NortonLifeLock Inc.
Q4 2007 Earnings Call Transcript
Published:
- Operator:
- Good day and welcome to Symantec’s Q4 and year end 2007 earnings conference call. Today’s call is being recorded. At this time, I’d like to turn the call over to Helen Corcos - Vice President of Investor Relations. Please go ahead, ma’am.
- Helen Corcos:
- Good afternoon and thank you for joining us. With me today are John Thompson, Chairman of the Board and Chief Executive Officer of Symantec; and James Beer, Executive Vice President and Chief Financial Officer. In a moment, I will turn the call over to John. He will provide comments the fiscal year 2007 results which ended on March 30, 2007, we well as highlights of our results for the fiscal fourth quarter. He will then turn it over to James who will provide financial details for Q4 and review our guidance as discussed in the press release. John will conclude by outlining our plans and objectives for FY2008. This will be followed by a question-and-answer session. Today's call is being recorded and will available for replay on Symantec’s Investor Relations home page at Symantec.com/invest. A copy of today's press release and supplemental financial information are available on our website and a copy of today's prepared comments will be available on the investor relations website shortly after the call is completed. As mentioned in our press release, Symantec adopted FAB accounting bulleting 108, considering the effects of prior year mis-statements when quantifying mis-statements in current year financial statements during the March quarter. As such, our GAAP and non-GAAP results for the fiscal year and fiscal Q4 include the adoption of FAB-108. FAB-108 also impacted our previously reported quarterly results for the first three quarters of FY2007. We believe the resulting changes to the previously reported amounts for the quarter and the fiscal year are immaterial. Our filings with the SEC will provide a detailed explanation of the impact of our adoption on FAB-108. We have also provided the impact of FAB-108 in this quarter’s supplemental financial package, which is available on our 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, and projections of deferred revenue, cash flow from operations, amortization of acquisition-related intangibles and stock-based compensation contain forward-looking statements. These statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in the statement. Additional information concerning these risks and uncertainties can be found in the company's most recent periodic reports filed with the US SEC. Symantec assumes no obligation to update any forward-looking statements. In addition to reporting financial results in accordance with generally accepted accounting principles or GAAP, Symantec reports non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP results which can be found in the press release and on our website. Now I would like to introduce our CEO, Mr. John Thompson.
- John Thompson:
- Thanks, Helen. Symantec ended FY2007 with a solid March quarter. Our performance represents a combination of strong demand for our products and services and a much improved operational focus to optimize revenue yield. As a result, a greater proportion of the largest contracts signed by customers included terms and conditions that drove higher end-period revenue. The performance included solid results in a number of our key enterprise product areas, including Net Backup, Storage Foundation, Email Messaging, IT Compliance and Services, as well as another great quarter for our market-leading consumer suite, Norton Internet Security. In addition to better than expected revenue and EPS results, we are pleased with the growth of our deferred revenue and our strong cash flow generation during the March quarter. We continue to believe these are two important metrics to consider in evaluating the strength of our underlying business. The breadth of our security availability and services solutions continues to drive the number of large transactions for Symantec. In the March quarter, we generated a total of 376 transactions valued at more than $300,000 each, compared to 384 in the March quarter of 2006 and 99 deals worth more than $1 million each compared to 91 in the March quarter of 2006. In addition, 77% of the large transactions included multiple products or services, which underscores the success of our solution selling approach. During the quarter, we signed a multimillion-dollar, multi-year extension of a federal government contract which included a variety of our market–leading solutions, including anti-virus, anti-spam, endpoint compliance, policy compliance, storage, backup and message management as well as business critical services offerings. Other large, multimillion-dollar customer wins included a large US telco for Storage Foundation, NetBackup, Cluster Server and Enterprise Vault and a global financial institution for Storage Foundation, NetBackup and Enterprise Security Manager. The market trend of customers interested in doing business with fewer vendors is becoming more evident every quarter in our results. In our global scale, our deep product portfolio is central to their decision and purchase process. The March quarter was a strong finish to what was unquestionable a challenging year. Fiscal 2007 was a transition year for Symantec, marked by the implementation of several major but necessary changes in our operations as we continued to evolve our business. One of the most significant changes was implemented on the first day for FY2007, when we integrated our enterprise sales force. We aligned our model to a more typical industry approach of having a single account manager supported by individual product or solution specialists. We are pleased with the structure as it allows for better account and opportunity coverage while leveraging our broad product portfolio. We also undertook a major business process and systems consolidation project. Project Oasis integrated our two ERP systems into a single enhanced system, allowing us to implement new buying programs, drive operational efficiencies and create a platform to improve the ease of transacting business with our customers and partners. This project is important because it provides the foundation for scaling our business and lowering our costs over time. We believe many of the major challenges we faced are now behind us and our efforts are now directed towards the continuous improvement process so essential for business of our scale. We also undertook action to better align our operating expenses with our revenue expectations and implemented several initiatives that we believe will result in annualized savings of at least $200 million. James will outline our progress in this area in a few minutes. Also last June, we took a series of actions to optimize our capital structure with the issuance of a $2.1 billion convertible subordinated note. In addition, during