Gen Digital Inc (GEN) 2002 Q4 法說會逐字稿

Good day and welcome to the VERITAS Software 4th quarter and fiscal year 2002 earnings release conference call.

Today's conference is being recorded. At this time, for opening remarks, and introductions I would like to turn the conference over to Ms. Renae Buddig. Please go ahead ma'am.

Thank you good afternoon and thank you for joining us today for our report on VERITAS' Q4 2002 financial results and future outlook.

With me here today are Gary Bloom our CEO and Ed Gillis, our CFO.

Before we begin, I would like to remind you that some of the matters we will be discussing today include forward-looking statements that involve risks and uncertainties. For example, statements regarding the company's projections of revenue, pro forma earnings per share and operating margins for the quarter ending March 31, 2003 and for 2003 generally, estimates of revenue based upon the expected seasonal patterns typical of the software industry, and the company's expected ability to execute in a challenging economic environment, maintain a competitive advantage and define the future of storage by investing in next generation storage net working technology are forward-looking statements. Actual results may differ materially from those projected in the forward-looking statements.Additional information concerning factors that could cause actual results to differ can be found in our most periodic reports on form 10 K and form 10 Q which are readily available on our website as well as the SEC's website.

In addition, during this afternoons call we will refer to pro forma financial results of the company. Today's press release concerning our 4th quarter results contained detailed financial information that we may cover during this call including, where appropriate, a comparison and reconciliation of pro forma financial measures with the most directly comparable financial measure calculated and presented in accordance with generally accepted accounting principles.

A copy of the press release is available in the Investor Relations section of our website at www.VERITAS.com.

I will now turn the call over to Gary Bloom, VERITAS's CEO. Gary.

Thanks, Rene.

I will give a brief overview of our fiscal Q4 financial results and discuss the highlights of the quarter. I am very pleased to report that our 4th quarter performance was nothing short of stellar. With record revenues of $405 million surpassing the Street estimates by a significant margin.

Our pro forma EPS of 18 cents also exceeded first call consensus and clearly demonstrated the company's commitment to delivering solid results and leveraging revenue upside to deliver better than expected earnings. Our balance sheet continues to remain strong. As we exited the quarter with a record $2.2 billion in cash and generated approximately $140 million in cash from operating activities. In addition, by taking a conservative approach to our spending model and closely managing expenses we delivered a operating margin of 27% for Q4.

Our impressive financial performance is a validation of our business model that continues to withstand the test of a challenging economy. One of the key factors that distinguishes VERITAS from its competitors is our ability to innovate superior technology that allows our customers to improve their IT services at a lower cost.

In addition to maintaining our market leadership in key segments of the storage industry during 2002, we continued to execute on our three-prong growth strategy of platform, product and geographic expansion. In the storage software industry VERITAS offers the broadest platform support.

During calendar year 2002 we filled out our platform offerings with introduction of products on the AIX and Linux platforms and continued to see increased traction for our products on these platforms during the 4th quarter. Also during 2002 we saw more multi-platform license transactions which demonstrates the importance of our heterogenous platform strategy. For 2002 our platform mix included approximately 50% Unix, 40% Windows and 10% what we call multi-platform licenses. These multi-platform license transactions represent site licenses where customers can deploy our products across their heterogenous IT environments. Throughout 2002 we rolled out a number of product enhancements and upgrades leaving us well positioned with a [INAUDIBLE] fet of products as we move into 2003.

We recently announced Backup Exec 9.0 our flagship backup and recovery product for the growing market of small to medium sized business. VERITAS is number 1 in the 613 million dollar worldwide Windows data protection market with 56% market share. With the new version, we gained several additional competitive advantages. On top of the list VERITAS Backup Exec 9.0 delivery of the fastest backup recovery from Microsoft exchange servers. Backup Exec 9.0 is the also first product to offer the integrated support of Windows server 2003 which was perviously called the dot net version. Preparing us to leverage the upgrade market surrounding this new release of Windows.

Over the years VERITAS has always looked to leverage it's market positions, and stong balance sheet to execute on strategic acquisitions. Towards the end of 2002 we identified a number of opportunities allowing us to both augment our existing product line and move into new adjacent markets.

In November we bolstered our offering in the merging storage resource management market with the acquisition of NTP Software Storage Reporter. Storage Reporter complements VERITAS sampling control to provide the CIO with a complete solution for managing complex heterogenous storage environments.

