NortonLifeLock Inc.
Q2 2011 Earnings Call Transcript

Published: 28 Oct 2010

[Operator:]

Good day, and welcome to Symantec's Second Quarter 2011 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the call over to Ms. Helyn Corcos, Vice President of Investor Relations. Please go ahead.

[Helyn Corcos:]

Good afternoon, and thank you for joining our call to discuss fiscal second quarter 2011 financial results. With me today are Enrique Salem, Symantec's President and CEO; and James Beer, Symantec's Executive Vice President and CFO. In a moment, I'll turn the call over to Enrique. He will discuss how Symantec executed during this quarter, then James will provide highlights of our financial results, as well as discuss our guidance assumptions as outlined in the press release. This will be followed by a question-and-answer session. Today's call is being recorded and will be available for replay on Symantec's Investor Relations website. A copy of today's press release and supplemental financial information are posted on our site, and a copy of today's prepared remarks will be available on the site shortly after the call is completed. Before we begin, I'd like to remind everyone that we will review our financial results focusing on year-over-year constant currency growth rates, unless otherwise stated. Sequential growth rates are based on as-reported results. For September 2010, the actual weighted average exchange rate was $1.30 per euro, and the end of period rate was $1.38 per euro compared to our guided rate of $1.26 per euro. For the September 2009 quarter, the actual weighted average was $1.44 per euro and the end of period rate was $1.46 per euro. We've included a summary of the year-over-year constant currency and actual growth rates in our press release tables and in our supplemental information. Some of the information discussed on this call including our projections regarding revenue, operating results, deferred revenue, cash flow from operations, amortization of acquisition-related intangibles and stock-based compensation for the coming quarter contain forward-looking statements. These statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in the statements. Additional information concerning these risks and uncertainties can be found in the company's most recent periodic reports filed with the U.S. Securities and Exchange Commission. Symantec assumes no obligation to update any forward-looking statements. In addition to reporting financial results in accordance with Generally Accepted Accounting Principles or GAAP, Symantec reports non-GAAP financial results. Investors are encouraged to review the reconciliations of these non-GAAP financial measures to the most directly comparable GAAP results, which can be found in the press release and on our website. And now, I would like to introduce our CEO, Mr. Enrique Salem.

[Enrique Salem:]