FY2007, we repurchased a total of $2.8 billion of our common stock. Finally we fortified out strength at the end point with the addition of Altiris. Our customers know that they cannot have true endpoint security without the configuration management and software distribution capabilities so necessary to protect them. We believe a combination of Symantec and Altiris will enable our customers to better manage and enforce security policies at the endpoint, identify and protect against threats, as well as remediate and manage their IT assets. We were pleased with how swiftly we were able to close the transaction and with the progress we have made towards integrating Altiris into Symantec. While we are not providing specific financial details about the Altiris quarter, it did perform solidly and well within the range of our expectations. At the beginning of the new fiscal year, I reorganized the senior leadership structure. We have a strong leadership team and the goal of these changes was to ensure that every executive has the necessary cross-functional experience to better position the company for long-term success. Now I would like to take a few minutes to discuss some of the highlights of our business unit’s performance during the March quarter. We are pleased with the data center management group’s March quarter performance and with the sequential improvement in revenue. We saw strength primarily in our Storage Foundation solutions and NetBackup product family. Results were driven by customers’ desire to standardize and simplify their data center infrastructure. The complexity of enterprise IT environments is making it exceedingly difficult for organizations to keep up with the growing performance and availability demands for key applications while at the same time keeping costs under control. Earlier this year we introduced a customized ROI tool that clearly demonstrates how our solutions can improve the performance and availability of data centers as well as drive dramatic direct cost improvements – in several cases, well over $100 million over a three years period. While our data center standardization and ROI program was primarily focused on storage foundation and clustering areas, we have now expanded this approach to include NetBackup as well. An example of our success in this area is the opportunity we won with Sun Microsystems during the March quarter. Sun displaced a Symantec competitor in order to standardize on Net Backup throughout its enterprise. Sun will use Net Backup and Backup Reporter to streamline its IT operations and provide better data protection reporting. Overall, we feel confident that standardization and the growing adoption of new data protection, storage and server management technologies will help drive revenue growth in this segment during FY2008. Our security and data management group posted in-line results with our expectations. We continue to see solid growth in the emerging product areas where we are investing, such as compliance solutions and enterprise message management. For example, we achieved record results in our buying view and enterprise security manager compliance products. Companies face increasing challenges with IT compliance, especially in highly regulated industries. These products help our customers manage their internal as well as external regulatory compliance requirements and reduce the growing costs of doing so. We also achieved record revenue with our message management offerings, with strong growth coming from our anti-spam products and enterprise vault, our email archiving and retrieval solution. These two products categories are leaders and we continue to gain traction in the marketplace with them. Many of these represent technologies we acquired over the past few years. Our technology and company acquisitions are an important part of our strategy to diversify our revenue mix in the security arena towards segments of higher growth. Most of you are familiar with project Hamlet. Hamlet will integrate technology components from our leading anti-virus, anti-spam, endpoint firewall, zero day protection and network access compliance offerings, all to be managed by a single management platform. The solution will not only deliver a more advanced approach to endpoint protection, but address the all important issue for our customers of agent proliferation and systems resource consumption. We plan to launch the product at our vision conference net month. Given the phenomenal success we experienced with Norton 360’s extended beta program, we decided to expand the scope of the Hamlet beta program prior to full-scale release of such an important product. Like Norton 360, this will ensure a higher quality release for a very, very important product launch. Our services group performed solidly during the March quarter. Our focus on helping customers manage IT risk to their infrastructure is really starting to gain traction. With more than 1,100 consultants around the world, we have the skills to deliver more complete solutions for protecting and managing business critical assets. We are also happy with the launch of our beta of the Symantec Protection Network, our first software as a service offering. The Protection Network is a SaaS platform designed to deliver easy-to-use security and availability offerings to small and mid sized companies. The online backup service will enable cost-effective, reliable backup and restoration of business critical data from the convenience of a web browser. We expect this new service go live later this year and you should expect to see us announce additional SaaS offerings throughout FY2008. Our consumer business posted another strong quarter, while the online threat landscape and competitive environment continue to evolve, there has been one constant. Symantec’s Norton products are the clear market leader. We couldn’t be more pleased with the launch of Norton 360, as the industry and market reaction have been very positive. Our continued focus on technology leadership and product quality has clearly shown through in many of the published reviews on Norton 360. It has already garnered the prestigious Editor’s Choice Awards for both CNET and PC Magazine. The OEM channel continues to be an important route to market for our consumer products. During the quarter, we announced the extension of our relationship with HP with a new multiyear agreement. We also announced that ACER will be shipping a Vista-compatible version of Norton Internet Security in 2007 and at Dell, Symantec will be positioned as the default solution in North America from May through July. All in all, it was a very solid March quarter to cap off a challenging fiscal year. I believe we have taken the necessary steps to improve our global operations and our results in FY2008 will benefit from these actions. After James provides you details on our financials, I’ll come back and talk about our specific focus areas for FY2008. James?
