Helyn Corcos - VP, IR
John Thompson - CEO
James Beer - CFO
Sarah Friar - Goldman Sachs
Adam Holt - JP Morgan
John Stewart for Heather Bellini – UBS
Heather Bellini – UBS
Phil Winslow - Credit Suisse
Walter Pritchard – Cowen
George Roberts for Katherine Egbert - Jefferies &Company
Robert Breza - RBC Capital Markets
Michael Turits - Raymond James
Steve Ashley - Robert W. Baird
Daniel Ives – FBR
Tim Klasell – Thomas Weisel Partners
Rob Owens - Pacific Crest Securities
Analyst for Phil Rueppel – Wachovia
Symantec Corp. (SYMC) F2Q08 Earnings Call October 24, 2007 5:00 PM ET
Good day and welcome to Symantec's 2008 quarterly conferencecall. Today's call is being recorded. At this time I'd like to turn the callover to Ms. Helyn Corcos, VP of Investor Relations.
Good afternoon and thank you for joining us. With me todayare John Thompson, Chairman of the Board and Chief Executive Officer ofSymantec; and James Beer, EVP and Chief Financial Officer. In a moment I willturn the call over to John. He will provide you with highlights of our fiscalsecond quarter results which ended September 28, 2007. Then James will provide financial details and a review ofour guidance as outlined in the press release. This will be followed by aquestion-and-answer session.
Today's call is being recorded and will be available forreplay on Symantec's Investor Relations home page. A copy of today's pressrelease and supplemental financial information are available on our website anda copy of today's prepared comments will be available on the website shortly afterthe call is completed.
Before we begin, I would like to remind everyone that someof the information discussed on this call including our projections regardingrevenue, operating results, deferred revenue, cash flow from operations,amortization of acquisition-related intangibles and stock-based compensationfor the coming quarters contain forward-looking statements. These statementsinvolve risks and uncertainties that may cause actual results to differmaterially from those set forth in the statements.
Additional information concerning these risks anduncertainties can be found in the company's most recent periodic report filedwith the U.S. Securities and Exchange Commission. Symantec assumes noobligation to update any forward-looking statements.
In addition to reporting financial results in accordancewith Generally Accepted Accounting Principles, or GAAP, Symantec reportsnon-GAAP financial results. Investors are encourage to review thereconciliation of these non-GAAP financial measures to the most directlycomparable GAAP results which can be found in the press release and on ourwebsite.
Now I would like to introduce our CEO, Mr. John Thompson.
Thanks, Helyn. Our team’s performance during the fiscalsecond quarter demonstrated solid execution against our four key financialmetrics: revenue, EPS, deferred revenue and operating cash flow. As we continueour focus on improving the operational efficiencies of our company, we continueto see higher in-period revenue contributions from key product innovations.These efforts have the obvious offset in deferred revenue as we recognize agreater portion of revenue in the period.
In addition, last year's shift in our business model drove agreater portion of our sales activity to the balance sheet as deferred revenue.Therefore, this year we were able to recognize an increasing amount of revenueoff the balance sheet.
Performance for the September quarter was driven by twofactors: we experienced strong demand in our emerging enterprise technologies,specifically end point management, our compliance solutions and EnterpriseVault. Some of our core products such as Backup Exec and Consumer Protectionproduced strong results.
While our first half performance has been solid, exceeding ouroperating plan in both quarters for revenue, EPS and cash flow from operations,we have not met our planned new business targets. As you may recall, our North America operations experienced weak new business generation in theJune quarter. While we saw solid sequential improvements in the Americas,we remain cautious about the business outlook. This, coupled with the uncertaineconomic environment, causes us to take a more conservative view of theDecember quarter and the remainder of the fiscal year.
We continue to optimize our sales leadership team around theglobe to improve execution. In addition, we are taking several actions to drivenew business growth during the second half of the year:
First, we've initiated new sales incentives in North America to create more excitement within the salesforce.
Second, we continue to make operational improvements to makedoing business with Symantec much easier for our customers and more productivefor our team.
Third, we are focusing our hiring efforts within the salesoperation on the faster growing emerging markets such as Asia Pacific, the Middle East and Eastern Europe.
In addition to these initiatives, we will continue ourstrong focus on controlling our costs with specific targets for each operatingunit for the second half of the fiscal year.
Earlier this year, we started an active review of ourproduct portfolio to ensure many of the investments made over the years aremeeting our return expectations. During the September quarter we identified somenon-strategic assets in the Data Center Management Group that have not metthose expectations. As a result, we are taking an $87 million writedown of someassets in the data center management group acquired by Veritas during the 2003/2004timeframe. Going forward, we will continue to evaluate our portfolio to ensurethat we focus our investment efforts on a few key strategic areas that drivelong-term revenue growth.
