NortonLifeLock Inc.
Q2 2007 Earnings Call Transcript

Published: 26 Oct 2006

[Operator:]

Good day, and welcome to Symantec’s second quarter 2007 earnings conference call. Today’s call is being recorded. At this time, I would like to turn the call over to Ms. Helen Corcos, Vice President of Investor Relations. Please go ahead, Madam.

[Helen Corcos:]

Thank you, Lisa. Good afternoon, everyone, and thank you for joining us. With me today are John Thompson, Chairman of the Board and CEO 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 discuss highlights of the results of the fiscal second quarter 2007, which ended September 29, 2006. James will discuss the financial details of the quarter, and will review guidance for the fiscal third quarter and fiscal year 2007 as outlined in the press release. John will provide a few more concluding remarks before we open the lines up to take your questions. Today’s call is being recorded and will be available for replay on Symantec’s investor relations homepage at symantec.com/invest. In addition to today’s press release, a copy of our prepared remarks and supplemental financial information are available on the investor relations website. Before we begin, I would like to remind everyone that some of the information discussed on this call, including our projections regarding revenue and operating results for the coming quarter and fiscal year, contain forward-looking statements. These statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in the statement. Additional information concerning these risks and uncertainties can be found in the company’s most recent periodic report filed with the U.S. Securities and Exchange Commission. Symantec assumes no obligation to update any forward-looking statements In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, Symantec reports non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP results, which can be found in the press release and on our investor relations website. Now, it is my pleasure to introduce our CEO, Mr. John Thompson.

[John W. Thompson:]