- James Beer:
- Thank you, John, and good afternoon, everyone. I am encouraged by the progress we have made as evidenced by the March quarter results. Over the past 12 months, a lot of change impacted our operations and financial performance as John mentioned in his opening remarks. Although we have faced challenges, I believe we have emerged stronger and better-positioned for future growth. We grew our fiscal year non-GAAP revenue by 5% to more than $5.25 billion, compared to the prior fiscal year, and generated $1.01 in non-GAAP EPS. Given the recurring nature of our business model, deferred revenue and cash flow from operations are also important metrics in measuring the overall strength of our business. In fact, we generated operating cash flow of approximately $1.67 billion during FY2007. In addition, during the fiscal year, we grew non-GAAP deferred revenue to approximately $2.8 billion. Our financial results will benefit from this strong deferred revenue balance during FY2008. The contribution from our consumer business to deferred revenue growth is moderating, consistent with the now ratable revenue recognition policy, while the data center management group’s contribution has grown in line with our business model evolution that emphasizes long-term customer relationships. But before I get into the new fiscal year, I would like to spend a minute reviewing the financial details of the March 2007 quarter. GAAP revenue for our March 2007 quarter was $1.357 billion. Non-GAAP revenue grew 5% over the March 2006 period to $1.365 billion. Foreign currency movements positively impacted non-GAAP revenue by almost $48 million in the March 2007 quarter as compared to March 2006. Sequentially foreign currency movements had approximately a $9 million positive impact on revenue. The March quarter’s fully diluted GAAP EPS were $0.07. Non-GAAP fully diluted EPS for the quarter were $0.24. During the March quarter, GAAP EPS were impacted by a $51 million restructuring charge, related to our recent reduction in force and further facilities consolidation activities. International non-GAAP revenue for the March quarter grew 9% versus the year ago period to approximately $706 million and represented 52% of total non-GAAP revenue. YoverY, the Americas grew 3%, EMEA grew 7% and Asia Pacific including Japan grew 9%. Excluding currency effects, the EMEA revenue declined by 2% YoverY. Now I’d like to move on to non-GAAP revenue by segment for the March 2007 quarter. Consumer revenue came in at $408 million, up 11% versus the March 2006 quarter. Electronic distribution represented nearly 73% of consumer revenue and grew 25% compared to March 2006, driven primarily by strong activity from our online store subscription renewals and upgrades. From a product perspective, Norton Internet Security revenue grew nearly 40% YoverY and represents more than 50% of total consumer revenue. Moving on to our enterprise segments, our security and data management group generated revenue of $520 million, up 2% from the March 2006 quarter. The data center management business generated revenue of $368 million. This was flat with the March 2006 results and up 8% sequentially. Our services group generated revenue of $69 million, up 31% YoverY and represented 5% of our total revenue. The services business was positively impacted by the reversal of one-time administrative challenges that occurred during the December quarter, as well as generated by our team of consultants from the recently acquired Company-i. Non-GAAP gross margin was 84% for the March 2007 quarter, compared to 83.2% in December 2006. Gross margin was higher than expected sequentially because of a change in accounting for certain consumer OEM relationships. We have negotiated new contract terms with various OEM partners, which solidify our relationships for an extended period of time. The revised terms also drive an accounting change that has the effect of moving our OEM payments from cost of goods sold to operating expenses. Our total in-period expenses will increase, since they will now reflect the average economic cost of each relationship over the term of the agreement, rather than the cash impact to Symantec in a particular fiscal year. Our segment reporting for the consumer business unit will reflect this change during FY2008. Non-GAAP operating expenses were $842 million for the March 2007 quarter. This includes approximately $55 million of expenses, incremental to our previous guidance, related to the OEM item I have just mentioned. Foreign exchange rates negatively impacted operating expenses during the March quarter by approximately $23 million as compared to March 2006. GAAP net income was $61 million for the March 2007 quarter. Non-GAAP net income was $227 million compared to $279 million for the March 2006 quarter. Symantec exited March with a cash and short-term investments balance of almost $3 billion. However, our current cash balance is considerably lower as a result of closing the Altiris acquisition on April 6, for an effective cost of $815 million. Approximately two thirds of our cash balance resides overseas. As you may recall, in January, we announced a new $1 billion share buyback program. During the March quarter, we repurchased $500 million worth of the new program at an average share price of $17.41. Our net accounts receivable balance at the end of the March 2007 quarter was $667 million. DSO was 45 days, inline with normal seasonal trends. Cash flow from operating activities for the March quarter is expected to be between $560-570 million. This was higher than cash flow from operations of $484 million in the March 2006 quarter, primarily due to strong collections and to the timing of tax payments. As I already mentioned, we