Now I'd like to highlight a few items from the quarter. Oneof the largest growth drivers over the next 12 months will be the two majorproduct upgrade cycles that we are just beginning in the areas of enterpriseprotection and enterprise backup. We are encouraged by the prospects forSymantec Endpoint Protection 11.0. This is the first truly integrated single-agentendpoint security product that incorporates a strong compliance function.
We garnered several early customer wins during the Septemberquarter. One large multi-million dollar displacement occurred with a Europeanpower company that has over 100,000 laptops and desktops, in addition tothousands of servers. Symantec's Network Access Control feature will be deployedon tens of thousands of laptops where we will displace McAfee in the account.
This customer valued our multilayer solution with acentralized management console managing all components, including a strong personalfirewall.
We also generated solid interest for NetBackup 6.5, a singlesolution for centralized, end to end management of heterogeneous dataprotection environments. Other special features that customers particularlylike are our data de-duplication and continuous disk space backup.
During the quarter we closed a multi-million dollars dealthat replaces Legato at a large financial media company. The customer favoredNet Backup’s increased functionality and reliability.
In addition to the strength of these two products, we arepleased with how Altiris is leveraging Symantec’s international presence tofurther expand its business. One of the largest Altiris transactions during thequarter came from an international food and agricultural company; and, we alsosaw a significant transaction with an important U.S.government agency.
While several of our large Altiris deals slipped into theDecember period, the team has been successful in upselling additional productsto existing customers.
At the Altiris Managed Fusion conference last month, wedemonstrated the integration of Altiris 7.0 client management suite with BackupExec Systems Recovery. This solution offers our customers a more completemanagement solution for their distributed desktop environment and leverages thestrengths of both companies. The Altiris technology is also playing a key rolein migrating our enterprise antivirus customers to Symantec Endpoint Protection11.0.
On the consumerfront, we delivered new versions of our market leading security products. Wecontinue to be pleased with the uptake of Norton 360. And, Norton InternetSecurity 2008 has a set of new features including stronger protection against web-basedattacks, as well as password and identity management tools. PC Magazine recentlyawarded NIS the Editor’s Choiceaward again this year which represents the sixth win over the last seven years.
Looking at the business from a broader perspective, webelieve long-term growth for our company will be driven by our customers’desire to address the growing cost and complexity challenges associated withmanaging and securing their systems environments. In doing so, we can also helpthem meet the added challenge of ensuring compliance within the overall ITinfrastructure.
Specifically, we think we are well positioned to address twohigh growth areas that customers are prioritizing in the coming 12 -24 months.These include systems and application virtualization and data loss prevention.
As some have noted, virtualization may be the biggestdisruptor of data center technologies over the next few years. Servervirtualization is being adopted rapidly by large enterprises to drive higherutilization rates and reduce hardware costs.
It’s clear to us that virtualization also brings a bigopportunity to Symantec. As customers start to deploy virtualizationtechnologies in their production and mission-critical environments, complexitywill rise as they work to manage both the physical and virtual environmentsdelivered from many different vendors. This in turn will create a greater needfor sophisticated device and application management tools, as well as strongdata- protection tools.
Symantec is directly addressing the growing challenges ofmanaging today’s complex data centers by providing a single platform that canreduce downtime and improve manageability across heterogeneous physical andvirtual environments. A single platform to secure, manage and provide businesscontinuity, regardless of architecture, makes it easier for our customers toselect and change hardware and platform vendors.
We are committed to ensuring interoperability with everymajor operating system, virtual machine, and storage device. No other companycan match our breadth and depth of platform support.
One example of this is NetBackup 6.5. Our enterprise dataprotection solution not only protects physical platforms, but also delivers themost comprehensive protection for VMware environments, providing an industryfirst by enabling granular file-level and image level-recovery from a singlebackup. NetBackup 6.5 was also presented with the Best of Show Gold Award forData Protection and Security at the VMworld conference.
Outside of data center, software virtualization is gainingtraction as IT departments move to reduce the costs associated with patching,upgrading and maintaining a host of applications. Many customers want greaterflexibility in deploying applications in an “on-demand” environment.
Our award winning Altiris Software Virtualization Solutionprovides a unique desktop approach that decouples software from the OS tosimplify the deployment and management of applications running on virtualmachines. Altiris Software Virtualization Solution allows users to instantlyactivate, deactivate or reset applications and to completely avoid conflictsbetween applications, without altering the base Windows platform. InfoWorldcalls our Software Virtualization Solution a “paradigm-shifting technology thatfundamentally alters your perception of what is possible with IT.”
One of our large transactions last quarter was an AltirisSVS deal. This large European financial institution chose Altiris for its focuson complete desktop lifecycle management. Our Software Virtualization Solutionhelped them reduce costs by reducing application conflicts and speeding upapplication deployment.