Thanks, Helen. Our results for the September quarter met the low-end of our expectations, as we continue to build a strong deferred revenue base. I believe the underpinnings of our business remain healthy, and we are poised to achieve our full-year financial targets. Overall, we saw strength in our businesses in the Americas and in Asia-Pacific. However, sales weakness in our EMEA enterprise business was a disappointment. Contributing to the region’s underperformance were a number of factors, including weak macroeconomic conditions and a number of sales execution issues across the region. Earlier this year, we selected John Brigden to lead our EMEA operation. John is an energetic leader who has made good progress in redefining his organization and building the kind of country level leadership team we need for the long-term. He is making thoughtful moves, and I am encouraged both by the way he has tackled the task and the reception of the team. We know we have more to do, but we are convinced we have the right leader at the top. Our consumer and services groups were quite strong, and the data center management group turned in a very solid quarter. Underpinning these revenue results is very strong growth in deferred revenue, which is a very important element in our overall business model. Our value proposition is resonating more strongly than ever with CIOs. Customers around the world understand the benefits of a more standardized operating environment, which enables them to reduce the complexity and the cost of managing their infrastructure. We now have tools that clearly illustrate the return on investment a customer can achieve by implementing Symantec solutions in the data center. In some cases, the analysis suggests savings upwards of $100 million. I will share a few examples of that with you in moment. With what is traditionally the most challenging part of the fiscal year behind us, I believe we are well-positioned to achieve our full-year forecast for fiscal 2007. We have an energized team and the demand for our solutions is evident in our pipeline. During the September quarter, we booked 280 transactions valued at more than $300,000 each, including 66 deals worth more than $1 million each. In addition, 76% of the transactions over $300,000 included multiple products or services. These metrics underscore how our sales force realignment has improved our ability to cross-sell the broad portfolio of products. I would like to highlight a couple of the larger deals that illustrates the breadth of our products we are selling with customers around the world. We signed a multi-million dollar deal with a global financial services firm. They purchased a combination of security and availability solutions. As we were negotiating the renewal of an existing contract with this firm, we were able to demonstrate the value of consolidating more of the client’s data center infrastructure software through a thoughtful ROI analysis. The net result was a much larger transaction that was expanded to include anti-virus, anti-spam, ghost, storage foundation, net backup, and our cluster server products. We also gained a new customer in one of the world’s leading energy companies. They worked with our consulting team to strengthen their policy and endpoint compliance initiatives. We tailored a solution for them using our Symantec control compliance suite that helps enterprises implement, measure, and maintain compliance with security configuration standards. This solution includes technologies that we acquired from both BindView and Sygate. We also had our biggest ever quarter in the federal vertical, as we saw strength with both the Department of Defense and the civilian sector. We had several, multi-million dollar and multi-product deals that included a wide range of products from our security and availability portfolio. One large government service organization expanded their business with Symantec and now covers end-point compliance, storage, and back-up, displacing other smaller point product providers in the process. Now I would like to share a closer look at the performance of our four business segments during the September quarter. The consumer group posted another strong quarter, growing 12% year over year. Growth was driven primarily strength in our online distribution channel and our Norton Internet Security Suite. In September, the team launched a 2007 version of our flagship Norton products. These industry-leading security applications offer enhanced technology and performance to protect users from today’s evolving online threats. As a testament to our leadership in the security suite arena, Norton Internet Security 2007 won the coveted PC Magazine Editor’s Choice Award. In a head-to-head competition versus all in market security suites, NIS 2007 came out the clear winner. Our world-class security protection was touted for its superior firewall, improved anti-spam capabilities, and its reduced consumption of valuable system resources. I am very proud of the team’s success in continuing to deliver a solution that is head and shoulders above the competition. We delivered the world’s first comprehensive online transaction security solution, Norton Confidential. This product provides consumers with unprecedented dual level protection against the most dangerous tools in an attacker’s toolkit, and that is fraudulent websites, fishing websites, and eavesdropping crimeware. Norton Confidential is the only online transaction security solution designed to protect consumers at the moment they are transacting over the web. We are also coming up to the anniversary of our auto renewal program in North America. This program is now rolled out in EMEA and the process will begin for the Asia-Pacific region in 2007. Our consumer product portfolio continues to expand and strengthen to meet the changing needs of our customers. Symantec is out-innovating the competition with new products, new partnerships, and expanding distribution channels. Now let’s take a look at the Data Center Management group. This segment performed solidly, growing 8% over the same period last year. Growth was led by our storage foundations solutions. Our data center products continue to show impressive strength, driven by customers’ demands for standardization. While large organizations today are straining under the complexity of their infrastructure, Symantec’s storage foundation suite lets customers standardize on a common software layer to manage their heterogeneous storage environments. We are focusing our sales and marketing efforts on the Global 2000, since it is here that we have been able to show our customers a tremendous return on their investment through standardization. While standardization has been primarily a storage foundation story, we are starting to apply this approach more broadly. Specifically, in the net back-up market. We are encouraged by the early positive feedback from our customers. Our services group posted another strong quarter, growing 14% year over year. The consulting group played a key role in the number of the deals for us during the quarter. Using our consulting services, a large U.S. government agency has now standardized on our managed security services and deep site response technology to give it a real-time view of the online threat environment. The agency also will utilize our onsite training services to optimize their own malware intelligence resources. We recently announced an exciting joint initiative with Accenture. We have teamed with Accenture to create what we are calling the Accenture Symantec Security Transformation Services, which will build and implement data security solutions for companies grappling with the increasing complexity of managing risk in their IT environment. This will be a global initiative comprised of consultants from both companies, focused on three key areas -- compliance, security monitoring and management, and application security. Going forward, we will look to further expand the capabilities of our services group, which I believe will continue to be an integral part of our total solution set for large enterprise customers. We have a trusted brand and are establishing ourselves as a strategic adviser to our customers. In the September quarter, our security and data management group posted moderate growth versus last year, and experienced a modest rebound from last’s quarter year-over-year decline. Our e-mail security and our policy compliance offerings performed well. We are starting to experience good traction with our end-point compliance offerings, as well as our BindView policy compliance products. Both of these technologies were acquired earlier this year. Our enterprise antivirus continues to be a significant contributor in this segment. However, the sale of content filtering technologies is a part of a much broader strategy we call security 2.0, which is all about protecting corporate information, both structured databases and unstructured files and documents. I know some of you were able to attend our security 2.0 event earlier this month. At this event, we outlined our vision for protecting our customers from the next generation of threats targeting their information and interactions. Our view of security 2.0 brings together an eco-system of products, services, and partnerships to help our customers remain confident in today’s connected world. At the event, we also announced our plan to deliver two new products that address data leakage, a rapidly growing concern for today’s CIOs. First, the Symantec mail security 8300 series, a next generation mail security solution that helps organizations protect against data leakage while ensuring compliance with external regulations and internal corporate policies related to e-mail content. This is a solid example of how Symantec is focusing its offerings on the most important threats of today to address the growing and changing demands of our customers. Additionally, we announced a database security product, a new solution that reduces risk to information stored in major enterprise database management systems. It provides real-time fraud and data-leakage detection, as well as auditing capabilities to address growing compliance requirements for secure information access. With the changes we have made on our sales coverage model, the new products emerging from our labs, and the level of enthusiasm we hear from our customers and partners alike, I believe our results for the September quarter leave us poised to deliver on our full-year outlook. Now, I will turn the call over to James for a detailed review of our financials.