Thanks, Helyn, and good afternoon, everyone. The team's solid execution during the September quarter resulted in better-than-expected results. Our performance was driven by strength in backup and archiving and continued growth in hosted services and Data Loss Prevention. We closed a majority of the enterprise deals that had slipped last quarter and finished the September quarter on a strong note. In addition, I'm pleased with the better-than-expected results for PGP, GuardianEdge and the VeriSign Security business. Now let's take a closer look at some of the highlights from the quarter. Our Consumer business benefited from the strength of our eCommerce platform and our market-leading products, Norton Internet Security and Norton 360. Our new eCommerce platform completed its first anniversary of operations and now serves 230 countries in 18 languages and supports 24 currencies. Our ability to develop more targeted programs is benefiting renewals, as well as our upselling and cross-selling efforts. According to Internet Retailer, Symantec ranked number one in software online sales and is one of the top five consumer brands. Last month, we successfully launched the 2011 version of Norton Internet Security and Norton AntiVirus, which further improve consumers' online safety without sacrificing performance. Consumers benefit from our innovative technologies such as reputation-based security, which harnesses results from over 100 million systems in over 200 countries to expose threats other security vendors miss. Features like Safe Web, Proactive PC Performance Alerts and integration with Norton Online Family further differentiate Norton from the competition. According to independent research from PassMark, AV-Test, AV Comparatives and DennisLabs, Norton Internet Security has ranked number one in online threat detection and number one in overall performance. In addition, PC Magazine awarded Norton Internet Security its Editor's Choice Award for the fourth consecutive year and Norton AntiVirus, its Editors Choice Award, for the first time since 2006. Over the past two quarters, the growth rate of the Consumer revenue has declined as PC units have shifted towards low-end devices, which have lower conversion rates. Having said that, we expect growth rates to stabilize as we benefit from growth in overall PC unit shipments in our ongoing efforts to drive higher conversion rates. As part of these efforts, we are continuing to enhance the trial experience by improving the design and messaging of trial activation reminders. We're also working with our partners to further integrate the trial and purchase experience into the initial PC set-up. We are in focused on acquiring new customers through our multi-channel distribution network. I'd like to highlight a few of our September quarter wins. We expanded our retail relationships with Costco, Best Buy and Boulanger, a French retailer, during the quarter. In addition, we won several ISP deals with partners such as United Online and Telmex. We also renewed our OEM relationship with Sony to ship Norton Internet Security in the Americas. We continue to build on the Norton value proposition through sales of our Norton Online Backup, which ships on six of the top 10 OEMs. In addition, we are reaching millions of consumers through free offerings such as Norton Online Family, Norton Security Scan and Norton PC Checkup. Through these services, we are upselling our Norton Security, Backup and remote service offerings. Beyond the PC, we are positioned to take advantage of protecting consumers through our Norton Everywhere initiative. Norton Everywhere extends trust to new devices and consumer applications spanning across mobile, smart devices and embedded services. The June beta release of Norton Mobile Security and Norton DNS have received positive response with over 300,000 users to date. Partner interest around the globe for these offerings has also been encouraging. You can expect us to leverage our technologies and collaborate with industry leaders to take advantage of Internet-connected devices beyond the PC. Now, I'd like to turn my attention to our Enterprise business. As the fiscal year for the U.S. federal government came to a close, we posted double-digit, public-sector bookings growth, driven by strength across all product lines in both the civilian and defense agencies. Our commitment to government standards across the portfolio, along with products such as DLP and Enterprise Vault, helped drive our performance. With increased revelatory requirements, our recent acquisition of GuardianEdge has also resonated well in the public sector. Storage Management performed in line with our expectations. Our Storage Foundation and Cluster Server Products helped organizations capitalize on advanced storage technologies such as thin provisioning and solid state drives, while continuing to reduce costs and get better ROI from their hardware infrastructure. For example, Symantec's Storage Management products helped Vodafone decrease their annual hardware and ongoing maintenance costs and realize a three- to four-fold reduction in the company's Microsoft Exchange data store. Our value proposition continues to remain strong given our software's ability to work in heterogeneous environments. Over the last few quarters, a decline in OEM revenues from Sun-Oracle has put pressure on this part of the business. But having said that, we are committed to selling our products on all platforms, as well as focusing on long-term growth opportunities such as virtualization, private clouds and storage optimization. Our Storage business remains important as we further integrate our security and storage technologies to create unique offerings such as Data Insight, which helps customers manage growth in unstructured data in ways that our competitors cannot match. We remain focused on strengthening our relationships and product footprint in our top accounts. Some of our new storage management initiatives are centered around helping customers virtualize applications and databases. Earlier this quarter, we launched the Application High Availability, also known as AppHA and VirtualStore, which are jointly developed with VMware. AppHA helps organizations virtualize their business-critical applications with confidence, and VirtualStore provides high-performance, low-cost storage for desktop and server virtualization deployments. These new products, along with our recently launched FileStore and Data Insight offerings represent long-term growth opportunities for our Storage business. Now moving on to our Backup and Archiving business. NetBackup, the number one backup solution for the enterprise posted mid-single-digit revenue growth, driven by strong demand for deduplication and virtual machine protection. Through integrated deduplication, we help customers control information growth, eliminating redundant data at the source and optimize storage resources more efficiently than first-generation deduplication solutions. NetBackup, won the Best of VMWorld 2010 Gold Award in the Business Continuity and Data Protection category for its market-leading