In addition to ourown product efforts, Symantec is also actively partnering with both VMware andXenSource to offer a host of solutions to improve the manageability, functionality,and performance of their virtual machine environments. We have also partneredwith Intel to deliver new security and management solutions designed to work onIntel’s vPro platform.
Another area of growing interest for our customers is DataLoss Prevention or DLP. There has been some recent speculation about ourintentions in this space. Suffice it to say, it’s an important area for ourcustomers and we have a very strong sense of how the technology solutions willevolve in this area. We believe that true DLP solutions require the layering oftechnologies in a similar manner as malicious code detection has evolved. Nosingle technology addresses all of the requirements of a true DLP solution.
The reason this market is growing so rapidly is becausenearly all corporate information exists in electronic form. Additionally,companies are opening up their infrastructure to enable new collaboration,providing employees, partners and customers with more access to moreinformation.
At the same time, threats are proliferating from bothexternal and internal sources making information not just a critical asset butalso a potential liability. We believe a more policy driven and informationcentric approach to security is essential in today’s information intensiveenvironment.
Data loss prevention solutions help organizations controlthe flow of sensitive information, whether that information is in-motion on thenetwork, in-use at the device endpoint or at-rest within an organization’s ITinfrastructure.
Over the past several years we have been addingcomplementary DLP technologies to our compliance, messaging security andarchiving products through a number of important acquisitions.
We also continue todevelop our own technology with our recent introduction of new or upgradedproducts that assist with data loss prevention. For instance, the integrated applicationand device control capabilities within Symantec Endpoint Protection 11.0 can helpprevent data loss by enforcing policies and controls around the use of certain applicationsand disabling the use of USB ports.
Our newest version of Symantec Database Security, which wasannounced earlier this week, helps companies reduce the risk of losingsensitive information from backend databases by providing greater control overdatabase traffic and insight into suspicious activity.
So, in conclusion,September was a solid quarter. And, while our over performance on revenue andEPS in the first half of the fiscal year could easily lead one to be verybullish for the remainder of the year, our lighter than expected new businessgeneration and an uncertain economic environment leads us to be cautiouslyoptimistic.
We are encouraged by the much improved execution of our teamin the September quarter. But, we know we have much more work to do. We areexcited about our recent product launches and are focusing our marketingefforts on demand creation. Overall, we believe that we are strengthening ourposition with both our enterprise and our consumer customers.
And with that, I’dlike to hand the call to James.
I am pleased toreport that our September quarter results delivered on each of our four primaryfinancial metrics. As we outlined at our analyst day in June, we measure the strengthof our business by looking at the combined results of revenue, deferredrevenue, earnings per share and operating cash flow.
As we’ve previouslydiscussed, last year’s shift in our business model drove a greater portion ofour sales activity to the balance sheet as deferred revenue. This year, therefore,we are able to recognize an increasing amount of revenue off the balance sheet.
In addition, our continued focus on operational executionhas contributed to us being able to recognize a greater portion of our salesactivity as revenue in the period.
It is also important to note that while our sales activityfor the business remains seasonal, we are now seeing that the business modelshift coupled with the focus on operational execution is having the effect ofsomewhat smoothing out our revenue and earnings performance. This has resultedin our revenue and earnings for the first half of the fiscal year accountingfor approximately 50% of our full year forecast, as opposed to the traditionalsplit of 45% versus 55% for the front versus back half of the year.
Going forward, seasonality will continue to generatefluctuations in our deferred revenue and cash flow metrics, with cash flowbeing the most volatile in any given quarter.
Now, I’ll review the financial details of the Septemberquarter.
GAAP revenue was $1.42 billion. Non-GAAP revenue grew 13%versus the September 2006 period to $1.44 billion. The revenue acquired fromAltiris accounted for 4.4 points of our year-over-year growth.
Foreign currency movements positively impacted non-GAAPrevenue by $41 million in the September 2007 quarter as compared to September2006. Sequentially, foreign currency movements had approximately an $11 millionpositive impact on revenue. Holding currency constant, revenue grew 10%year-over-year.
The Septemberquarter’s diluted GAAP earnings per share were $0.06, which includes a write-downof $87 million related to our revaluation of some non-strategic data center managementassets, as part of our ongoing review of our product portfolio.
Non-GAAP diluted earnings per share grew 11% to $0.29 ascompared to September 2006.
International non-GAAP revenue for the September quartergrew 15% to $730 million versus the year ago period, and represented 51% oftotal non-GAAP revenue. The Europe/Middle East/Africa region grew 20% and AsiaPacific, including Japangrew 9%. The Americasgrew 10% year-over-year.
Now, I’d like to move to the September quarter’s non-GAAPrevenue by segment.