In December, we announced our plan to acquire Jareva Technologies, a leading provider of server automation technology. Since that time we have closed the deal with Jareva and are very pleased to begin integrating this technology into our product portfolio. The Jareva technology allows IT managers to allocate and manage their server hardware similar to the way they use VERITAS today to manage storage hardware. This will allow CIO's to drive down costs through better utilization and management of available server resources.

As we move toward the world of Linux [INAUDIBLE] and grid computing, this technology is a perfect fit. We also announced in the fourth quarter that we had signed a definitive agreement to acquire Precise Software Solutions, which is expected to close in Q2 of this year. While Jareva takes us from storage to servers, Precise will take us a level higher right up to the application.

Precise Software, which is the leader in application performance management proactively detects and corrects the root cause of performance problems before they expect response times. Precise uniquely provides the ability to analyze performance down through the application from the web browser to the data or from the URL to the SQL. All major software vendors are supported from SAP, PeopleSoft and Sibel applications to BEA and IVM application servers and across Oracle, Microsoft and IBM databases.

As we integrate Precise into our product offering we anticipate an acceleration of our growing CIO relationships. The value and relevance of VERITAS software has never been greater. We can dramatically improve application service levels and, at the same time, drive down the cost of the infrastructure.

Geographically we are able to increase our international revenues from 31% to 2001 to 36% for the year ended December 31st, 2002, of total non-OEM revenue. This increase is the result of our continued investment and focus on expanding our geographic reach.

During Q4 non-OEM international revenue was 39% of total revenue. We are particularly pleased with the growth in some of the emerging markets within Europe such as Italy, the Nordic countries and Eastern Europe. In addition, Asia Pacific region also shows solid growth on a year over year basis.

I will now provide some perspective on the selling environment for the 4th quarter. The strength of the quarter was primarily attributable to acceleration demand in December, and increased end of year spending by our customers. Once again we saw high number of smaller transactions with increased solution sales demonstrated by the growth in professional services which were up by 23% year over year. We also noticed sector strength in government, financial and telco as well as strength in our channel and geographic regions. Particularly in the [INAUDIBLE] emerging markets. In addition, the increased interest in our AIX and Linux products that we mentioned earlier, we are seeing growth in our clustering technology and increased demand for our backup products.

All in all, VERITAS continues to be well-positioned to accomplish our goal of emerging from the downturn a stronger more robust company. For 2003 we will remain focused on executing our business model and strategy to meet the growing demands of our customer.

I will now turn the call over to Ed Gillis for the detailed Q4 financial results. Once Ed finishes this discussion I will provide our outlook and open the call for questions. Ed?

Okay. Thanks, Gary.

Good afternoon, everyone. I'm going to begin by providing some comments on our income statement.

First, focusing on our pro forma results. Followed by a previous discussion of the differences between our pro forma results and our GAAP operating results. Finally I will provide a few comments on our balance sheet.

Revenue for Q4 was $405 million, up 11% sequentially, and up 8% year over year. Revenue for the year was $1.5 billion, up 1%, year over year. License revenue for the quarter was $264 million, up 10% sequentially and relatively flat year over year. License revenue from our core products, which in this case including backup and infrastructure products, was $228 million, up 8% sequentially. License revenue from emerging products, which include clustering, replication and storage resource management products, was $36.5 million, up 22% sequentially. The strength in the emerging products was driven by 24% sequential growth in our clustering and replication products.

Service revenues for the December quarter were $141 million, up 13% sequentially and 33% year over year. Service revenue represents 35% of our total revenue for Q4. The strength in service revenue reflects both our ongoing committment to providing best-in-class customer support and our continued investment in expanding our professional consulting and training businesses.

The channel revenue mix for the quarter was 89% end users, [INAUDIBLE] and distribution partners, and 11% from OEM partners. The non-OEM international revenue in Q4 represented 39% compared to 37% in Q3. As Gary indicated, for the fiscal year non-OEM international revenue is 36%, up from 31% for 2001.

Throughout 2002 one of our goals was to continue to increase our international presence by at least 2 to 3 percentage points and we well exceeded that goal. For 2003 we will continue to focus on increasing our international reach by at least 2 to 3 percentage points.

This quarter we closed 12 end user transactions, valued over $1 million, and 59 transactions over $250,000. Throughout all of 2002 we continued to see increasing numbers of lower dollar deals, and achieved our results by closing a large number of transactions demonstrating the breadth, strength and adaptability of our sales model.