[James A. Beer:]

Thank you, John, and good afternoon, everyone. GAAP revenue for our September 2006 quarter was $1.262 billion. Non-GAAP revenue grew approximately 7% versus the September 2005 period to $1.275 billion. Foreign currency movements positively impacted non-GAAP revenue by almost $22 million in the September 2006 quarter, as compared to September 2005. Sequentially, foreign currency movements had a $6 million positive impact on revenue. The September quarter’s diluted GAAP earnings per share was $0.12. Non-GAAP diluted earnings per share for the quarter were $0.26. International non-GAAP revenue for the September quarter grew 10% versus the year-ago period, to $637 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 8%. As John mentioned, the EMEA region posted weak results, declining 3% from the June quarter. Excluding currency effects, EMEA revenue grew by 4% year over year. Now I would like to move on to revenue by segment for the September 2006 quarter. Consumer revenue came in at $395 million, up 12% versus the September 2005 quarter, and up almost 3% sequentially. It is important to note that although launching our 2007 products on time was an important objective for the consumer team, it did not have a material impact on revenue in the September quarter. Growth was driven primarily by strong electronic distribution activity from our online store, subscription renewals, and upgrades. From a product perspective, the growth was driven by strong sales of our Norton Internet Security Suite. Electronic distribution channels represented nearly 70% of consumer revenue, and grew 22% versus the September 2005 quarter. Norton Internet Security revenue grew nearly 50% year over year and 7% sequentially. Norton Internet Security remains the single largest product contributor to our consumer category, now generating approximately 56% of total consumer revenue. Moving on to our enterprise segments, our security and data management revenue of $484 million grew by 1% over the September 2005 quarter. Our IT policy compliance products experienced the largest year-over-year gains, as these solutions continue to lead their respective markets. Our e-mail archiving products also posted double-digit growth. The data centre management business generated revenue of $342 million, growing 8% from the September 2005 results. As John mentioned, the storage foundation family of products continued to deliver solid, double-digit percentage revenue growth. Our services group posted another strong performance, increasing revenue to nearly $55 million, up 14% from the September 2005 quarter. Services represented approximately 4% of our total revenue. Non-GAAP gross margin was 83.2% for the September 2006 quarter. Gross margin was lower than expected for two reasons

[John W. Thompson:]

Thanks, James. I would like to highlight a couple of significant partnership agreements we have entered into recently. These partnerships are an important component of Symantec’s growth strategy, as we establish strong ties with leading companies whose products and services complement our offerings. This allows us to leverage our combined strength and focus on common customers and common competitors. Last month, we announced a strategic technology and go-to-market partnership with Juniper. Symantec and Juniper are collaborating to reduce the cost and complexity of deploying unified threat management appliances, as well as endpoint compliance and access control solutions. We also signed a new partnership with Dell, with the creation of Secure Exchange, an offering that brings together hardware, software, and services, and a full solution that protects and archives e-mail environments. Secure Exchange takes time and complexity out of deploying a secure, reliable exchange environment with extensive archiving capabilities. The offering will include Symantec’s mail security 8300 series appliances, Symantec mail security for exchange, back-up exec, and our enterprise vault product. Looking ahead, in the consumer segment, it is clear to us that the trend of financial motivated threats will continue, as will the overall movement toward doing more online. We will continue to provide protection to consumers, as we have in the past, but we have expanded into other areas of protection to give consumers confidence and trust while they operate online. Norton Confidential Online Edition, a version of Norton Confidential, is designed for partner companies to be delivered online to their customers. This will be our first product where we partner with enterprises, such as financial institutions and online retailers to provide protection to their customers. This creates a new distribution channel for us, and gives our partners the ability to protect their customers online transactions and interactions. Finally, on our July earnings call, I discussed our intent to expand in India. We have decided to augment our presence in Pune with an additional facility in Chennai, capable of accommodating up to 1,000 Symantec employees. Chennai is a major commercial and industrial city with a rich talent pool. In fact, we already support a portion of our consumer mission from Chennai. Additionally, we have decided to expand our presence in Pune, capable of accommodating up to 2500 employees. With these facilities, we expect to double our investment in India over the next few years. In summary, I remain enthusiastic about our position as we enter what is our seasonally strongest part, or the seasonally strongest part of our fiscal year. Moreover, I am confident the team will achieve the guidance we have affirmed today. Our optimism is based on several facts

[Helen Corcos:]

Thank you, John. Lisa, will you please begin polling for questions?