Consumer revenue generated $434 million up 10% versus theSeptember 2006 quarter. Electronic distribution channels reached a new highduring the quarter representing 72% of consumer revenue and grew 16% versus theSeptember 2006 quarter. Norton Internet Security revenue grew 21% and remainsthe single largest product contributor to our consumer category - - generatingapproximately 61% of consumer revenue. We also continue to be pleased with thereception that Norton 360 is receiving in the marketplace.
Moving now to our enterprise segments. In the Septemberquarter, including Altiris’ sales, we generated a total of 302 transactionsvalued at more than $300,000 each as compared to 292 in the September 2006 quarter. Wealso recorded, 64 deals worth more than $1 million each as compared to 67 in the September 2006 quarter. 75%of large transactions included multiple products or services which under scoresboth the success of our solution selling approach and the reality that as CIO’stry to lower their costs and minimize complexity, we are well positioned tomeet their needs with a broad portfolio of products and services.
Our Security and DataManagement revenue of $423 million grew by 7% over the September 2006 quarter.Within this business unit, Backup Exec continued to build momentum, postingdouble digit revenue growth for the third consecutive quarter. In addition,compliance, one of our emerging growth areas, continues to garner strong year-over-year growth rates. As expected, however, our corporate desktop securityproduct slowed ahead of our Symantec Endpoint Protection 11.0 launch.
The Data Center Management group produced revenue of $402million and grew 7% from the year ago period. NetBackup and Storage Foundationalso grew revenue at double digit rates.
The Altiris business unit generated non-GAAP revenue of $92million. We continue to be pleased with the performance of the products weacquired from Altiris which contributed $56 million in non-GAAP revenue duringthe quarter. Altiris’ non-GAAP revenue includes the impact of $13.5 millionworth of deferred revenue lost on a GAAP basis, as a result of the purchaseaccounting method related to the acquisition of Altiris.
Our Services group once again posted strong top lineperformance increasing revenue to $86 million up 30% versus the September 2006quarter. Services represented 6% of our total revenue during the September 2007quarter. Importantly, we believe that the participation of our services groupin our solution selling process is leading to higher levels of customersatisfaction. Going forward, the services group will focus more on its profitability,while continuing to generate value by increasing both customer satisfaction andour ability to sell, deliver and implement more software.
Non-GAAP gross margin increased to 85.3% for the September2007 quarter compared to 83.5% for the year ago period, driven by the movementof consumer OEM fees from the cost of goods sold line to operating expenses, aswe discussed on our May conference call.
Non-GAAP operatingexpenses of $865 million for the September 2007 quarter were up 20%year-over-year. Expenses grew primarily due to three factors. Altiris added $37million, foreign exchange movements added $26 million and the OEM issue I just mentionedadded $56 million to our operating expense base. However, we were able to offseta portion of this expense growth as a result of our cost reduction activitieswhich continue to run ahead of plan. Thus, operating expenses grew 3.5%year-over-year, after adjusting for Altiris, exchange rates and OEM fees.
GAAP net income was $50 million for the September 2007quarter. Non-GAAP net income equaled $263 million, flat versus the September 2006quarter.
Symantec exited September with a cash and short-terminvestments balance of $2 billion. We remain committed to returning excess cashflow to our shareholders. As such, during the quarter, we repurchased $400million of our outstanding shares, or 21.6 million shares at an average priceof $18.51.
Our net accounts receivable balance at the end of theSeptember 2007 quarter was $602 million. Days-sales-outstanding, or DSO, was 38days, in line with normal seasonal patterns.
Cash flow from operating activities for the September 2007quarter totaled $331 million. This figure was higher than previously projecteddue to unexpected foreign tax refunds and our continued focus on cost reductionactivities.
GAAP deferred revenue at the end of the September 2007quarter was approximately $2.6 billion. Non-GAAP deferred revenue at the end ofthe quarter was approximately $2.62 billion, up 12% as compared to theSeptember 2006 quarter. Foreign exchange
rates positivelybenefited deferred revenue by approximately $115 million versus the September2006 quarter.
Now, I’d like to spend a few minutes discussing our guidancefor the December quarter.
Taking into account the currently somewhat uncertainbusiness environment and an exchange rate of $1.37 per euro, our forecast forthe December quarter is as follows.
GAAP revenue is estimated to be between $1.41 and $1.45billion. Non-GAAP revenue is estimated to be between $1.425 and 1.465 billion.
GAAP earnings per share are forecasted between $0.06 and $0.11.Non-GAAP earnings per share are estimated between $0.25 and $0.30.
As I mentioned in my opening comments, we expect our revenueand earnings results during the second half of the fiscal year to be similar toour revenue and earnings results during the first half.