and unique virtual machine protection capabilities. Additionally, we started shipping NetBackup deduplication appliances, and the response from customers has been very positive. As information continues to grow at unprecedented rates, our capacity-based pricing model positions us to take advantage of this trend. We're seeing strong customer adoption of this new model as over 23% of licensed bookings for the NetBackup were on the capacity-based model. We will update you on customer adoption of this new pricing model once a year. In the mid-market, Backup Exec generated second consecutive quarter of double-digit bookings growth. Our customers and partners benefit from an unmatched comprehensive solution that simplifies data management through integrated deduplication, archiving and virtual machine protection. Backup Exec now protects more than 40,000 VMware hosts and an estimated 1 million VMware guests. Business Solutions magazine named Backup Exec the best channel product for 2010 due to its ease of installation, richness of features and reliability. Our market-leading archiving products, Enterprise Vault, posted double-digit revenue growth. Our performance was driven by strength in e-Discovery in the federal -- including the U.S. federal government vertical and execution across all geographies. Last month, we released Enterprise Vault 9, which includes support for Exchange 2010, hosted Exchange, Sharepoint 2010 and enhanced discovery features. Moving on to Enterprise Security, our Hosted Services business realized another quarter of double-digit bookings growth, driven by the rapid adoption of our SaaS-based security solutions. We are beating the competition worldwide and realizing growth across all regions. By leveraging the Symantec sales force, we are extending our customer and geographic reach. We won a competitive contract with Internet Solutions, a leading South African ISP to provide hosted messaging security services to over 225,000 users. We're also seeing a positive response for our new hosted Endpoint Protection service launched in May. This offering provides comprehensive security for desktops, laptops and servers as a hosted service without the need to install additional hardware or management software. Our leading DLP security product continues to be a growth driver for our Enterprise Security business, posting another quarter of double-digit bookings growth. Both Vontu and Message Labs are examples of acquisitions that we've been able to effectively integrate and grow consistently in highly competitive markets. We continue to use DLP to capture mind share with CISOs and cross-sell our security portfolio. As a result, we're seeing increased interest in our security suites, which include our Endpoint Protection and mail security products. Recently, independent research from PassMark ranked Symantec Endpoint Protection number one in overall performance for both the enterprise and SMB markets, beating our nearest competitors. As expected, Encryption is a complementary sale to our DLP solutions. ECI Telecommunications, a global networking infrastructure provider in Israel, signed a multi-year deal, which includes our encryption and DLP products. The PGP and GuardianEdge acquisitions exceeded our expectations in the September quarter. The team has done an outstanding job of integrating sales and operations. We are now positioned as a leader in the 2010 Gartner Magic Quadrant for Mobile Data Protection, receiving the highest rating in the Vision category. When we acquired PGP and GuardianEdge, we outlined several near-term goals. First, use the acquired technologies to enhance our ability to make data protection more intelligent. Second, utilize the broad Symantec distribution network to grow these businesses. And third, integrate PGP's encryption management platform into the Symantec protection Center. Let me give you an update on where we are today. Earlier this month, we announced the integration of our removal storage encryption offering with Data Loss Prevention. By integrating encryption and DLP capabilities, customers can utilize central policies to automate the identification of sensitive content and intelligently drive encryption. We also announced the integration of Intel's Antitheft Technology into PGP Whole Disk Encryption. With this release, customers will be able to use Symantec's PGP technology to remotely disable a lost or stolen notebook and reactivate it if the system is recovered. To take advantage of Symantec's distribution strength, we introduced our new encryption solutions to our partners and are working on program initiatives that encourage them to sell these offerings. We also integrated the Encryption sales group into our specialist team. The sales team quickly started cross-selling on Encryption Solutions with DLP and other security products into various customer segments and verticals, such as the public sector and financial services, with particular strength in the Americas. Lastly, we combined the engineering teams to work closely on the integration of PGP's encryption management platform with Symantec's Protection Center. We are on schedule to launch the integrated console by the middle of next year. On August 9, we closed the acquisition of VeriSign Security business, and our results exceeded our expectations. The SSL certificate installed base grew 16% year-over-year as we realized growth in both the premium and low-end segments. During 2009, the macroeconomic environment was a headwind for the SSL business. However, we've seen the business improve, generating its third consecutive quarter of year-over-year bookings growth. The addition of unique features such as daily malware scans and seal-in-search are driving VeriSign's SSL sales and renewals higher. Seal-in-search is a feature that differentiates VeriSign's SSL customers by including the VeriSign Trust Seal in online search results. We are utilizing or GeoTrust and Thawte SSL offerings to aggressively go after the price-sensitive segments of the market and gain share. The VeriSign authentication assets are critical to achieving our vision of securing and managing information and identities. As a result, we have the following near-term goals. One, leverage the Symantec sales force to expand adoption of user authentication. Two, cross-sell these technologies into the installed base; and three, make our consumer and enterprise products more identity-aware. To leverage the Symantec distribution network, user authentication services are already being sold by the combined sales force, and the response from customers has been very positive. The VeriSign telesales team is already cross-selling Symantec's Critical Systems Protection and we plan to launch VeriSign's authentication products integrated with Symantec Protection Center, as well as launch integrated seal-in-search into Norton Safe Web by the end of the fiscal year. I'm pleased with the progress we're making in integrating all three of our recent acquisitions and the team's focus on our key priorities. I'll now turn the call over to James to provide you the financial details for the quarter.