Pro forma gross margins for the quarter increased to 86%, compared to 85% for Q3. Gross margins on license were 96%, and service margins were up sequentially to 67%. Driven primarily by our maintenance and support business.

Pro forma operating expenses were $239 million, compared to $226 million for Q3. The increase in operating expenses was primarily attributable to higher sales commissions driven by increased revenues.

Pro forma operating income was $110 million or 27%, clearly demonstrating the leverage in our business model.

Going forward, we will continue to aggressively manage our operating expenses, balancing funding requirements for ongoing research and development, while controlling discretionary spending and maintaining solid profitability. We continue to maintain our near-term operating margin target of 21% to 23%, which reflects our ongoing plans to balance earnings with our plans to continue investing for future growth. Our pro forma tax rate for Q4 and all of 2002 was 34%. For 2003, we expect this tax rate will be 33%, as we begin to see the benefit from our international expansion.

Before I turn to the balance sheet, I want to comment briefly on the difference between our pro forma and GAAP earnings. On a GAAP basis, we reported a net loss of $49 million, or $0.12 per share. Including in our GAAP income is $38 million in purchase accounting adjustments, all of which are non-cash.

The intangibles associated with our previous acquisitions should be fully amortized in Q2. Accordingly ongoing amortization should decline in the third quarter to approximately $10 to $12 million per quarter, including the effect of the Precise and Jareva acquisitions. Additionally, GAAP results for the quarter include a $3 million loss on the disposal of the DMD business.

Finally as we announced last quarter, we took a special charge in the 4th quarter of approximately $100 million related to a worldwide facilities restructuring which will consolidate our facilities in key geographic areas and reduce the excess capacity we accumulated prior to the market turndown. This charge is primarily related to future net lease and rental commitments on the affected properties. The restructuring activities will be completed over the next several quarters. Ultimately we expect this restructuring to result in a analyzed cost savings of approximately $13 to $15 million which we should begin to benefit from starting in the second half of Q3.

Our head count exit in Q4 was approximately 5650. Looking forward to 2003, we expect to see nominal growth in head count. However, as we have said before, our business model is highly leveraged and we are prepared to take advantage of revenue upswings without significant increases in head count. Specific to our sales organization, we have pretty much completed our normal fine-tuning of the sales force as we do at the beginning of every year with two notable goals achieved this year: First, we're well ahead of our normal schedule, preparing us well for a fast start for the new year. Secondly, we have increased sales capacity through this tuning effort without adding more head count.

I'll comment briefly on our balance sheet. We exited the quarter with a record $2,241 million in cash. During the quarter we generated approximately $140 million in cash from operating activities. For the fiscal year, we generated approximately $580 million in cash from operating activities and increased our total cash balance by 32%. Our strong cash position and our ability to consistently generate positive cash from operating activities is a key differentiator for VERITAS. For customers, it is the sign of strength and staying power. We will continue to use our cash to invest in growth, either organically or through strategic transactions like the Jareva and Precise deals that either fill out our product line or expand our reach into adjacent markets.

Accounts receivable was $170 million for the quarter and our DSO increased from 30 days for Q3 to 36 days in Q4. Reflecting the increase in both reported revenues and deferred revenue. Deferred revenue increased from $257 million at the end of Q3, to $279 million at the end of Q4. The increase is largely attributable to annual maintenance renewals.

For Q1 we expect deferred revenue to be relatively flat to slightly up and as we have said quarter after quarter we expect DSO to be in the low to mid-40s range. Before turning the call back to Gary, I would like to provide a update on our proposed acquisition of Precise Software. To date, we have already cleared the Hud-Scott-Rodeno filings and have completed regulatory filings in Israel, and we expect to close this transaction in calendar Q2.

On another topic, last week we announced that as a result of our previously described review of the September 2000 AOL transactions, we would restate our financial results to reflect that $20 million of license and support fees paid by AOL will not be recognized as revenue, and $20 million of advertising services paid to AOL would not be recorded as expense. We are working with our auditors to reissue restated audited financials, and expect to have this process completed in the March quarter.

Additionally, given the size and buying power of VERITAS, it is not unusual for us to purchase goods and services from our customers. Naturally, as part of our review, we looked for similar transactions with our suppliers and remain satisfied that the issue with the AOL transaction is an isolated occurrence.

I will now turn the call back over to Gary who will comment on our outlook before we open the call for questions.

Thanks, Ed.

I will first comment on our outlook for fiscal Q1 as well as provide some perspective on what we see ahead for calendar 2003.