generated approximately $1.67 billion in cash flow from operations during FY2007. This was in line with our original guidance issued a year ago. Consistent with the past several quarters, deferred revenue increased substantially as we continue to move our business model to one that generates significant recurring maintenance activity and thus more predictable cash flow. GAAP deferred revenue at the end of the March 2007 quarter was approximately $2.75 billion. Non-GAAP deferred revenue at the end of the March 2007 quarter reached a record $2.77 billion. Sequentially, deferred revenue grew $187 million or 7%. Foreign exchange rates had a positive impact of approximately $105 million versus the balance as of March 2006, and the $19 million benefit versus the December 2006 balance. By year end, deferred revenue balance exceeded the high end of our guided range of $2.65 billion as provided in January. Now I’d like to spend a few minutes discussing our guidance. Our FY2008 plan has revenue and earnings growing at a faster pace than FY2007. Specifically, we expect GAAP revenue for the fiscal year to be between $5.59-5.69 billion. Non-GAAP revenue is expected to be $5.65-5.75 billion as compared to $5.253 billion in FY2007. This includes the revenue contribution from the Altiris acquisition on a non-GAAP basis, reflecting the impact of deferred revenue lost due to the purchase accounting method associated with acquisitions. During FY08, gross margins will come under some pressure as we continue to grow our services businesses, while the change in accounting for our consumer OEM fees will have the opposite effect. We expect the net result to be an improvement in gross margins YoverY. Our operating expenses during the year will benefit from the results of our cost savings initiative. We have clearly defined budgets in place that will achieve the $200 million annualized savings target during FY2008. The largest element of this plan is represented by an approximate 5% reduction in force. This has been completed in the Americas and Asia while the EMEA region implementation is underway. The addition of the OEM fees to our operating expense base will create a situation in which totally operating expenses increase substantially YoverY. That said, we do believe that operating margins will improve during FY2008 as compared to FY2007, as a result of our revenue growth, the expansion of our growth margins and the benefits of our cost reduction program. GAAP diluted EPS is expected to be between $0.45-0.50. Non-GAAP diluted EPS is expected to be between $1.10 and $1.15 as compared to $1.01 in FY2007. This guidance assumes a common stock equivalence total for the year of approximately 925 million shares. We have assumed an exchange rate of $1.27 per euro for the fiscal year. Continuing in the trend seen throughout FY2007, we expect FY2008 to be another year in which deferred revenue growth outpaces our recognized revenue growth, particularly in the first half of the fiscal year. We would expect annual cash flow from operating activities to continue to grow versus fiscal year 2007 levels. Our strong cash flow generation will underpin our ongoing share buyback activity which will, in turn, support improvements in our EPS growth. We expect revenue during the first half of the fiscal year to represent approximately 45% of the non-GAAP FY2008 revenue forecast. Diluted EPS during the first half of the fiscal year are expected to represent approximately 35% of the non-GAAP FY2008 EPS forecast. For the June 2007 quarter, we expect our core business to exhibit similar seasonal patterns to those we have seen in prior years. We typically experience a sequential decline in revenue earnings and deferred revenue from the March to June quarter. This year, the impact of the Altiris acquisition will grow our revenue base while the accounting for our new OEM agreements will put additional pressure on EPS. As such, our guidance for the June 2007 quarter is as follows
- John Thompson:
- Thanks, James. We believe we have entered FY2008 with the most difficult part of our transformation behind us. More importantly, we are much better positioned to deliver our market-leading security and availability products to our customers and partners around the world. We are placing much greater emphasis on managing our diverse portfolio of products and striving for better balance between revenue grow, operating cost and margin expansion. There are several areas of focus for FY2008 that should lead to better operating returns. Perhaps the most significant ones are stronger alignment between sales and marketing, tighter alignment between product delivery activities and our market readiness plans, increasing our internal operating efficiencies and continuing to realign our capital structure. First, on sales force alignment we are satisfied with the structure implemented in 2007. As a result, we entered this fiscal year with our sales team better trained on the breadth of our product portfolio and our major marketing campaign initiatives. We will make slight modifications in the compensation model to ensure a better balance between growing our annuity revenue stream that drives strong cash flow growth and growing new license sales. We also intend to tighten the linkage between our marketing campaign actions and the key geographic sales activities around the world. The October launch of our new, branded product marketing platform is a great starting point, particularly given the strong feedback we have received on overall aided and unaided recognition. Next, we intend to leverage a combination of the Hamlet product launch and the integration of Altiris as a significant proof point to the strength of our M&A strategy. Customers