[Operator:]

(Operator Instructions)

[Helen Corcos:]

While Lisa is polling for questions, I would like to announce Symantec plans to attend the following upcoming conferences

[Operator:]

We will go first to Adam Holt with JP Morgan.

[Adam Holt:]

Good afternoon. My first question is about revenue versus deferred revenue, particularly on the enterprise side. I was hoping maybe you could help us reconcile what looks like bookings that came in a little bit better than expected with deferred revenue a little bit ahead of expectations, with a little bit of weakness in the enterprise. I was wondering if you could talk about how you are managing what gets recognized in the quarter versus what goes into deferred, and whether or not there were any transactions you thought you might see in the quarter that end up going into the balance sheet.

[John W. Thompson:]

Adam, I think the answer here is that we do not make decisions about what goes to deferred or what gets recognized. That is a function of the accounting principles and accounting standards that we follow, so it is not an arbitrary decision that we get to make at the end of the quarter. However, we have set up a business model over the course of the last few years that acknowledges that the value of our deferred revenue pool will streamline and stabilize reported results over time, and hence it has a dampening effect in the early term as we are setting it up, but delivers consistency and predictability over time. If ever there was a statement of weakness in the quarter, it would be more transactions that we had in our forecast or expectations that did not occur, particularly in Europe. It is in that part of our business that we saw weakness that quite frankly impacted our ability to hit the mid- or high-end of the guided range. We are pleased that we were able to come in at the low-end of the range, but we are disappointed that we could not get better performance out of Europe.

[Adam Holt:]

If I could, my follow-up is along that line. As you look into the December quarter and the guidance for the December quarter, is the expectation that you see a recovery in those regions that were weak, or have you taken a more conservative view of closed rates, et cetera, as you built out the December quarter guidance for Europe?

[John W. Thompson:]

I think it would be fair to say, Adam, that much of the problem in Europe was isolated to one particular region, although you could find a country or a team that did not perform as they would have forecasted, but the single largest problem was in the central region, which is Germany. Germany is suffering from its own set of economic woes, and we have our own set of issues there, because we have chosen to make leadership changes because of our dissatisfaction, quite frankly, with the way that part of our business has been performing. That being said, the reaffirmation of our forecast suggests that we believe appropriately covered ourselves for what the results are likely to be in Europe.

[Adam Holt:]

Thank you.

[Operator:]

We will go next to Heather Bellini with UBS.

[Heather Bellini:]

I actually just had a follow-up to Adam’s question regarding the pipeline and your comment that it is stronger than ever. He was referring primarily to your business in Europe, but if you look overall across your business, can you give us an idea directionally, or talk to us a little bit about what you saw for a close rate this past quarter across the board in your enterprise business? Are you assuming an up-tick in your close rates for the December quarter in order to make the midpoint of the revenue guidance? Thank you.

[John W. Thompson:]

Heather, we do not typically talk about close rates. You will have a number of transactions that are in the queue for a given quarter that may or may not close, because they may push, and so one of the real issues with any enterprise sales force is do you have enough deals in the pipeline that have a reasonable enough chance to close that you can hit the forecast for the quarter. As was the case in the Americas, we saw deals push, but they did pretty well. We saw deals push in Europe, but they just did not have enough in the pipe to cover what the expectations were for the quarter. My sense is that our enterprise pipeline is clearly larger than it has ever been. That is a statement of both number of transactions and value of the revenue that underpins those transactions. Most importantly, our sales team is now starting to be able to sell across the portfolio. Sales productivity is up. Customer relationships are strengthening. Attrition rates are down. All of those things would lead us to believe that we can certainly deliver the forecast that we put on the wall.

[Heather Bellini:]

Directionally, would you comment on whether the close rate would be up or down from last quarter?

[John W. Thompson:]

I really do not know.

[Heather Bellini:]

Okay. Thank you.