[James Beer:]

Thank you, Enrique, and good afternoon, everyone. I am pleased to report that Symantec posted better-than-expected second quarter results in each of our key financial metrics. Our performance was driven by strength in our Backup and Archiving, Hosted Securities Services and Data Loss Prevention businesses. In addition, our three acquisitions exceeded our expectations. We prudently managed our expenses and generated another quarter of strong cash flows. GAAP revenue of $1.48 billion increased 2% in constant-currency terms versus the September 2009 period. The content, subscription and maintenance line accounted for 86% of our revenue, of which approximately 40 percentage points came from our consumer, Software-as-a-Service and authentication solutions. These offerings are solely subscription-based and represent a significant portion of our new business growth. However, this new business is not included in our license revenue line. The U.S. dollar strengthens 10% against the euro as compared to the year-ago period, decreasing our international revenue as measured in U.S. dollars. As a result, foreign currency movements negatively impacted revenue growth by two percentage points year-over-year. Net income of $266 million resulted in fully diluted non-GAAP earnings per share of $0.34. Excluding the purchase accounting related deferred revenue write-downs of $49 million from our three recent acquisitions, EPS would have increased by $0.04 to $0.38 compared to $0.36 in the September 2009 quarter. As a reminder, with the acquisition of VeriSign's Security business, we now own the majority of VeriSign Japan. The consolidated revenue and expenses for VSJ are included in our income statement, with an adjustment below the net income line to account for the income attributable to the noncontrolling minority interest. Looking at our geographic results, international revenue of $741 million increased 3% year-over-year and accounted for 50% of total GAAP revenue. Revenue was flat in the EMEA region while the Americas and Asia Pacific/Japan regions increased year-over-year by 3% and 5%, respectively. It's interesting to note that the euro and the yen moved in opposite directions with respect to the U.S. dollar during the quarter. This has been reflected in our currency-adjusted growth rates for the EMEA and APJ regions. Now, I'd like to move on to GAAP revenue and GAAP operating margin by segment. The Consumer business generated revenue of $468 million. It reduced Consumer revenue by approximately $10 million due to a onetime charge resulting from certain consumers not receiving their subscription entitlements on a timely basis. Excluding this item, Consumer revenue increased 3% year-over-year as reported and 5% year-over-year after adjusting for foreign exchange. Our Consumer segment's GAAP operating margin was 45% as compared to 47% in the September 2009 quarter. The margin decline was driven by the onetime charge. We remain focused on upselling consumers to our premium suites. Norton 360 continues to generate double-digit revenue growth versus the reported results in the year-ago period and accounted for 39% of total Consumer revenue. Turning now to our Enterprise business. We generated a total of 320 transactions valued at more than $300,000 each, up 15% year-over-year. 59 of these transactions generated more than $1 million, down 16% year-over-year. Of our deals valued up more than $300,000, 74% included more than one of our products, and 42% of our deals over $1 million included sales from both our Security and Storage segments, emphasizing our ability to cross-sell our broad product portfolio. The Storage and Server Management segment generated revenue of $557 million and increased 1% as compared to the September 2009 quarter. Revenue from our Backup and Archiving business increased 8% year-over-year. We continued to see strong demand for our award-winning Backup and Archiving Solutions, which generated double-digit bookings growth in the September quarter. Revenue from our Storage Management business declined 8% year-over-year. OEM royalty declines from Sun-Oracle represented approximately 1/3 of the year-over-year decline. Our Storage and Server Management segment GAAP operating margin was 49%, flat as compared to the September 2009 quarter. The Security and Compliance segment generated revenue of $363 million, up 7% year-over-year. This is the fourth consecutive quarter of double-digit revenue growth for both our DLP and Software-as-a-Service solutions. Total revenue for our three recently acquired businesses was $33 million compared to our expectations of $26 million. Specifically, PGP and GuardianEdge exceeded expectations, posting revenue of $15 million. The VeriSign Security acquisition also performed better than expected, generating revenue of $18 million. The combined EPS dilution from these acquisitions was $0.03, which was $0.01 less diluted than our expectation of $0.04. Our Security and Compliance segment GAAP operating margin was 16% as compared to 26% in the September 2009 quarter, driven by increased expenses from our three acquisitions. Excluding the deferred revenue write-downs, the Security and Compliance operating margin would have totaled 26%. Our Services business generated revenue of $92 million, a decrease of 9% as compared to the September 2009 quarter. Our Services segment GAAP operating margin was 9% as compared to 13% in the September 2009 quarter. We remain focused on supporting our partner-less consulting program, which is driving a commensurate reduction in low-margin consulting revenue. Turning now to total company margins. Non-GAAP gross margin was 85.2% for the September 2010 quarter, down 50 basis points from the year-ago period. Cost of goods sold increased as this line item now includes credit card fees, driven by our new eCommerce store and also reflects our increased investment in offshore technical support centers. And non-GAAP operating margin of 25.1% was down 300 basis points year-over-year. Excluding the effect of the acquired deferred revenue write-down, our operating margin for the September quarter would have been 27.5%. Cash flow from operating activities for the September quarter totaled $310 million, up 37% year-over-year as reported. The strength was primarily driven by improvements in working capital and lower tax payments. During the last 12 months, we have generated strong cash flow from operations totaling $1.74 billion. We exited the September quarter with $2.26 billion in cash, cash equivalents and short-term investments, with approximately 50% of our cash balance in the U.S. During the quarter, we raised $1.1 billion from the issuance of two tranches of investment-grade senior unsecured notes. A total of $350 million of 2.75% notes will mature in September 2015, and $750 million of 4.2% notes will mature in September 2020. Shortly after issuing these notes, we repaid $500 million of our convertible senior notes due in June 2011. $600 million of these convertible notes remain outstanding. Separately, we renewed our $1 billion revolving line of credit during September, extending its term for another four years. During the quarter, we spent $1.28 billion to acquire VeriSign Security business. In addition, we spent $225 million to repurchase approximately 17 million shares at an average price of $13.16. We have $322 million remaining on our current Board-authorized share repurchase plan. GAAP deferred revenue at the end of September 2010 was $3.1 billion, up 7% year-over-year, which exceeded our expectations and reflected in part strong quarter end execution by our Enterprise sales team. Now, I'd like to spend a few minutes discussing our guidance for the December 2010 quarter. We're assuming an exchange rate of $1.35 per euro for the December 2010 quarter versus the $1.48 per euro that we experienced during the December 2009 quarter, equivalent to approximately a 10% currency headwind. Also, the end of period rate for the December 2009 quarter was $1.43 per euro versus our $1.35 per euro assumption, equivalent to approximately a 6% currency headwind. Our guidance assumes a common stock equivalence total for the quarter of approximately 780 million shares and an effective tax rate before consideration of any loss from our joint venture of 27%. Thus for the December 2010 quarter, we expect GAAP revenue to be in the range of $1.57 billion to $1.59 billion as compared to revenue of $1.55 billion during the December 2009 quarter. We are expecting PGP and GuardianEdge to contribute $18 million and the VeriSign Security business to contribute $38 million to our December quarter revenue. These acquisition-related assumptions are already included in our revenue guidance. We expect year-over-year revenue growth to be up 2% to 3% on an as-reported basis and up 3% to 4% on a constant currency basis. GAAP earnings per share are estimated to be between $0.23 and $0.24 as compared to $0.37 in the year ago period. Non-GAAP earnings per share are estimated to be between $0.32 and $0.33 as compared to $0.40 in the year ago period. We expect $0.045 of dilution as a result of our three new acquisitions. Specifically, we expect VeriSign to dilute EPS by $0.04 and PGP and GuardianEdge together to dilute EPS by $0.005 in the December quarter. In addition, our December quarter EPS guidance includes approximately $0.01 of dilution as a result of the recent senior note issuance and credit facility replacements, which is not currently fully reflected in consensus estimates for the December and March quarters. Including $65 million of deferred revenue write-down amortization for the December quarter, non-GAAP earnings per share would increase by $0.06 and would be between $0.38 and $0.39. We expect GAAP deferred revenue to be between $3.19 billion and $3.22 billion compared to $3.05 billion at the end of December 2009. We expect deferred revenue to be up 5% to 6% on both an as-reported and constant currency basis. We expect approximately 68% or $1.08 billion of our December quarter revenue to come from the balance sheet. In closing, we will continue to focus on integrating our recent acquisitions, managing costs and generating strong cash flows while we reallocate resources into the growth areas of our company. And now, I'll turn it back to Helyn so that we can take some of your questions.

[Helyn Corcos:]

Thank you, James. Glenn, will you please begin polling for questions?

[Operator:]

[Operator Instructions]

[Helyn Corcos:]

While Glenn is polling for questions, I'd like to update you on a few upcoming events. We'll be presenting at several conferences this quarter. In addition, we'll be reporting our fiscal third quarter results on January 26. For a complete list of all of our investor-related events, please visit our Events Calendar on the IR website. Glenn, we're ready for our first question.

[Operator:]

We'll take our first question from John DiFucci with JPMorgan.