During the December quarter, we expect about $900 million ofour non-GAAP deferred revenue balance to convert into recognized revenue. Thisis 16% higher than the year ago figure as we are now seeing the benefits in theProfit and Loss Statement of the model shift that last year placed more of oursales activity on the balance sheet. Going forward, we expect deferred revenuegrowth to stabilize and be more aligned with revenue growth rates.
GAAP deferred revenueat the end of the December quarter is estimated to be between $2.635 and $2.785billion. We expect non-GAAP deferred revenue to be in the range of $2.65 to$2.8 billion.
The December 2007quarter operating cash flow is expected to be below the $454 million werecorded in the December 2006 quarter. The lower cash flow estimate is beingdriven by lower than expected business activity in the first half of the fiscalyear and higher consumer OEM fees. As noted earlier, I should emphasize thatquarterly operating cash flow is the most volatile of our four primaryfinancial metrics.
With that, I’ll turn the call back over to Helyn so that wecan take some of your questions.
Thank you, James. Rodney, will you please begin polling forquestions? While the operator is pollingfor questions, I’d like to announce that Symantec plans to attend the GoldmanSachs conference on November 7th, the UBS conference on November 13th, theLehman conference on December 6th, and the CIBC virtualization conference onDecember 11th.
In addition, we will be reporting our fiscal third quarterresults on January 23rd. For a complete list of investor-related events, pleasevisit our events calendar on the investor relations website.
Rodney, we are ready for the first question.
Your first question comes from Sarah Friar - Goldman Sachs.
Sarah Friar - GoldmanSachs
Could you give us alittle bit more granularity on the guidance? Specifically how do pipelines lookon a year-over-year basis? Is that part of what's giving you pause? Are yougiving yourself greater coverage rates than normal between what the pipelinewas saying and how you have guided? Are there any early indications fromverticals like financials where you are seeing them actually pull back or isthis just more you trying to read tea leaves in advance?
Well, we actually have not seen anything from our largest financialservices customers that would indicate that they are going to curtail theirspending. However, we did see in the September quarter some of the mid-marketcustomers pause or slow their purchasing decisions. We saw transactions that wehad originally thought might occur in the September quarter shift to December-- or at least shift out of the quarter -- and that certainly would give uscause for pause.
As we look at backlog coverage to the outlook, we are aheadof where we were this time last year. In other words, we have stronger coverageof the outlook in the December quarter of '07 than we did in the Decemberquarter of '06, so we feel good about that. We feel good that the team certainlyis working every transaction, but we cannot ignore the uncertain economicenvironment that's out there nor can we ignore the fact that we've got more todo in the Americasbusiness itself.
I think Bill and his team have done a terrific job in thefirst quarter that he's assembled that team but it would be a bit too bullish,I think, to assume the same kind of sequential improvement from September toDecember that we saw from June to September.
Your next questioncomes from Adam Holt - JP Morgan.
Adam Holt - JP Morgan
Just a follow up on the improved execution in the U.S.Can you talk a little bit about what the management changes have led to in termsof turnover and retention of your best talent? Should we look for anyincremental changes to the management team going forward? Are we pretty wellsolidified at this point?
I think at this point Bill has done pretty much all of whathe has wanted to do or is planning to do. He has actually consolidated somefunctions and taken some layers of management out. The intent there was tocandidly speed our execution and obviously control costs a little bit betterwithin the overall Americasales operation.
We put a terrific young leader in place for our combinedoperations and specialists force, a guy who brings great product knowledge andexperience out of our development organization. I think that has certainly invigorated orexcited our SE force quite a bit.
I think Bill is on the right track, I just don't think we should get out ahead ofhim as he tries to assemble his team and get them focused. I think the workthat Enrique and James did to identify incremental spending that we could directtowards sales incentives in the second half of the year in the Americas willcertainly go a long way to energize, if you will, the sales force and we areall excited about that.
Adam Holt - JP Morgan
If I could just ask aquick follow up on the product side, obviously you have a couple of realimportant releases with the NetBackup 6.5 release and the Hamlet release justgetting into the market a little bit, can you talk about the preliminarycustomer reaction to both products and in particular how the price increase inHamlet is holding? Thank you.
Hamlet has done quite well in its initial launch. We areslightly ahead of track through the first few weeks of the quarter, but thatdoes not necessarily mean the quarter for December is in the bag. It just meanswe are off to a really, really good start with what is in fact a great product.
I was in Europe a couple of weeks ago visiting that largewin I referred to in my planned commentsand the customer was quite, quite bullish on the performance improvements thatthey had seen as they deployed Symantec Endpoint Protection 11.0 through all ofthe phases of the beta program and rolled it into the production environment. Ithink we are going to see similar results or responses from customers aroundthe world. It's a terrific product and the team has been anxiously awaiting itsdelivery into the market.
Your next questioncomes from Heather Bellini - UBS.
