a lower yield in the data center management, is there any probability that we might see the same type of phenomenon play out in the security and data management segment?

John Thompson

We don't anticipate that because that business doesn't have the same dynamics, if you will, in terms of the way transactions have historically been booked or are currently being booked with customers. So it's not assumed in any of our forecasting at this point in time.

Ed Maguire - Merrill Lynch

Okay. Just a follow-up on the data center management group. Were there any products or can you provide any granularity in terms of where there may have been a greater than expected change in yield?

John Thompson

Well, suffice it to say, it was across the board. While we don't provide product level detail in this particular instance, I can say there wasn't a product that was hot and one that was not. It was an across the board decline, if you will.

Operator

We have our next question from Kathleen Egbert with Jefferies & Co.

Kathleen Egbert - Jefferies

Hi, good afternoon. A quick question on your capital structure. As you look to another borrowing to finance a buy back, what level of debt are you comfortable bringing on?

James Beer

We have announced another buyback this afternoon, but our cash position is strong, as you see in our financials. So I would be expecting to buy those shares back out of the cash proceeds of the company.

Kathleen Egbert - Jefferies

Fair enough. Did I hear you right when you said that EMEA was down 4% if you exclude the currency impact?

James Beer

Yes I think that is right, 4%. Yes.

Kathleen Egbert - Jefferies

Can you explain what went on there? Give us a little more detail about the issues you had in September, how quickly you are going to resolve those?

John Thompson

Actually, Europe performed better than our expectations in the December quarter. Now, you might conclude from that that our expectations were modest. But we are still working our way through the issues in the central region which is predominantly Germany. It continues to be a challenge for our team, but we have not only a focused leader sitting on top of all of EMEA, we have a new leader in the central region and he is on board and working his way through the issues.

We think it will take year to work our way through the issues in the central region and we are one quarter into it, so we probably have three more quarters to go.

Operator

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

Daniel Ives - Friedman Billings Ramsey

Just being a veteran and seeing a lot of cycles, how does '07 look when you talk to customers in regard to just general spending trends, enthusiasm as compared with '06? Not just Symantec-specific, but just in regard to spending patterns and judging it relative to previous cycles?

John Thompson

I think corporate profits are strong. Therefore, I think investments will continue to be made in productivity enhancing technologies. I think on the IT side many, many of the CIOs I talk to are very much focused on, how do I take complexity and cost out of my data center? So the things that we were doing around data center consolidation and data center standardization should certainly help them.

The compliance problem is real. They have IT general controls concerns that have certainly surfaced through SarbOx and other compliance initiatives. There is going to continue to be strong spending on both software and services around that particular paradigm.

So I think in general the '07 environment will be as strong as it was in ‘06 or as solid as it was in '06 and I think that should bode well for our company as we get our sea legs under us for all of the activity we have undertaken over the last 12 months to bring the two companies together.

Daniel Ives - Friedman Billings Ramsey

A lot of people are talking about mobile device security, protecting data leakage, however you want to characterize it. What you think of that technology in regards to where it is in the cycle, and are a lot of customers talking about mobile device security?

John Thompson

I think data leakage is a slightly different problem than mobile device security. While they manifest themselves perhaps similarly, that is the device happens to be the source of the leak. But you can deliver data leakage technologies in many instances without touching the end point or the mobile device.

I think mobile device security in and of itself long term, represents a big opportunity for the industry. The question I think is when does the real opportunity show up? And I'm not convinced it is next week or this year. I think it's a bit further out than that, because I think there are other problems that customers are trying to solve around data management and data security beyond just mobile devices.

Daniel Ives - Friedman Billings Ramsey

So this doesn't seem like necessarily a near term sort of spending surge? It seems maybe long-term/near-term enthusiasm was kind of overstated?

John Thompson

It would be my view that it's two to three years out. Not something that's going to happen in significant terms in FY '07 or calendar '07.

Operator

We will take our next question from Tim Klasell - Thomas Weisel Partners.

Tim Klasell - Thomas Weisel

First question has to do with the deferred revenues. You mentioned you are selling more of the Veritas products, will be going into the deferred line, but you mentioned that you may be quick promoting the three-year term contracts or multi-year contracts into the consumer. Will the second piece be negligible, or will there be a piece that will offset the Veritas build?

James Beer

I would say that in the December results that we just announced the expected reduction in multi-year consumer sales has already been taken into account.

Tim Klasell - Thomas Weisel

Very good. Going on to the security and data management, it seems like obviously your archiving and compliance are doing well out there. Is that helping to firm up the pricing on the enterprise AV side as you can begin to offer more attractive bundles?

John Thompson

Well, there are certainly instances where when we can go in and sell a more complete solution and I would characterize that as our front end scanning technologies with our back end indexing technologies, plus services. We can have a deeper, more highly valued relationship with the customer. But to be clear, enterprise AV or End Point security is a fairly stable pricing market at this point in time. I'm not convinced that you get leverage through tying it to something on the back end. I think you get leveraged through implementation of unique new technologies at the end point itself.

So things like Sonar which I talked about on the call or our end point compliance solutions, those are the ones that are likely to give us the opportunity for some higher yield per end point as we move forward.

Helen Corcos

Tom, we have time for one more question.

Operator

All right, and that question comes from Gene Munster - Piper Jaffray.

Gene Munster - Piper Jaffray

Good afternoon. If you can talk about the Dell opportunity, maybe a ‘State of the Union’ of what's going on with Dell? I haven't heard much on that front.

Second is, you talked about the overall growth in consumer at least on the deferral side is going to be tracking to organic growth. Was the organic growth 19% year over year last quarter? Just to clarify that.

John Thompson

Well, the organic growth for the consumer business in the December quarter, adjusted for the ratable model, was 19%. So that is off the charts kind of performance for that business and it's consistent with seasonal trends. So the consumer business will tend to have its strongest growth in the December quarter and perhaps its weakest performance in June quarter. That is the historical trend.

With respect to Dell, Dell continues to be a very important partner of ours both on the enterprise side, as well as on the consumer side. We did have a nice position with Dell during the December quarter where we were on the default option, if you will, for the configuration for the Dell products. We continue to work with Dell to make sure that we have an opportunity to sell licenses through the Dell channel. We also want to make sure that we can enhance our relationship with them on the enterprise side.

That's where we think there may be a bigger opportunity that is perhaps a little less price sensitive. They build our mail security product. We have a bundled solution there that we are co-marketing together in the marketplace and we think there are other opportunities like that for us as we move forward.

Gene Munster - Piper Jaffray

I guess one quick follow-up. Norton 360, do you think that will be within the consumer configuration window with Dell?

John Thompson

Well we are certainly talking to them about it. But as you well know, our relationship with any OEM provider or manufacturer is not just solely based upon the quality and innovation in our products, but it is the economics associated with the relationship that we can build with them. While we think we have market-leading products, we want to get market-leading economics as well.

Operator

Mr. Thompson, that does conclude our Q&A session. I will turn the call back over to you for any closing remarks.

John Thompson

Thank you very much for taking the time to be with us this afternoon. Clearly the December quarter was a huge disappointment to us, but we think many of the one-time actions associated with our process and systems changes are behind us. We think we have recalibrated our revenue and cost expectations to be more consistent with what the reality is of our business at this point in time. As always, it's now about us executing, more than ever before. Thanks very much.

Operator

This does conclude today's conference call.

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Source: Symantec F3Q07 (Qtr End 12/29/06) Earnings Call Transcript
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