[John DiFucci:]

I think, Enrique, you spoke about lower conversions for some of lower-end PCs and that's just sort of a reflection of the PC market out there, and it sounds like you're sort of adjusting your approach to that and you're going more aggressively after different distribution models, I guess and you mentioned some ISPs. Should we expect to see you even increase your aggression in these different distribution models which really are up until, I don't know, beginning of this year was somewhat foreign to Symantec? Actually, I shouldn't say that. You weren't really aggressive up until this year. Should we see you continue to adapt to the market itself in this regard?

[Enrique Salem:]

Two comments on that. One, what we've have always done is looked at a multi-channel customer acquisition approach. And so we always are saying what are the different ways we can bring new customers' into the Norton products and you heard me outline a range of different things. We've got our products that allow us to have customers scan their PC and check if they've got any malware on it, and then we upsell them to our full antivirus products. So we've got things like we call Norton Security Scan, which is an online delivery technology. The other thing that we're always doing is, in the ISP segment, we have a range of big accounts that we work with for many years. T-Online and others had been using our services and delivering them. From an ISP perspective, you saw us win Comcast about a year ago now. And so, we're always going to look at the ISP channel. What I did want to make sure is clear is that PC unit shipments, we expect to still grow year-over-year, December over December. What we have seen was a bit of a mix shift to lower-end devices, probably driven by a netbook phenomenon. And the netbook, as we've said, had a slightly lower conversion rate. We expect, at this point though, that there'll be stability in the consumer revenue growth rate off of these levels that we achieved in the September quarter.

[John DiFucci:]

Just one quick follow-up for James. James, you pointed out the really strong cash flow here, which is much greater than at least we were looking for, and I think most. And you said it was assisted by meaningful changes in working capital and tax, and we can see in the receivables in line and also in deferred revenue. Just wondering if you could just comment on how much of this had to do with, I guess, the more meaningful VeriSign acquisition made in the quarter? Or was it just like on receivables, just good collections in the quarter? What was happening there?

[James Beer:]

There's a modest effect from the VeriSign acquisition. But really, it was driven by just core working capital.

[Operator:]

We'll go next to Walter Pritchard with Citi.

[Walter Pritchard:]

James, I'm wondering just on the license revenue. I noticed that, that's still declined in the quarter by about 4% or 5%. And I note your commentary around some of the products that are growing around the ratable [ph] model. But should we assume that we start to see a turnaround in that license revenue? Or is that not necessary for you to achieve that sort of growth rate that you'd like to see, given some of the changes you discussed?

[James Beer:]

Well, we were actually quite pleased with the trend line in the license line sequentially. So on a constant-currency basis, it was down a couple of percentage points year-over-year. But you'll recall, a quarter ago, we were up 15% year-over-year, so quite pleased with how that line is going. I just really wanted to remind everyone that a loss of our new business goes in what is often referred to as the maintenance line. But of course, that's where all of subscription activity goes as it is initially sold. And that's becoming increasingly important as we sell more hosted services. It's always being important on the consumer side of our business.

[Walter Pritchard:]

James, a follow-up on that. I didn't hear you talk about the percentages or, I guess, the number for revenue coming off the balance sheet next quarter, sort of what you saw this quarter. Would you be willing to provide that, given it is becoming and it sounds like it's a much more important part of the business?

[James Beer:]

Yes. It's going to be around 68%, coming off the balance sheet.

[Walter Pritchard:]

Of the expected revenue in December, off the balance sheet?

[James Beer:]

That's going to be just a little over $1 billion, $1.08 billion. And then of course, another driver of the maintenance subscription line is VeriSign. And obviously, that's going to be a bigger impact. We'll have a full first quarter of that business in December.

[Operator:]

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

[Heather Bellini:]

I was wondering if you could talk a little bit, we've been hearing a lot about the popularity of tablets and whether or not it's cannibalistic to consumer PC sales, which obviously, can still be debated. But Enrique, I was wondering if you could share with us what your thoughts are for how your consumer security strategy might change as tablets become an increasing percentage of units?

[Enrique Salem:]

What our consumer team has been very focused on is the initiatives that take us beyond the PC. And in my comments, I referenced our Norton Everywhere initiative, which is basically our ability to deliver across any type of device, more services that are coming off the network like our DNS offering. And what we've fundamentally believed is that we have to be able to deliver capabilities across a range of these new devices, whether it be Android, BlackBerry, Apple and we see that as an opportunity. These new smart devices, our expectation is that next year, there'll be more smart devices connecting to the Internet and PCs, and that's why our team is focused on a number of these new initiatives across, not only the Consumer business, but also in the enterprise market, where our teams are delivering new capabilities to do a better job of helping enterprises, secure the devices but also manage the devices. And so it's a combination of aggressive new capabilities in the consumer business like Norton Everywhere and then also the work that we're doing on the Enterprise.

[Operator:]

And we'll go next to Sarah Friar with Goldman Sachs.

[Sarah Friar:]

In the Storage business, Enrique, you talked about NetBackup growing mid-single-digits and Backup Exec growing double digits. But overall, the growth there it's still just 1% in total. I think it's a little bit of what Walter was asking. When does whatever is in decline, which I'm assuming is mostly Storage Foundation suite and so forth. When is that cut enough [ph] so that your healthy businesses can show through in the growth rates?

[Enrique Salem:]

We're probably facing several more quarters of the Sun-Oracle OEM deal, and that will be one of the headwinds for that business. Now, we did introduce, and I talked about the new App HA technology, the new virtual store technology in combination with Data Insight. So the combination of lapping the OEM agreement with Sun and then bringing on these new technologies should allow the businesses that are shining through like BackUp Exec, our new DLP products, our range of new capabilities to shine through on the growth rate. And that's really going to take probably a couple of more quarters.