John Stewart for HeatherBellini – UBS
Can you talk a little bit about how we should be thinkingabout the growth rate of cash flow for the full year?
We've talked back atthe start of the year as to our view that we could grow cash flow year overyear. We talked about 90 days ago about the fact that we are not going to beupdating annual guidance each quarter by quarter. I won't go into any great specifics on thattrack. Obviously we are pleased that we are able to exceed our expectations forcash flow during the September quarter and yet we have, I think, appropriatelyguided that we are expecting cash flow to be down below last year's Decemberquarter, particularly driven by the increase in the OEM consumer fees that weare now incurring.
We think that those fees will be a good investment over thelonger run but that there is a timing issue between when the cash is physicallypaid to the OEM and when we see cash coming in from our subscribers.
Heather Bellini – UBS
James, it's Heather, sorry we are jumping in between conferencecalls here, but just to ask on that question in particular, how much did thatimpact you this quarter, the timing of the OEM contract that you're referringto?
I had a follow up for John related to are we looking atpotentially is there room to take costs down further like you did earlier thisyear to try and size the business appropriately so we can get margins back tothe 100 basis point a year goal?
Well, in terms of the OEM fees, they cost a little over $50million this quarter. That was reflective of continued growth in that figurequarter on quarter.
Heather, I think we are on track to deliver strong operatingmargin performance this year ex some of the incremental things we added likeAltiris or like the OEM fees. That being said, however, we have issued costtargets for the second half of the year that we would expect our team to makein light of lighter new business generation in the first half that will yieldslightly lower revenue than we might have assumed, if you will, for the secondhalf of the year.
So we are going to continue to put cost items on the agendauntil we see new business generation equal our plan levels, because that's theway we will deliver the operating margin expansion or the EPS results that wehave forecasted.
Your next question comes from Phil Winslow - Credit Suisse.
Phil Winslow - CreditSuisse
I just wondered if I can get some clarification on yourcomment that the revenues for the fiscal year will be split more 50-50? Thatwould almost imply that revenues for the next two quarters are basically flatif not down slightly from what you did in September.
Also tying that with your guidance for deferred revenue tobe up, it just seems to be a mismatch there in my mind. From a deferred revenuestandpoint, I wonder if you can give a sense of possibly what you would for theMarch quarter?
Well we are not again to be talking about the March quarteron this call again. We will offer guidance one quarter at a time. Myobservation about the first half versus second half being 50-50 approximatelyon revenue EPS is exactly that. It's approximately. So I don't want you to readtoo much specifically into those words.
In terms of deferred revenue, the fact that we see thatgrowing in the back half of the year is very typical for our business. Wetended to see relatively flat to down deferred revenue depending upon the yearin those first couple of quarters, and then when we have the bigger renewalquarters in December and March, we tend to see deferred revenue increasing moresharply. I would expect that to be thecase this year.
Phil Winslow - CreditSuisse
When you talk about the softness in new business, can you bespecific to Data Center Management or just where that was located?
think in our SDMG, our Security and DataManagement business, it would be obvious to you, Phil, that there would be somesoftness ahead of the release of Symantec Endpoint Protection. That's been theexperience that we've had for the last few quarters and we finally have theproduct out and so our hope is that the trends that we've seen in the earlyparts of this quarter will continue throughout the quarter, or better yet,throughout the fiscal year.
In SDMG,the Net Backup was strong from a revenue point of view. However, new licensesales for a number of Data Center Management Group products was a little bitweaker than our forecast and hopefully as we re-incent and refocus the team inthe Americas, which is the largest part, if will, of our sales channel,that will bode well not just for SDMG but for our Data Center Management Groupas well.
Your next questioncomes from Walter Pritchard - Cowen.
Walter Pritchard –Cowen
In terms of the EPS range for the December quarter, it's alot broader than you've provided over the last several quarters. I waswondering, James, what the major factorsare outside of the revenue range that you have out there in terms of that EPSrange?
Well, it's largely driven by the revenue range becauseobviously expenses are easier to predict. We've got very specific plans inplace as John was alluding to earlier on the expense side of the ledger versustrying to predict exactly how recognized revenue will play out. That'sobviously more driven by specific sales and activity, how we wrote up, if willyou, that sales activity. That's been a point that has definitely helped us Iwould say in the first half of the year. We've been able to convert more of oursales activity into recognized revenue in period, in both the September andJune quarters. So that's been a big part as to why we've exceeded our guidancein those two past quarters.
I'm certainly encouraged by that because I think that is illustrativeof how within our organization we are working very well right from the personon the front line doing the selling through sales management all the waythrough to the back office. So I think that's a very encouraging theme.
Walter Pritchard –Cowen
Just to follow up on that topic, around the composition ofdeferred revenue you've talked traditionally about a 60/40 mix between yourenterprise and consumer. Could you update that for us given that it appears asthough the consumer deferred dynamic hasn't changed much but it's really beenthe enterprise side that has.