As we indicated in our last call, a significant overperformance in Q4 combined with the normal seasonal patterns of the software industry would lead to a conservative viewpoint relative to sequential performance as we move from Q4 of 2002 to Q1 of 2003. As such, we expect revenue for the March quarter to be approximately $370 million and pro forma EPS of $0.13 based on our ongoing operating margin target of 21% to 23%.

We are encouraged by what we saw during Q4. However, one quarter does not make a trend. Until we see a sustained pattern of increased IT spending and further economic improvement, we will maintain a conservative stance on guidance. This will allow us to continue managing our expense and head count growth, allowing us to maintain our leveraged model where further revenue improvement drives an enhanced bottom lines.

With that said, our optimism around 2003 has improved since our last earnings call. While we expect relatively flat Q1 to Q2 results, we continue to believe that the second half of 2003 could line up to generate some positive revenue and earnings momentum.

Our performance not only in Q4 but also in this past year is a testament of our ability to execute to our business strategy, maintain our market leadership and deliver strong financial results. I am very proud of the effort displayed by our employees who contributed greatly to our success this past year and to our customers who view VERITAS as a trusted supplier, helping them achieve their business objectives.

As we look to 2003 we expect to have a exciting and successful year. As we close and integrate our recent acquisitions we will be even better positioned for the future than we are today and I am confident that our ongoing diligence in managing the business and innovating new technologies will allow us to emerge stronger and continue on our path of creating one of the all-time great software companies.

Operator, I would now like to open it up to calls for questions.

Thank you, Mr. Bloom.

The question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your touch tone telephone. If you are on a speakerphone, please be sure your mute function is turned off to allow your signal to reach our equipment.

We will proceed in the order that you signal us, and will take as many questions as time permits. Once again, please press star 1 on your touch tone telephone to ask a question.

And we'll pause for just a moment to give everyone an opportunity to signal for questions.

We will take our first question, from Thomas Berklis of Goldman Sachs. Please go ahead.

Thank you, congratulations on the quarter guys.

Thanks.

A couple of questions on the demand side. I heard all the commends you made. But I was just curious on a vertical industry basis if you could comment on what you are seeing and just some of the bigger spenders, financial services, maybe in manufacturing and any other big industries just in terms of whether or not there was any sort of change in their tone in the fourth quarter, and so far what you have seen maybe in January.

Yeah. It is interestingly Tom, the mix has not really changed from what we've been saying for some time. We've been a little bit of an anomaly in one particular sector in that telco has continued to be a strong sector for our business. The other, couple areas that continue to be strong, government was very strong in particular at the, kind of, federal and state government level. We are very happy with our results in that particular catagory. And then the, you know, kind of overall other areas that also saw strength, although I think telco and government were probably the real highlights, certainly manufacturing and financial services were both strong. And we, as I think you know, have not seen any real substantial change to that mix over the last few quarters either, and did not see any substantial change through the fourth quarter either.

Okay. And also, just in looking at your mix of business split, obviously services continue to do very well. As you look out at the guidance that you've given, is it fair to think that services growth kind of continues at this pace or does that moderate a bit in the first half of the year as well?

I think, as you know, on our services growth, our services growth we expect to continue to be a positive trend. It is a area we are investing in as part of our strategy to really, kind of, change the nature of our relationships with our customers, from kind of your typical product supplier to one of the much more trusted advisor. And part of that, introduces, you know, much more premium services, it also introduces typically, you know, more advance consulting services around disaster recovery strategies, storage architectures and the like. So that, I think, will continue. The other part that drives our services number to very, very healthy rate continues to be very good renewal rates on our maintenance and support contracts, and we see that as the continued opportunity to keep going after renewal rates, and continue to expand, especially in our products sold through the channel, continue to expand the renewals of products that have been sold in the channel in prior periods.

So all in all, I think services will continue to be strong. Clearly the license revenue side of it will benefit from improvement in the economic climate in general and IT spending, although we think there is a lot of new products in our pipeline with AIX, with Linux, with the new Backup Exec 9.0 product to help drive some license momentum as well.

Alright. Great. Finally just on the emerging products you've mentioned the strong sequential growth.

I noticed also that there was a fair amount of sequential growth in the hardware and communications sector around storage this quarter as well which in some cases I know shows up in your first quarter. Would you expect OEM business to be a little bit better perhaps in March than it was in December?