[Sarah Friar:]

So when VeriSign was bought, it was doing about $70 million a quarter in its Storage business. And I think you got it for $38 million for the December quarter. And I understand there's a deferred revenue write-down going on, but James, does it take a whole 12 months to get back to the prior run rate whether deferred revenue write-down is finished? Or should that start to happen a little bit more quickly as you get through the year?

[James Beer:]

It would take at least a full year. In fact, some of the deferred revenue based upon the contract terms that VeriSign signed, is actually a little longer than 12 months. So certainly, the significant majority of the effect will play through after the first full year.

[Operator:]

We'll go next to Keith Weiss with Morgan Stanley.

[Keith Weiss:]

I was wondering if you could delve into the Consumer business a little bit and the lower conversion rates you're seeing there, with the PC initiative towards lower-end units. Are you seeing any sort of similar shift in ASPs of that lower units where, I mean, PC Tools is more prevalent? And similar shift in ASPs, was this just on conversion rates?

[Enrique Salem:]

The current pricing has remained very stable, and what we are seeing is that as we move from this to 360, that's always a positive for us, where we are able to upsell our customers to the higher price point products. The specific issue is really driven by just the mix shift that we saw to the netbooks. And my expectation is that we'll probably see a year-over-year growth in total units shipped December over December. And that should have a positive effect.

[Keith Weiss:]

And then just on the conversion rate side, could you give us some background on sort of how long you guys have been seeing this decline in conversion rates? And I think, you guys had talked about bringing the eCommerce platform in house. Part of that reason was to increase the conversion rates. What's your planning assumption of what the timeframe would be to when you could actually start to see results from having the eCommerce platform in house?

[Enrique Salem:]

Let me take the second half and I'll let James take the first half. So if you look at the platform, the eCommerce platform, we've now had that up for a year, and it's performed as expected. Quite frankly, I'm very pleased with how effectively our team has executed on bringing that in-house. I mean, completely transparent to our customers and the ability to be more targeted, the ability to deliver new services that we're starting to outline is absolutely a positive for the Consumer business. And so that is already built in. Expect us to continue to extend that platform beyond just the Consumer segment to leverage it across other segments and to bring in other products. And so that transition has been very positive, and we'll continue to be a positive, not just for the consumer business but over time, the entire company.

[James Beer:]

And as to when we started to see the conversion rate that we've been referring to, we saw some first hints of this in the June quarter. But the June quarter is a seasonally low quarter anyway for the business. So as we move into September and saw that continuation and in fact, some of the deepening effect, clearly, it was an issue that it was worth discussing.

[Keith Weiss:]

Could you just briefly give us a little bit more color on that issue that caused the $10 million one-time reduction? Why were those consumers not getting the updates on that?

[James Beer:]

This relates to a group of consumers that we heard also renewed but haven't made the additional step to actually renew their subscription. So in essence, we had recognized that revenue sooner than we should have done, so we baked it out in this quarter. It's a very small portion of the population, well, well less than 1% or so.

[Operator:]

We'll go next to Brad Zelnick with Macquarie.

[Brad Zelnick:]

Enrique, in your prepared remarks, you talked about technologies like DLP, driving the security conversation higher within the customer organization up to the CISO level. And when I look to the deals that you're doing and deal size and your deal metrics, it seems like the number of $1 million-plus deals are consistently coming down. And I guess just as we've tried to resolve what's happening here, I was hoping you could maybe comment a little bit about the customers' willingness to purchase forward, something that you've talked about a little bit in the past? And how we should think about large deals and maybe what the megadeal metrics were in the quarter?

[Enrique Salem:]

You said it exactly right. You focused on the point, Brad, that customers are not pre-buying years two and three. There's really no reason at this point for them to do that, given what they saw in 2009, while 2010 obviously, there's improved confidence than we saw in previous years. There's no move to say we'll pre-buy years two and three, so that's not changing. The other thing to focus on the discussions moving up to the CISO is some of those deals are for one or two of the technologies. They're not necessarily buying all of the DLP technologies so that gives us an opportunity, for example, to sell the initial functionality of DLP and then come back and sell the next set of capabilities. And so as we look at the big deal metrics, given that I don't expect anyone to start buying or prebuying the outyears, the one factor that will have an effect is historically, the first half of the year is seasonally a little bit slower than the second half of the year from the big deals as people ramp into both our calendar year and our fiscal year end. So that's what will drive all the improvements in the big deal metrics. But again, I don't expect prebuying to begin at all during this fiscal year.

[Brad Zelnick:]

One follow-up for, I guess, James. On employee headcount, where you ended up the quarter, it appears even if I back out what was acquired, you were net hires. I guess the question there is were there redundancies that came from VeriSign? And what do you expect in your hiring plans going forward?

[James Beer:]

There's a very modest change in non-acquired headcount quarter-over-quarter. So I think that just reflects the fact that as I mentioned in the notes that we're already looking to manage our expenses as tightly as we can, and that continues to be the strength as we move forward here. Yes, we're absolutely looking to redirect resources to the higher growth parts of the business, but we're, while doing that, mindful of the overall financial picture, obviously.

[Operator:]

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

[Neil Herman:]

Could you talk a little bit about the competitive environment particularly vis-a-vis McAfee? Given the Intel acquisition, are you seeing any significant changes competitively in that portion of the market? And then as a follow-up, a few quarters ago, we had Google and a number of other companies that were apparently penetrated now. We seem to have this Stuxnet worm. Are you starting to see some of these issues translate into increased business in the segments of your business as well?