I think directionally I would stand by our earlierdiscussions. I wouldn't say that anything has materially changed in thatregard.
Certainly to follow up on my earlier points, as you'rebuilding more in period recognized revenue then, yes, you are going to bebuilding a little less deferred revenue on the enterprise side of the equation.So to some extent there, the balancefavors the consumer side as a result. But I would not want to overstate thatimpact, frankly.
Your next question comes from Katherine Egbert - Jefferies& Company.
George Roberts for KatherineEgbert - Jefferies & Company
I was hoping I could get your early impressions on theBackup install base [inaudible] update? I know you spoke to it a little bit,but more broadly?
Well, it's still quite early. The product was only released atthe end of September so it would be way, way, way too premature to talk aboutits update given what we've seen so far.
However, the one transaction that I did reference in myplanned comments was one where NAC was a part of the deal. They will deploy theNAC function on all of the laptop machines that are part of that environmentwhich represents about one-third of the 100,000 machines or so. So I think NAC,coupled with the enhanced management capabilities associated with Symantec EndpointProtection will be a great driver of additional momentum in our securitybusiness.
George Roberts for KatherineEgbert - Jefferies & Company
Did any of those slipped Altiris deals close after the quarter?
Quite frankly, Idon’t know. I haven't even looked.
I think it's fair tosay that some portion of them have, and obviously we are going to continue tobuild on the momentum that we have developed at Altiris in the last couple ofquarters. So we are very pleased by how that part of the organization isdeveloping and we are seeing, as we expected to, that there will be realopportunities for the Altiris product suite, particularly internationallyacross the EMEA region and across the Pacific so we will be very much focusedon that as the quarter plays out.
Your next question comes from Robert Breza - RBC CapitalMarkets.
Robert Breza - RBCCapital Markets
First let me apologizefor the background noise, I am in the airport. John, I was wondering if you couldtalk about some of the writedowns or the writeoff of products? In what specificareas there? Do you look at taking a strategic look at all the products thatyou have in your portfolio? Thanks.
Well, we go through that analysis once a year, as a matterof practice. In this particular instance, we started the activity early thisyear and concluded that we did have some assets that were not major products likeNet Backup or Storage Foundation or what have you that are part of the DataCenter Management Group that just aren't as strategic today as they may havebeen some time ago. We are in discussions with people about alternatives forthose assets and therefore I'd rather not talk about the specific names beforewe talk to our customers about it.
Your next question comes from Michael Turits - RaymondJames.
Michael Turits -Raymond James
On the SDM Group it was up mid to high single-digits, but inNet Backup it was actually up double-digits. It implies that enterprisesecurity was flat, possibly down. With Symantec Endpoint Protection coming on,does it look to you like you will have a chance to get the security piece ofenterprise either flat or growing? What do you think would be the specificdrivers for that?
Well, the strength of SDMG’s performance this past quarterwas clearly Backup Exec. In addition to that, we had very strong contributionsfrom our compliance technologies and our enterprise vault or archivingtechnologies. So it's not just the backup business that's doing well. Many ofthe emerging technologies are doing quite well and we are encouraged by that.
However, the largest revenue stream in that BU or business unitis in fact the Endpoint Protection technologies and with SEP in the marketplacenow, that should start to improve the performance of that set of products orthat business area within SDMG.
We don't give specific product forecast or revenue outlooksbut suffice it to say now that we no longer have the headwind of no product inthe marketplace that should bode well for this whole business unit.
Your next question comes from Steve Ashley - Robert W.Baird.
Steve Ashley - RobertW. Baird
First a quick housekeeping question, James. How much was theforeign tax refund in the period that benefited cash flow from operations?
We actually had a few different tax refunds that all came inroughly around the same time, either from Asia, Europe or some of the U.S. States.When you added it all together it was on the order of $50 million.
Steve Ashley - RobertW. Baird
I know it hasn't been in the market very long, but InformationFoundation, can you comment on how the initial or early response has been tothat product?
It is early, but it is a part of a collection of technologiesfocused on helping customers manage the digital content that they have createdor they own, if you will, more effectively. So it's our mail security products,it's our archiving products. It's a full range of things like that. But the sub-segmentof products did very, very well in the quarter. I won't give you specificrevenue performance, but let's just say that we are pleased with what Francis andhis team are doing. They are doing a really great job.
Your next question comes from Daniel Ives – FBR.
Daniel Ives – FBR
John, I just have a question in regards to guidance. Howmuch comes into play, there have been false starts before where you have a goodstring of quarters, bullish on The Street and then you have missed numbers. Areyou trying to bake in some breathing room here, thinking people were getting alittle too bullish and the fact that you are still a transition story?