[Operator:]

We will go next to John Walsh with Citigroup.

[John Walsh:]

Good afternoon. Just on the large deals, up sequentially, the $1 million plus, and I think over $300,000 were basically flat, but on a year-over-year basis, they are down quite a bit. Is that primarily associated with the recognition now of deals and putting a portion into deferred?

[James A. Beer:]

No, I think you may be not quite correct there. The deals greater than $300,000 were actually up year over year around 15%, and the million dollar deal figure, which was 66 in this past quarter, was at 67 in the year-ago period. So really, very close to flat at that level. We have talked in the past about how we feel as though the transactions of greater than $300,000 are probably the best indicator as to the progress we have made in terms of sales force integration.

[John Walsh:]

Okay, and that would speak to the multiple products and the sales force being realigned going forward? You think that metrics on a sequential and a year-over-year basis should start to uncover some of those multiple product deals?

[James A. Beer:]

Certainly the focus is very much on leveraging this breadth of product portfolio that we now have as a company, and I think that has resonated well with CIOs and other IT executives during the past quarter, and really, as John as talked about the strength of the product pipeline that we see, our view is that resonating effect will increase as we enter the busier time of the year.

[John Walsh:]

Okay, just one quick follow-up on the consumer side with Vista. Could you give us an update on where you are at with Microsoft there? Thank you.

[John W. Thompson:]

All of our products will be Vista ready, so when Microsoft ships the final bits to OEM manufacturers, we will certainly have products in their hands shortly thereafter. Many of the statements that have been published or reported about Microsoft’s plans are certainly encouraging to us. We now want to see more of the action that underlines or underpins those statements. Their desire now to provide APIs to disable defender ware, we have the code to be able to do that. That is a very positive step. Their statements that they will provide APIs to allow us to turn off the Windows Security Center, we think that too is a positive step. We have not seen all that we would like to see around kernel access or how we will manage in 64-bit environment with patch guard, but they have made statements that certainly represents significant movement from where they have stood for the last year to two years. While progress has been made, it is our opinion that there is more that needs to be done to demonstrate true evidence of the commitment.

[Operator:]

We will take our next question from Sarah Friar with Goldman Sachs.

[Sarah Friar:]

Good afternoon. John, just a bigger picture question first on the enterprise security area. What is the disconnect between when we do a lot of market growth surveys and so on, people talk about their security budgets still growing 10%, 12%, and yet you guys are sitting with 1% year-over-year growth this quarter? I guess the question is you should be benefiting consolidation towards the bigger vendors. Over time, should we start to see those growth rates come together as you hit your stride better?

[John W. Thompson:]

I think some of this, Sarah, is a function of where customers might be investing and clearly, you have seen in the security space for the more well-established firms, lower growth rates over the last I would say several quarters to a year. That being said, in the segment of the security market where we have the largest portion of our revenue, that is antivirus or content filtering, it is clear that unit volumes are relatively flat to down slightly, and that price points continue to follow kind of the seasonal or annualized pattern of erosion. If you do not have rising volumes and you have normalized price erosion, you are going to see lower yield. Our investments have been focused on moving the needle into compliance and moving into technologies that are more about data leakage and new areas for customers, and we think that is where we will get revenue lift in the out quarters, as we see a continued erosion, if you will, in the revenue yield in the core AV business.

[Sarah Friar:]

Then, just a quick follow-up on the margin side. James, you said you expect that gross margins trend higher, now that you have gotten rid of some of these one-offs like the obsolescence on the appliance side, I think that you said. What is a reasonable expectation for the second-half? Is it back up closer to 85% gross margin, where you were through fiscal year ’06?

[James A. Beer:]

Sarah, I am afraid I am going to have to dodge that question. I think I will just leave it at the fact that we would expect gross margins and operating margins to both be trending upwards. We are in the seasonally stronger half of the year, and we will work on it.

[Sarah Friar:]

Fair enough. Thank you.

[Operator:]

We will go next to Todd Raker with Deutsche Bank.

[Todd Raker:]

Two follow-up questions on the consumer side. First, in terms of the Vista question that was asked earlier, not so concerned in terms of what Microsoft is doing, but how do you think from a unit perspective, the introduction of a new OS is going to impact your business? Do you see it as a potential catalyst, or do you see a potential slowdown around the holiday season until it actually starts to ship?