[Enrique Salem:]

From a competitive perspective, it's still very early. As you know, the McAfee-Intel deal hasn't closed, and so we haven't seen any changes. While you get questions and everybody believes it will be a distraction for the McAfee team, it's pretty clear that it's still very early to really see any effects. We do see it as an opportunity for us. With regards to the threat environment, it's becoming a lot more toxic. I mean, Stuxnet is an example of an attack on the industrial control systems, and this has just raised the awareness of something that all of us who focus on protecting critical infrastructure have known would absolutely become an issue. And so when you have an issue like this, it raises awareness and people turn to the largest security company in the world and that's Symantec, so we see it as absolutely a positive. It opens up a lot of conversations with our customers, and it allows us to talk to them about the best ways of protecting themselves, in this, again very, toxic or cyberthreat environment.

[Operator:]

We'll go next to Brent Thill with UBS.

[Brent Thill:]

Enrique, if you could just characterize your pipeline for the second half here? I don't want to put words in your mouth, but it sounds like you're slightly more confident about what you're seeing. And I was wondering if you could help us just characterize how that pipeline feels versus the first half and what you saw last year. And then for James, on the operating margin, is there any reason to believe why you shouldn't be able to get back above 30% at some point, considering some of these factors seem to be one-off issues that you're going through right now and that should pass here with time?

[Enrique Salem:]

I'll take the first part of the question. What you see is our ability to integrate -- these acquisitions has gone very well. I commented on DLP, I commented on the MessageLabs, both VeriSign, GuardianEdge and PGP. All of these acquisitions are being very rapidly integrated and are performing well for us. My expectations as we're going into a seasonally stronger period, and I believe that we should see results that are consistent with what we've seen in years, where we're not facing IT budgets being down 9%. So I'm confident that our execution's improving, and I'm confident that the integration of the acquisitions is going well, and I believe that we should see a typically stable end to this fiscal year, nothing that is unexpected on either the up or the downside of this point.

[James Beer:]

And Brent, in terms of operating margins, back at Analyst Day, I thought that operating margins could get back to the 30% level in the next three years, and I think the September quarter is a good example of how we've been able to integrate well around the acquisitions, around the rest of the business. We've had good execution, I noted the strong end of quarter, the Enterprise business had. And as we work to continue to do that, I think we can achieve the goals that I laid out at Analyst Day.

[Operator:]

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

[Todd Raker:]

First of all, with the discussion around the Consumer business and conversion rates around the low end, can you just remind us with the HP renewal, when did the new economics kick in? And does that give you more flexibility around this issue, and should that positively impact the profitability of the Consumer business?

[Enrique Salem:]

When we look at that deal, that deal is targeted to begin in the first quarter next year in January. And as you look at the business, we really haven't commented on the economics, but as we've always said, we're not going to be deals that don't make economic sense. And so I'd rather not going to the details of that deal, given that it is confidential.

[Todd Raker:]

And then second question, you guys commented that VeriSign has a sell-through that were up 16% year-over-year, which is a significant acceleration. Can you talk about what you saw from a pricing perspective? And any sense for whether you think that uptick on the unit side is sustainable?

[Enrique Salem:]

Yes, well, we've been pleased by the first couple of months of operations of the VeriSign business. Certainly, unit growth has been quite strong on both the lower-end brands and the flagship VeriSign brand. And the pricing picture, we've seen nice improvements there in the last few quarters of the business. And so put it all together, you've got a good top line story and I think that is before we start utilizing the benefits that we've been talking about earlier in terms of cross-selling capability, integrating it into Symantec Management console and those sorts of things. So all in all, we're pretty pleased with how things are evolving there.

[Operator:]

We'll go next to Katherine Egbert with Jefferies.

[Katherine Egbert:]

I don't think anyone's asked about the Storage side. You had a nice uptick there sequentially. Obviously, we've seen a lot of M&A in this area for some crazy premiums. Can you just give us some thoughts on how you're positioned in Storage in terms of management?

[James Beer:]

What you see is really a situation where some of the new technologies that are getting a lot of attention, we've been clearly the market leader in these technologies. Things like thin provisioning using solid state drives, the new FileStore technology. So we're positioned well to take advantage of some of these new technologies that customers are trying to get deployed. The thing that continues to be the headwind is that we've got to lap the OEM agreement with Sun-Oracle. But in general, the attention that deduplication, thin provisioning, virtualization are currently getting, are very positive for both the Storage Management business and the Backup and Archiving business. And so my expectations are that we will see continued results in Backup and Archiving and then some improvements in the core Storage Management business.

[Operator:]

We'll go next to Steve Ashley with Robert W. Baird.

[Steven Ashley:]

I'd just like to talk about the PC business and the mix change there. And you've been clear that, that's impacted kind of the close rates you're seeing. But has there been any commensurate impact with the sliding fees that you pay or any benefit in seeing that going down as a result of this change in mix?

[Enrique Salem:]

What you see is that as we negotiate the agreements, we're always thinking about what are the conversion rates, not just in the high-end versus low-end units but also geographically. And so our team is very sensitive to modeling what are the appropriate, whether it be fees or rev shares or any of the different contracts or the contract vehicles, where we're always trying to understand how units are going to flow to the market, because we completely understand, for example, conversion rates here in the United States are higher than in emerging markets. And so we adjust for that when we look at payments. The same is true when we think about high-end units or non-netbooks, and we definitely adjust the payments based on that. And so as we renew agreements, as we get better knowledge of what conversion rates look like, we always take that into account. Netbooks have now been out for more than a year, and so as we've renewed to these agreements, that's been a factor in our thinking. It should be a positive ultimately for what we ultimately pay, given the conversion data that we have.

[Steven Ashley:]

And then maybe you can give us a quick update on the Symantec Protection Center? Where we are there in adoption and how that's being received early on?