continue to tell us that they see value in operating with fewer vendors supporting their IT initiatives. They would like to see the real benefits of our integration actions. In the security and compliance arena, the combination of Altiris, a significant new endpoint security product, and in integrated compliance offering which combines the strength of ESM and BindView will be proof positive. In the storage arena, a refresh of our market-leading offerings should strengthen our competitive position. Finally, our consumer team will focus its efforts on out-executing the competition, in both product initiatives as well as with our key channel partners. Next, with the implementation of Project Oasis behind us, we intend to shift our focus to areas that should yield improved operations effectiveness and overall company efficiencies. Many of the important customer and partner-facing activities associated with our quote to cash process will be the target of our re-engineering efforts. We have teams in place and some of the work has already begun and is starting to bear fruit. Finally, we took our first step in FY2007 to move the company toward a capital structure more fitting a company with the strength of our cash flow generation. We clearly think more can be done and expect to make additional progress in that direction during this fiscal year. We will spend considerably more time on our plans in these areas at our analyst day event next month. With the tremendous number of changes implemented during FY2007, we are looking forward to FY2008 to be a year of greater stability and growth. I believe Symantec is a much stronger company today, largely due to the broad portfolio of award-winning technologies and our diverse base of enterprise and individual customers around the world. More than ever, our customers and partners are looking to Symantec for IT risk management solutions across a broad spectrum of operating platforms and we look forward to delivering on those expectations. Now I’ll turn the call back to Helen, so we can take some questions.
- Helen Corcos:
- Thank you, John. Alan, will you please begin polling for questions?
- Helen Corcos:
- While Alan is polling for questions, I would like to announced that Symantec plans to attend the JP Morgan conference on 22 May. In addition, we will be hosting our annual analyst meeting on June 14 in Las Vegas. This event is by invitation only and registration is required. If you would like to take advantage of the special hotel rate for this event, we encourage you to register by this Friday, 4 May. A live webcast and replay of the event will be available on the investor relations homepage for those who cannot attend in person. Lastly, starting now and on a going forward basis, we will announce our next quarterly earnings date on the current earnings call. As such, we will be reporting our Q1 FY2008 results on 25 July. This information will also be posted on our events calendar. For a complete list of the investor related events, please visit our events calendar on the investor relations website. Alan, we are ready for our first question.
- Operator:
- We’ll take our first question from Sarah Friar - Goldman Sachs.
- Sarah Friar:
- Nice to see the stability coming back. John, if I could ask you a question on the storage business, the data center business, as that was where we saw a lot of the weakness last quarter – you talked about refreshing the product set. Is that enough to get you back to a market growth rate of mid single digits? What are some of the key things we should watch for, other than just product refresh?
- John Thompson:
- Clearly, the team, both in the development lab as well as in the field, is executing very, very well. Last quarter’s performance, that is the March quarter’s performance, was a reflection of tighter focus on transactions as they work their way through the pipeline. I think that improved the yield, quite substantially, of revenue in the period. That being said, we are still going through a transition of that business where today more of the revenue goes through the balance sheet than the P&L. I think as we complete that transition, about mid year, this fiscal year, you’ll start to see much improved performance in that business, independent of what we will do on the product front. On the product front, we will launch a new Net Backup product, Net Backup 6.5, and we will always do more if you will in the storage management arena because that is an area of great investment by our customers and therefore we have to follow suit by making significant investments ourselves. I feel that the team has sharpened its end period market execution and the engineering team is moving a terrific set of products through the pipeline. I think that will bode well for us in this fiscal year.
- Sarah Friar:
- One quick follow up on that. Maybe it’s the same question. Can you tell us what portion of total bookings are now ratable and what you think the steady state percentage might be, just to give us a sense of where we’re moving from today to that mid-year stability point?
- James Beer:
- I mentioned in my remarks about the volume of business in the June quarter that we would expect to see coming straight off the balance sheet. We offered an absolute dollar statistic in this call, because we really wanted to emphasize the point as to how that absolute figure is rising quarter by quarter. I would expect that to continue for the foreseeable future. I think the ratable percentage can climb some more. I would not expect it to trend towards 100% however, so I think there would be some incremental increase from where we are right now, but we are pretty comfortable with the general direction of the 60-70% range that we are in.