Could you talk about that with regard to what has happenedin the past, and has that played into your guidance for next quarter? Thanks.
I don't want to keep describing or defining Symantec as atransition story, but I also don't want people to get overly excited about thefirst half and drive up the outlook for the second half beyond what we thinkare reasonable expectations for our company in an economic environment, quitefrankly, that's quite uncertain.
So given some of the things that we have seen, given whatwe've seen from other companies that have a pretty good pulse on the globaleconomic environment, we thought it would be prudent to be a bit moreconservative, perhaps, and not let estimates run away from us.
Now that's certainly going to cause people to question thestrength of our business. We are quite pleased with how our business isperforming but we don't want estimates to get too far out ahead of us.
Daniel Ives – FBR
As a follow up, when you look at your business, is there anythingstructurally wrong with your company right now? I mean, you have been doingwell. Anything that should cause investors concern, given the outlook, or is itjust more a speed bump given the cautious environment?
Can you address that on the call rather than investorshaving to think about it tomorrow? Thanks.
I don’t think we have anything that is structurallywrong. Do we have things that we want tocontinue to do to improve overall business operations? Absolutely. We have madegreat progress in a number of the things that have made doing business withSymantec much easier than it was a quarter ago or even a year ago.
I think we also have made progress and turned the corner onour customer sat scores, that is an important indicator of what futureperformance might be for our company; and I think we have more work to do onour cost structure. That is not where we are going to take a hatchet to thecompany, we do need to take a scaffold, though, to certain areas of the companywhere we think we have allowed ourselves to get a little ahead of either therevenue performance or the operating return expectations that we have for thatbusiness segment.
Those are modest tweaks that we will make along the way, notmajor structural changes.
Your next question comes from Tim Klasell – Thomas WeiselPartners.
Tim Klasell – ThomasWeisel Partners
I want to dig into a little bit of your North American salesforce. You mentioned you made progress. Howmuch longer will it take for you to completely reorganize your salesforce andhave that totally behind you, do you think?
This was not about a salesforce reorganization, let me beclear. This was about making leadership changes at the top of the organizationto make sure that we had the right focus on execution day in and day out. Itwas about streamlining the leadership of the organization such that we didn'thave to go so many places to get so many things done. So we've made decisionmaking-- hopefully by the structural changes -- a lot easier and a lot faster andwe've got a leader in place that is well respected by the team across the Americas.
So this is not we are reorganizing the salesforce, puttingnew quotas out, this is not that. This is let's make it easier for our team toexecute, let's get an enhanced set of incentives in front of them so they willsell their way out of what was a tough first quarter and we can then start tofeel good about performance as we wind down this fiscal year and head into thenext one.
Tim Klasell – ThomasWeisel Partners
Would you say that the leadership changes are pretty muchbehind you at this point?
I think that's a fair characterization.
Your next question comes from Rob Owens - Pacific Crest Securities.
Rob Owens - PacificCrest Securities
John, I was wondering if you could give us a little morecolor around your commentary around the SDMG group and Hamlet. Are youexpecting a big attach rate of the NAC products? You talked about this being anupgrade cycle and my understanding of Hamlet being free to customers onmaintenance, I was wondering how that is going to drive growth?
Actually where you get growth, Rob, is in the mid-market for un-penetratedmachines or new machines that they add. But fundamentally for any of ourcustomers who are on maintenance, it is a free upgrade to them. They have topay, however, for the NAC component. We've seen tremendous interest through thebeta customers and in the early proof of concept if you will, for some of the largeenterprise customers that we've been with. We think over time NAC will be arevenue add for the SDMG business but that's not a huge, huge lift in thecurrent fiscal year for sure.
Your final question comes from Phil Rueppel - Wachovia.
Analyst for PhilRueppel – Wachovia
Would you expect seasonality to come back to historicallevels as you look out to March?
We think as we have tuned the business model of the companyto where more and more of our revenue is rolling from the balance sheet, itshould make us more predictable and it should smooth results.
Now will it be a perfect 50-50? Probably not. But hopefullyit wouldn't be skewed as dramatically as it has historically been. I think thevalue of changes that we have either incurred or endured here is that we shouldproduce in the end a much more predictably consistent company and that's whatwe want, and we know that's what you want.
That is all the time we do have for the question-and-answersession. At this time I would like to turn the program back over to Mr. JohnThompson for any additional or closing comments.
Thank you very much for dialing in this afternoon. I'mcertainly proud of our team’s performance in our four key metrics through thefirst half of the year. We remain cautiously optimistic about our business,given the strength of our product portfolio, but we also think it's prudent tomake sure that we are conservative in our guidance given the uncertain economicenvironment. We are about execution now and have been for some time.
We'll talk to you again at the end of the December quarter.Thanks for dialing in.
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