[John W. Thompson:]

Todd, it is my sense that the market excitement around the new release of an operating system has become less and less since Windows 95. Candidly, I do not see people lined up running into the stores to buy a Vista-enabled machine, and so I do not know that it is going to have a pausing effect or, quite frankly, an afterburner or booster effect on our business at all.

[Todd Raker:]

Second question for you on the consumer side. Can you give us some feel for when your OEM relationship with HP comes up for renewal? What kind of impact is that having on your business today, if you look at incremental new customers? How much of that is being driven by HP versus other channels?

[John W. Thompson:]

HP is certainly our largest OEM partner. They are also the largest provider of PCs to consumers in the world, so that relationship is awfully, awfully important to us. I would rather not talk about the date terms associated with the contract, because it is between us and HP.

[Todd Raker:]

Could you tell us if it is up for renewal in the first-half of calendar next year?

[John W. Thompson:]

No, it is not.

[Todd Raker:]

Thank you.

[Operator:]

We will go next to Phil Winslow with Credit Suisse.

[Philip Winslow:]

Just looking back at your European operations, you mentioned obviously some slippage on the enterprise side, but I am wondering if you could mention if there is any distinction between more the security sections of your business, or the storage side. Also, in the services line, down a couple of million sequentially. I am wondering if anything is going on there, and sort of what your expectation for growth is there going forward?

[John W. Thompson:]

We believe that our services business will clearly hit our guided target for the year. The fact that it is down sequentially has more to do with the seasonality of that business than anything. It is a people-based business. The summertime is in fact a time when people take vacations and therefore there are no billings associated with their activity. So I am not at all bothered by a sequential decline in services. That is just the norm, if you will, for a people-based business. With respect to Europe, I think the statement that was made by one of our guys really does reflect some of what is going on there, and that is our European team has lost their security swagger. They have not quite figured out how to embrace the totality of what we have in our portfolio, and take those offerings to the marketplace in the same manner that we have been in other parts of the world. That is unfortunate, but it is something that will be fixed in due time. I am not worried about it long-term.

[Philip Winslow:]

Great, and then also just back to the cost of goods sold line. I am just wondering if you could set sort of what your long-term expectation there is.

[James A. Beer:]

Again, I think we will just leave it at the fact that we certainly believe we improve off the 83.2% that we recorded in this quarter.

[Philip Winslow:]

Thank you.

[Operator:]

We will go next to Walter Pritchard with Cowen and Company.

[Walter Pritchard:]

I just wanted to follow-up on the bookings and deferred revenue piece. I calculate the non-GAAP revenue up about $6 million. I am wondering, James, if you could tell us the currency impact on the non-GAAP deferred revenue?

[James A. Beer:]

Let’s see, the currency impact between this point, the end of September and the end of the previous quarter?

[Walter Pritchard:]

Exactly, sequential.

[James A. Beer:]

That would have been -- let’s see. I want to say about 2% or 3%, 2.5%, something of that nature.

[Walter Pritchard:]

Then, on Norton Confidential, you just launched that product this quarter. I am wondering if you could give us any sense of an early read on that, and what types of customers you are seeing buy that. Is it a new customer or is it somebody that has already bought NAV or NIS from you? I just want to get a little more detail, if you could, on the revenue model around this new Confidential online service that you are contemplating.

[John W. Thompson:]

With respect to Norton Confidential, it is just way, way too early to talk about results. We literally launched the product near the end of the quarter, so nothing in the September quarter results in any material way reflects Norton Confidential. Norton Confidential Online Edition is targeted at our enterprise customers who will buy the product for distribution to their online customers. So it is way for them to help deliver confidence, if you will, which is one of the real challenges that we are starting to see with all for the fraud and identity theft activity that has gone on around the world -- mostly in the U.S., I must admit. So this is a slight change in the model, but it is one that allows us to monetize the relationship with a consumer in a different way than we have in the past.

[James A. Beer:]

Walter, let me just confirm, on the first question that you asked, since the end of the last fiscal year, we have seen appreciation of around 5% in terms of the dollar-euro relationship. So between the end of the fiscal year of ’06 and the end of the September quarter, you should use a 5% number.

[Walter Pritchard:]

Thank you.

[Operator:]

We will go next to Robert Breza with RBC Capital Markets.

[Robert Breza:]

Two quick questions. James, obviously everybody wants to know where gross margins are going. Could you at least tell us what the impact was for the discontinuation for the appliance and that impact?