- Operator:
- We’ll go next to Heather Bellini – UBS.
- Heather Bellini:
- I was just wondering, John, I noticed in the US that your results here showed that you guys grew 1% YoverY. I’m just wondering if you could tell us what you are seeing from buyers in this market, the types of hesitations you’re seeing, what you’re factoring in for June and then also for James, I didn’t believe I caught – and maybe you didn’t disclose it – what you’re expecting for an Altiris revenue contribution for FY2008?
- John Thompson:
- I think one of the things you have to factor in, Heather, about the US business in particular is it is the largest and strongest business for our data center management group. If you were to peel underneath that group’s performance, what you’ll find is a larger portion of the transactions occur in the Americas. More of that revenue is moving to the balance sheet than the P&L and hence, in the near term, the US business may look weaker than it actually is performing in true market-based activity. I’m not at all concerned about what’s going on in the Americas. It is executing as we would expect, particularly related to the large deals that we see coming out of the data center management group product portfolio.
- Heather Bellini:
- So you’re not seeing any weakness in terms of decision-makers pulling the trigger, it’s more a function of it going to the balance sheet?
- John Thompson:
- That’s exactly right. If you look at our large deal flow, we had more large deals above $1 million this quarter than we did a year ago, and while we had a slight downtick in deals above $300,000, that was not particularly alarming to me at all.
- Heather Bellini:
- Great. Then just the question on the Altiris revenue contribution for FY2008?
- James Beer:
- We are not going to break out projections for FY2008 by business unit.
- Heather Bellini:
- Since it’s an acquisition, so people could get a sense for organic – I mean, is $200 million a decent ballpark figure for Altiris? That’s what I’m getting a lot of questions on.
- James Beer:
- I’d rather not be frankly pressed on a particular figure. Obviously the segment reporting in our form K and form Qs as we go through the year will give you a very clear sense to how Altiris is doing. As John mentioned, we’re very comfortable with where Q1 was. We think we’ve got a very good series of opportunities in front of us. We’re working hard on that.
- Operator:
- We’ll go next to Gene Munster - Piper Jaffray.
- Gene Munster:
- Could you talk a little bit about Norton 360? Obviously it’s a whole new game changing platform for the consumer business, I’m on backup of something that no one’s really targeted – I guess just how the adoption has been? Any sort of metrics we can get our arms around for some more details on that?
- John Thompson:
- Gene, we were very, very pleased with Norton 360’s performance in the quarter. As you may recall, it was released late in the quarter or near the end of the quarter, I think would be a better phrase. Its contribution from a revenue perspective is quite small, but its contribution to the deferred revenue bill was quite surprising and quite pleasing. I think it would be fair to say that with over 1 million units shipped so far, it is the single most significant product release we have ever made in the company. The team just did a bang up job, both the engineering team as well as the marketing team. Our sales teams now around the world are really having a lot of fun with Norton 360 and that’s evident in all of the positive press we’ve got.
- Gene Munster:
- Have you seen any consumers starting to pay up for more storage? How’s the storage side of Norton 360 coming together?
- John Thompson:
- Gene, frankly I can’t answer that – I don’t know that I’ve looked that closely.
- Gene Munster:
- One more question, in terms of the earnings for Q1 being a little bit below what analyst expectations were – is there any shift in terms of timing of expenses that might have impacted that?
- James Beer:
- Certainly this OEM fee issue that I referred to a few times in my remarks will certainly impact the bottom line. I have the sense that it will incur about $0.015 at the bottom line. That is probably the single largest issue and again that is very much an accounting issue rather than en economic issue, based upon the fact that the accounting rules require us to utilize the average rate that applies over the multi-year deal over the current year economic rate.
- Gene Munster:
- So there is no incremental initiatives that you are spending more money on in Q1, it is just more kind of shift in accounting?
- James Beer:
- In fact, in Q1, we will really see the full effects for the first time of the $200 million cost reduction activities. As I mentioned, the reduction in force is complete at this stage in the Americas and in Asia, so that will help us.
- John Thompson:
- Also, Gene, it’s not clear to us that all the models reflect the typical seasonality of our business. As a matter of fact, we would view that the seasonality is not reflected in many of the consensus view models that are out there today.
- Operator:
- Our next question comes from Walter Pritchard, Cowan & Co.
- Walter Pritchard:
- I have a couple of questions, John. I know last quarter, meaning December, the ERP turned out to a be pretty big hindrance to the business. Any comment on where you are with that? Are we 100% through it, or is there still work to go there?