[Enrique Salem:]

I'm extremely pleased with how it's being received. Our team did a great job of delivering it, and what we now have is the Management console that allows us to integrate a range of our products, as you heard in both James and my comments around the VeriSign business, around the PGP business, around our hosted services business, all of that work is being done around SPC and that's been due to the very big positive from our customers, especially our largest customers who have multiple Symantec products installed.

[Operator:]

And we'll go next to Philip Rueppel with Wells Fargo Securities.

[Philip Rueppel:]

On the Enterprise side of the business, I recall last quarter you had mentioned that due to the lengthening of sales cycles that you had assumed lower close rates. Given your commentary about how the quarter ended and the pipelines going forward, are you assuming, are you 're going back to normal assumptions for close rates, or are we still in somewhat of a depressed environment?

[Enrique Salem:]

The close rates, obviously, as you go into the seasonally stronger period or you go into the calendar year end, we always have models that we work off of from previous years. And then we also take into account the current environment. So my expectation is we don't expect that there's a dramatic improvement in confidence, so we expect it to be stable and we've modeled in what we believe is the appropriate close rates. But again, this is a little stronger seasonal period because of the calendar year end, and we've obviously taken that into account into our guidance.

[Philip Rueppel:]

And you mentioned some of the earlier progress you're making in the mobile market. How should we measure that going forward? And sort of what is your go-to-market strategy going to be focused around platform providers? And you gave us some end-user accounts, but is it really going to be driven by service providers and platform providers? And how should we think about measuring your success going forward?

[Enrique Salem:]

As you look at our long-term vision, we see mobility, smart devices as becoming a very important part of what everybody is doing, whether it's an individual consumer and enterprise. When you take into account go-to-market, enterprises are going to buy from either the channel partner or from our own team, so our expectation is that the Enterprise segment will be a traditional enterprise sale. When you look at the consumer market, obviously, we see opportunities to use handset providers and nontraditional OEMs for our business and a number of those relationships that we have been working on. And obviously, we'll continue to go through our customer base because many of our customers that have been using our consumer products are now moving to some of these new devices, and our expectation is that we'll be able to, in effect, cross-sell to those customers. So it's a combination of selling to Enterprise, working with carriers and handset providers and then also cross-selling our consumer base.

[Operator:]

We'll go next to Rob Breza with RBC Capital Markets.

[Robert Breza:]

Enrique, I wanted to talk about the new or the joint venture by looking at some of the press releases and expectations you're making, it looks like currency in the North American market a few weeks ago. Well, let me just get to your expectations there and understanding how you're viewing that joint venture longer term? I understand there's a one-time option here in a couple of weeks that comes up. And really, how you're going to be using that joint venture to target the North American market and how you see that going into the competitive landscape?

[Enrique Salem:]

Our customers continue to look for solutions in both on-premise in software appliances and then hosted or Software-as-a-Service. So our expectations is part of the appliance capability is going to be working closely with the joint venture. As you probably know, a majority of hardware today is already being built in China. And so we're able to leverage a relationship with one of the largest tech companies in China as a strategic partner. And so we will absolutely be taking a number of different appliances to market, some developed by the joint venture, some with the content developed by Symantec into markets all over the world. We had this June quarter, we saw some of the initial sales outside of the U.S. for the appliances that we've developed with the JV, and my expectation is that, that will be technology that we deliver all over the world, including the United States.

[Robert Breza:]

James, maybe a follow-up to Enrique's comments, if you look at the 2% additional stake, and correct me if I'm wrong here on my math, but it looks like the additional 2% stake would cost you about $28 million giving you the 51% controlling ownership. Just looking at that based the value of the last 10-K, 10-Q you put out had $51 million, really would imply about a $1.4 billion valuation for that. Is my math correct there?

[James Beer:]

That's all correct, yes, and the option comes available to us in February of next year.

[Operator:]

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

[Philip Winslow:]

I just wanted to focus on sales force productivity. Obviously, you guys saw a good bounce back quarter-to-quarter and license sales up after you mentioned some deals slipped during our fiscal Q1. When you think about what programs, et cetera, that you've got in place, you'd sort of keep that consistency back on place here, just what are those? And then also, Enrique, when you do think about your channel model right now, any tweaks that you're making in that program?

[Enrique Salem:]

The channel program, we continue to drive our partners towards more specialization in the portfolio, and that's working well because we're bringing on partners that are security or DLP experts. We're bringing partners that are Backup or Archiving experts because these products require true specialization. We've also set it up so that partners can work together, so that there is a benefit to somebody saying, "If I specialize on Backup or Archiving and I need to bring in somebody who has expertise in DLP, we've worked out a channel model and an incentive model that allows our partners to both be successful, while being very targeted in these notion of specialization." When you think about the sales force, we've got a cost structure and incentive structure that's typically put in place at the beginning of the year and we're running with that structure. Obviously, at this point, given that we've done the three new acquisitions, there's a lot of enthusiasm in the sales force because everywhere we've sold our DLP products, there's now more opportunities to sell our Encryption products. And so our sales force is seeing a real opportunity around some of the new acquisitions. Our conference though are stable from the beginning of the year, and we will look at what we need to do as we go into fiscal year '12.

[Enrique Salem:]

I just like to conclude by saying that we're pleased with our execution during the September quarter. In particular, we're pleased with the strength of our Backup and Archiving, SaaS and DLP businesses and the progress we've made in integrating our acquisitions. I'm optimistic about our prospects for the December quarter, and I would like to thank you all for joining us this afternoon, and I look forward to speaking with you again soon. Thank you.

[Operator:]

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