[James A. Beer:]

We are not breaking out the dollars, per se. I would say that was the smaller of the two items that I mentioned.

[Robert Breza:]

John, maybe one follow-up question for you. As you look at the new consumer products coming out, and I know it is early to talk about pricing, but can you talk directionally, how you see going to market and educating users, trying to get them to upgrade, obviously, to what I would assume would be a higher feature, higher price point product, but can you talk directionally about those comments?

[John W. Thompson:]

Yes, but before I go there, let me make a comment on the question on margins. I think as our business mix continues to evolve, hence as we add more services to our solution portfolio, the optimization point for this company is more about its operating line, operating margin line, not just its gross margin line. I think you guys, as you analyze our company, have to have expectations that we are going to manage op-ex to deliver the right operating margins that delivers the right net income that delivers the right EPS. We will do whatever we have to do at the op-ex line, given whatever the gross margins become at the top. Now, on Norton 360, I assume that is the product you are asking about, we are in a controlled beta -- a rather extensive controlled beta, I might add -- right now, where the most significant feature addition in that product compared to what we have in the market today, is online back-up. It is our belief that there are many, many, many more customers out there who have interest in not just back-up, but online back-up because of the potential ease and convenience that it might offer them for not just their MP3 files and their digital photos, but targeted at small business users who may have five to 10 PCs in their operation. We have not priced the product yet. We certainly have a range of expectations as to where the product will be released, but we are not going to disclose that until we are ready to release the product itself. We think the first target buyers are in fact existing Symantec, either NAV, that is Norton Antivirus, or NIS, Norton Internet Security users. We also think it represents an opportunity for us to go back into some of the OEM manufacturers that we have worked with in the past and offer them a different kind of solution for them to consider versus what some of our competitors might have.

[Robert Breza:]

Thank you.

[Operator:]

We will go next to Katherine Egbert with Jefferies.

[Katherine Egbert:]

Thank you. I was actually going to ask about the operating margin. If I go to the midpoint of your guidance, it looks like it is going to be up about 150 basis points in December, and then flat from there in March. Is that right?

[James A. Beer:]

Again, we are not going to try to get into the specifics of how we see the margins moving around in the next couple of quarters, but again, we think that the trend at both the operating and gross line is positive.

[Katherine Egbert:]

A quick question on the European business. Does that business come back, or are you losing some market share?

[James A. Beer:]

We very much have looked through the deals that pushed, and are of the view that those are still available to us. In fact, a good number of those have already come through the door. So no, we are not losing these transactions to other competitors.

[Katherine Egbert:]

Last question, when is the beta of Norton 360 going to be out?

[John W. Thompson:]

There is a controlled beta in the marketplace right now. It has just shy of 20,000 users who are working with our engineering team. As we continue to iterate that, we will put out a press release when we are ready for an extended beta, and that would be a beta that would hit tens of thousands of people around the world. Just keep watching your screen.

[Katherine Egbert:]

Will do. Thank you.

[Operator:]

We will go next to Ed Maguire with Merrill Lynch.

[Ed Maguire:]

Good afternoon. I was wondering if you could comment on what the impact of exiting the UTM market may have had on your security business, and also talk a little about your expectations for the ramp-up for the alliance with Juniper?

[John W. Thompson:]

Clearly we booked less business there this quarter, Ed, than we did in prior quarters, by a marginal amount but it is not a whole lot that it is going to make a material difference in the company’s reported results. So we wouldn’t dare want to hide under that rock, suggesting that because we exited the UTM business, that is why our security and data management group is weak. There are other issues that we have to continue to work on. The relationship with Juniper we believe can leverage both companies’ strengths. Juniper is a terrific hardware provider at the network tier. They have great relationships with a lot of the large, network operators, and as you think about the emerging world, where the switching fabric has become very fast, and therefore what they need to provide is more content, or more performance and capability in the switch, our software products start to make more sense for them. Being able to deliver our intrusion prevention products, our content filtering technologies, all of the things that we do so well from a software perspective on their converged JUN OS/NET OS platform, is going to be a boost for I think both companies. Now, we are talking about a program that does not start to deliver revenue, I suspect, for another couple, three quarters, given that there is still engineering work that has to be done.