Yeah. And OEM numbers are always a little bit hard to track, especially, you know, given the volatility that they tend to see. You know, you have to kind of remember that, you know, September kind of was a bad quarter on the OEM side. So, you know, that certainly accounts for the sequential piece of it, a little bit going into the December quarter. You know, all in all, I think, you know, OEM, yeah, I do not see it going on given their results of the different hardware manufacturers and such. I do not see a continual massive decline but I am not expecting OEM revenue to be a turn around business given how I view their projections looking forward.

Sure. Are you classified Linux related products in the emerging sector, Gary.

No. I think the Linux products are really not being categorized. Typically the way we split the categorization is things like replication, clustering, the product side being separate. Where it falls into emerging is really the emerging platform measured in the Unix and the multi-platform Unix number that we mentioned.

Got it. Did you see strength in Linux this quarter?

We did. We continue to see good strengths in Linux. It is important to remember that when we talk about platform growth that, you know, having these new platforms really helps us sell on all platforms. So the fact we have AIX and the fact we have Linux actually helps us increase sales in the Sun and HP environment because of the heterogenous opportunity down the road and the flexibility to give the customer in the future.

The other thing to remember is for both AIX, and Linux, while while we are happy about the results and we like the growth we saw, they are off small base. So the growth percentages get, you know, a little bit tricky to look at the small base, but we love the progress we're making on those platforms and we think they are having great influence on our other platforms as well.

Great. Thank you very much.

Okay. Thanks. We'll take our next question from Drew Rousseu of SG Cowen.

Just a couple. First, can you comment at all on the deal activities, it looks like you are is it will not doing that many more large deals, but a higher volume of smaller ones I am wondering if you are seeing any change in that momentum or is part of your guidance forecasting any change to that? And then the second one is a just a little bit of an update from a competitive standpoint as to who you are seeing more of and less of in the various market segments, thanks.

I will try to address the deal activity. Ed can jump in here as well.

Yeah, we continue on a generalize basis to see a high volume of smaller transactions. And one of the things that we've been able to do is adapt our sales model very effectively to delivering in the fourth quarter what was just a stellar quarter based on a relatively small number especially for a fourth quarter of small transactions. It is up slightly from Q3. And I do not see, kind of the large deal mix changing dramatically, you know, in a very rapid fashion.

As I mentioned in the last call, there is -- you know, buying site licenses and doing big deals is still a very valid way for customers to purchase our software and technology. You know as a purchaser of software and products, we do some site licensing ourselves in our purchases, and we do that so you do not have to count, so you get the advantage of locking in the strategy and deploying it broadly in your company, and also just for the flexibility on discounting and pricing. So there is lots of motivation that drives people to do it.

But, with that said, you know, people are still taking a much more nearer term view of their requirements and buying much more as you go. The one thing that I find encouraging is when I look at forecast in pipeline is the number of customers that don't go out and do the big deals but show up quarter after quarter or every other quarter buying more product at a nice rate. You know, maybe not the million dollar plus transactions but doing several hundred thousand dollars every other quarter, and that is not a bad way to run a business. Ed, I do I not know if you want to add to that.

No. I think that is pretty complete.

The two -- the two other kind of comments would be, it is still very much an ROI purchase. And, you know, can customers are really looking to optimize around or reduce their -- their investment in people and hardware. And so that is still very much the focus. And arguably, in a tough economy, more focused than ever. And then I think, in Gary's introductory remarks, he observed that the average kind of deal size is, I think, about $156,000, and that has been trending down a little bit, which is kind of remarkable in the context of what has been a very strong quarter. So I think it underlines the core strength of the business.

Drew, you also asked about, kind of, the competitive landscape, we have not seen a real dramatic shift in the competitive landscape. You know, obviously, many of the -- the hardware providers, especially the storage hardware providers, are talking a lot about software and raising the -- you know, kind of the focus of their businesses toward software. But as far as actually seeing a difference in the competitive landscape from a product perspective, the competitive landscape remains relatively underchanged, and so we continue to see, you know, a very similar competitive climate that we've seen across the board in the storage software sector for some time and then in the backup market, which is, you know, kind of the other piece outside storage again, haven't seen a real dramatic shift.

And if you actually start breaking that down product about I product what you really do find is that competitively there is really no new products that are creeping in that have caused us competitive pressure or difficulty. You take something like the clustering market as a example, we still compete against the vendors clustering products, whether it be Sun Clustering or Microsoft Cluster Services, but there is nothing really new out in the marketplace in the clustering market that has changed the landscape there at all. So the competitive landscape has not shifted much at all.