- John Thompson:
- Walter, I think we are beyond the critical stage where we are making continuous improvements in the systems environment. Clearly we saw improvements in the administrative processes around our services business, that is reflected in the March quarter results. Our licensing portal, which was one of the challenging areas, we have had a subsequent release of software to improve that. There is yet another one coming. As I said in my stated comments, we are in a process now of continuous improvement, because we think we have the right foundational architecture and products in place to support a business that wants the scale.
- Walter Pritchard:
- James, is there any way you could quantify for us the impact – I believe your guidance does include the penalty of purchase accounting on the Altiris business – is there any way you could quantify for us how much deferred revenue you’re having to write down from Altiris?
- James Beer:
- Altiris is a relatively small deferred revenue balance. There wasn’t an enormous part of the acquisition. It was of the order of $40 million or so. We have reconciliations in the back of the press release that take you from GAAP to non-GAAP that include the Altiris issue.
- Operator:
- We’ll now go to Todd Raker - Deutsche Bank.
- Todd Raker:
- If we step back and look holistically at the business, you have a data center business that was basically flat from a revenue perspective this year. The security business was up a little bit. Consumer continued to just be a phenomenal performer in double digits. Deferred revenue was very nice. If I try and step back and think organically what the growth profile of the various businesses look like and what we should be thinking about, you know, the overall ability of the business to grow YoverY, can you help us quantify it from a business perspective, segment by segment?
- John Thompson:
- It’s not our intent, quite frankly Todd, to provide segment-level details or projections. We have given you a view of what we think the aggregate business can perform at and I think that is sufficient for now. I think what people perhaps do not spend as much time on as they should is while revenue growth is certainly one measure of our performance, and I would never want to lose a sharp eye on that. I think the other two metrics that people should and must pay more attention to are what is going on in the deferred line and what’s going on with cash flow in this company. The success of our sales efforts are measured not just in revenue growth alone but in free cash flow from operating activities and how we build the deferred revenue balance. Both of those last two metrics performed very, very well in FY2007, while we were a bit shy admittedly on the revenue and EPS side.
- Todd Raker:
- I totally agree with that. If we look at deferred revenue, you mentioned the government transaction. They have a ton of products in the multi-year deal. Are we seeing contract length extent out, or can we look at deferred revenue and say growth should start accelerating at this type of level? How can we segregate out the annual organic growth in deferred revenue versus deal extension?
- John Thompson:
- Clearly on our balance sheet you can see current and long-term deferred revenue so you’ll be able to see what is happening in the deferred revenue lines on those two elements of our balance sheet. I think it’s fair to say that when you do deals of over $1 million and they grow as they have grown, many of those will be multi-year deals. The average deal term is not extending very long, although you will see the episodic, large transaction like we saw one or two in the most recent quarter. James, do you want to comment on that?
- James Beer:
- Certainly the vast preponderance of our deferred revenue is in the short-term category. That is important to remember. In terms of long-term deferred revenue, one of the most important elements of that balance historically, at least going back over the last year or so, were those multi-year subscriptions we sold in the consumer business. We were very interested to do that prior to the auto-renewal capability coming on stream. We are very pleased with the results of auto-renewal so that has allowed us to rethink the pricing of our multiyear consumer subscriptions. So not surprisingly, when the discount on those multiyear subscriptions goes down, the volume comes down. We’re very happy with that. That’s exactly the balance that we were looking for based upon the strength of auto renewal. I think the takeaway is that our deferred revenue balance is largely a one-year time frame.
- Operator:
- We’ll go next to Adam Holt – JP Morgan.
- Adam Holt:
- I’ll ask a follow up on the bookings and deferred revenue question. I understand you may not be prepared to give specific commentary around deferred revenue or bookings growth for the year. If you are, that would be terrific, but if you’re not, should we be thinking about bookings growth this year coming in faster than aggregate revenue growth?
- John Thompson:
- We don’t actually provide, as you well know, bookings forecasts, but we do run our sales team on bookings targets. A booking will be not just be things that show up in the P&L for this period, but it will reflect a transactions that may have a multiyear term to it. Clearly bookings are going to have a disproportionately higher number associated with them in the aggregate than the actual FY2008 revenue that we will produce. That being said, our expectations are that bookings for FY2008 will grow faster than period revenue.
- Adam Holt:
- Terrific. If I could just turn to the security business, you mentioned in your comments that Hamlet is going to be released at the upcoming user conference. Is that a GA release and what is your current thinking about how the Hamlet release is going to impact the pricing environment? Can you talk to us a little bit about how you view the revenue opportunity there?