[Ed Maguire:]

A follow-up on operating costs. You had spoken about some new facilities expansion in India, and just from a very high level, what are your thoughts towards headcount expansion? Are you looking to move any of your existing positions off-shore, at least for this fiscal year? What are your hiring plans?

[John W. Thompson:]

We have been on a fairly aggressive ramp to hire through the first half of the year. Candidly, hiring will slow in the second-half of the year, because we think we are about right in terms of net adds. Now what we will be doing is hiring to address attrition. With respect to India, we have had a well-established position in Pune for quite some time. Both BindView and Veritas had large, large engineering populations there. We have grown those populations since we acquired both companies. What we felt we needed to do was to spread out a bit so we were not so dependent upon one skill pool, or one location for our skilled people. Hence, Chennai represents the second site. It is not unlike what any company would do here, even in the U.S., much less in India. We expect that over the course of the next few years, the population in India could reach 3,500 to 4,000 people, which is double what it is today.

[Operator:]

We will take our next question from Gregg Moskowitz with Susquehana Financial Group.

[Gregg Moskowitz:]

Thank you, and good afternoon. John, with the level of marketing spend in light of what you were expecting in Q2, and how are you thinking about consumer marketing activities over the rest of the fiscal year?

[John W. Thompson:]

The largest increase in spending this year, from a marketing perspective, or product management perspective, quite frankly, has been in our consumer business. I think the results of the consumer business certainly reflect that that investment was well-timed and well-placed. Now, it would also suggest that we cannot rest on our laurels because we do not think Microsoft has fired all the salvos they have just yet. So we will continue to monitor activity at every channel level, at every distribution outlet, with every partner around the world, to make sure that we are incentivizing them the right way, and we are putting the right marketing air cover in place for our partners to move our products. I think the team has done a terrific job of not just delivering great products, but getting the noise out and news out so that we are able to drive 12%, 13% growth for a business that is annualized now well over $1.5 billion.

[Gregg Moskowitz:]

Just a follow-up for James. The bookings number overall was certainly solid in the quarter. On deferred revenues, the mix was a little more skewed towards long-term than I was expecting. I am just wondering if there was anything that kind of drove that up more.

[James A. Beer:]

No, other than the types of bookings that we were able to bring in during the quarter. This has been somewhat of a consistent trend, I would say, actually in recent times, and I would expect that could well continue. Certainly the length of a lot of our enterprise deals is increasing, and we are pleased to see that. That is the sort of trend that underlines all of this. Certainly the largest deals tend to have the longer terms.

[Helen Corcos:]

We have time for one more question.

[Operator:]

Today’s final question comes from Chris Hovis from Morgan Keegan.

[Christopher Hovis:]

If you look at the guidance for the full fiscal year, what would you characterize as the factors that dictate whether you come in low-end or high-end, and specifically, which factors may be macro conditions versus things in your control?

[John W. Thompson:]

Chris, as is the case in every single quarter, the thing that influences where we land is how well we execute around the world. How well we build products, how well we support customers, how well we engage in our consulting business, whether or not our sales force is on point and able to close the deals in the forecasted time frame that they have put before me and the sales leadership team. This is all about execution. There is no place for us to hide if we do not make these numbers. It will be a function of us not delivering on what we said, hence us not executing.

[James A. Beer:]

A couple of the things, obviously that just mechanically will drive the figures will be things such as the exchange rate. We are using $1.24 per euro in the guidance that we have offered this afternoon, and of course, the share price will dictate a couple of things. First of all, how many shares we are able to buy back over the next six months, and then also the number of common share equivalents that we will include in the denominator of the calculation. That is going to drive the number of stock options that count in the denominator, as well as the number of shares that would be driven by the convertible debt. There are some mechanical elements to the calculation, but as John says, really, top-line execution and a close focus on our spending is going to be the key.

[Christopher Hovis:]

Thank you.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back to Mr. Thompson for concluding remarks.

[John W. Thompson:]

Thank you very much for joining us on the call this afternoon. While our results certainly achieved the low-end of our guided range, we know we have more work to do, specifically in Europe, to improve our performance to hit our full-year guidance. However, I am quite pleased with the strength of our pipeline, the productivity of our sales force, the excitement that we see in our channel partners and our customers, and confirm and reaffirm that we can make 5.2 to 5.4. Thanks very much.

[Operator:]

This concludes today’s Symantec conference call. Thank you for participating, and you may now disconnect.