- John Thompson:
- Our view is that we will launch Hamlet in June at our Vision conference. That is our premier customer event and it is the place where we want to showcase all the capabilities of Hamlet. Hamlet is the integration of not only many of the technologies that Symantec had in its portfolio for a long time, but a number of the acquisitions we have done over the last few years, where we will deliver an end point solution that literally uses far less systems resources and is a single agent on the desktop. That is something that customers have wanted for a long, long time. It comes in a base product plus extensions that should allow us to drive a higher price point. As customers take the base, that will get a little bit more price, and as they add the extensions for network admission control and other things, that too should drive incrementally higher price. So it is our belief that the combination of the way it has been packaged, both technically and the price packaging of it should allow us to yield a higher price point per seat over time.
- Adam Holt:
- Just to be clear, customers should be able to start buying Hamlet shortly thereafter the user conference? Or is GA going to lag the initial launch?
- John Thompson:
- We are going to extent the beta testing for Hamlet to make sure we get it right, with more than 50-70 million desktops using our products around the world, I am more concerned about getting it right as we did with Norton 360 than rushing it into the marketplace. We’ll talk to you more about the release details at the June conference.
- Operator:
- We’ll go next to John Walsh – Citigroup.
- John Walsh:
- James, you mentioned the capital structure that you would continue to evolve – should we assume that includes both a combination of share buybacks and potentially more debt?
- James Beer:
- I don’t want to get into any particular specifics, but obviously those are both important elements of a capital structure, so they are very much the sorts of things we are sorting through in our minds as we look to really find what is the appropriate balance sheet for a company that has this sort of cash flow generation and this sort of predictability.
- John Walsh:
- Just a follow-up again on the timing of Hamlet, maybe if you could help us – what is assumed in the full year guidance as far as the impact of Hamlet from a revenue and deferred revenue perspective?
- James Beer:
- I don’t want to get into specifics down at product level, but obviously our thinking in terms of the future of Hamlet is absolutely baked into our fiscal year plan.
- Operator:
- We’ll take our last question from Phil Winslow - Credit Suisse.
- Phil Winslow:
- I have a quick question on Altiris with regard to your plan to integrate that into the rest of your product lines. How you see that evolving obviously, right now, you’re managing it at stand alone. Longer term, how do you see that integrating in with the core products? When you do look at your product portfolio right now, do you feel comfortable with where you stand on the systems management side, or do you feel that you need more internal development or acquisitions there?
- John Thompson:
- First off, Altiris has their head down delivering on a solution tailored for Dell. That’s a very, very important relationship. We want to make sure we deliver on the commitments we have made to Dell for a white label platform for managing the Dell, both client and server environment. Beyond that, we have integration plans in place already that speak to how modest overlaps between the two companies product portfolios will in fact be rationalized. The team has been meeting for the last several weeks to not only finalize those plans, but build a roadmap that is digestible by customers and partners around the world. As a matter of fact, I was on the phone just this morning with one of our customers in Europe, talking through some issues on that roadmap. I think over time, there are clearly opportunities for us to look across both the Symantec portfolio and the Altiris portfolio to see where there might be leverage points. I will give you two in particular. On the data center management group side of the house, we bought a technology, a little company called Relacore a few years ago that has turned into the Veritas configuration manager. That might be a wonderful piece of technology to snap into the Altiris suite. So the team is looking at how we might do that, because it could in fact populate the Altiris configuration management database. Coming the other, Altiris is looking at how it can link into Project Hamlet with its current product, the Release 6.0 product that is in the marketplace and clearly planning for linkage in its Release 7.0 product to not just Hamlet, but the other compliance solutions we have in our portfolio. I think that given the nature of what Altiris is and how they designed the platform, it represents wonderful cross-pollinations opportunities across the two companies. On the broader question of whether we have enough or are we going to do more, I think it would be fair to say that the systems management market is full of holes from lots of vendors. Therefore there are lots of unmet needs for customers in the marketplace. As Altiris gained a lot of traction as we gain traction in our data center management group, I suspect you will see us deliver more organically and I suspect you will see us buy additional pieces to round out our portfolio.
- Phil Winslow:
- Quickly on Dell’s relationship with Landisk[?]. Do you see that having any effect on the Altiris business?
- John Thompson:
- No, not at all.
- Operator:
- Ladies and gentlemen, that concludes the question and answer session. At this time, Mr. Thompson, I’d like to turn the conference back over to you for any additional or closing remarks.
- John Thompson:
- Thank you very much. After what unquestionably was a very challenging FY2007, I think our company is in terrific shape and well positioned for not only improved stabilization and operating efficiencies this year, but much stronger top line and bottom line growth. Thank you for your patience.
- Operator:
- Ladies and gentlemen, that concludes today’s call. Thank you for your participation. You may now disconnect.
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