And other than, like I said, some increased marketing focus by some of the larger providers. The other thing is that our OEM partners, both the storage providers and the server providers, in some cases those relationships are a little bit more, you know, competitive , but by and large they're cooperative relationships. And in several cases we actually see them expanding and growing as people really say what is my core business, what am I focused on and how does VERITAS help me in the market. So we see, kind of, a little bit of a mixture there but more on the cooperative side than the competitive side.

Okay.

One quick follow-up, regarding the outlook on products for this year, are there any particular products that we ought to be keeping our eyes open? I think we have Sand Volume Manager in the second half of the year but anything else that is a important new release we should be looking for?

Yeah, that is the interesting part going into the next year, we do not have any, kind of huge deliverables, our engineers obviously aren't going be sitting on their hands doing nothing, they are working on lots of products and lots of upgrades and lots of new versions and features, but when we think about it from a sales perspective we really enter the year with a flush pipeline of new products. We have the Linux products out, we have the AIX products out. We have the Backup Exec 9.0 product that we just launched, you know, a week or two ago that had great momentum. We did a worldwide launch of that product, and we are absolutely thrilled with the attendance and the results of that launch relative to driving interest and momentum in that area.

You know, not too long ago we upgraded the NetBackup 4/5 release of our NetBackup product. So the reality is the vast majority of our product portfolio went through some major expansion or major refresh during the last year, and we now get a full selling year of those technologies throughout this year. Obviously we have the ongoing challenge or upcoming challenge of integrating the Precise technology, the Jareva technology and rolling those into successful VERITAS product lines as those transactions close.

Okay. Thanks.

Sure.

We will take our next question from Steve Mahedy of Solomon Smith Barney. Please go ahead.

Thank you. First question would be as it related to deferred revenue is up both sequentially and year over year, last quarter I think you mentioned the maintenance renewal rate was close to 90%, I'm not sure if you mentioned it on this call yet.

The maintenance renewal rate continues to be in a similar range. There is, again, a area with no significant shift at all relative to renewal rates. As we said before, that kind of applies to both year one and year 2 renewals, so we see continued strength in our renewals business.

One of the reasons why, in answer to Tom's question, the first question, that we can continue to believe that the services revenue will continue to drive forward as well.

Okay. Great. And on the restatement with AOL, is your sense now that all of that is pretty much behind you given the fact that you were never really the subject of the inquiry anyway. Is that kind of a closed matter?

Well, as we had said earlier on in the call, we're working with the auditors to restate the financials and complete the audit, and hope to have that done in the March time frame. And that should put a end to it.

Okay. Great. And then finally, it -- it seems on some of the quarterly conference calls that we've heard that that although southern Europe has been somewhat strong, noticeably absent has been the UK, France and Germany. Do you have any commentary to provide relative to those geographic regions?

Sure in our case, as it typically goes, we are always a little bit of an anomaly there. But the UK in particular for us was a very strong country for us this particular quarter. Germany in the quarter was a little bit weaker, but on a relative basis, I think, to what kind of news you hear in general, Germany was very good for us on business throughout the year.

On France, do I not have specifics on France, I do not know if you have that, Ed.

No.

Okay. We do not have the France data, it wasn't one of the ones highlighted to me.

I don't think it was a selling quarter, the standouts were the one you described.

Okay, great. Final question would be on the IBMP series upgrades, I think you were working closely with their sales force relative to the AIX product. Any updates there?

Yeah, I do not know there are a whole lot of updates there. Our volume and opportunity of business for the AIX product line and platform continues to have some dependency on IBMs ability to sell that platform as well as the speed at which people upgrade to the new version of AIX that has -- where we start introducing our support. And that continues to be trending, you know, very well.

IBM continues to seemingly do quite well in the server marketplace. We are very happy with the way our IBM relationship is evolving, with IBM in general but also through the IBM Global Services arm and we continue to put a heavy amount of focus on enhancing and building out that IBM relationship. We see it as a huge opportunity.

Okay. Great. Thank you.

Sure.

We will take our next question from Bob Simpson of Banc of America Securities. Please go ahead.

Good afternoon everybody, Bob Simpson, Bank of America.

Hey, just a quick question. One is, I'm curious on the clustering side, given the fact that IBM did make some-- excuse me, Microsoft made some notations about the WINTEL outlook. Is the bulk of that coming from the Linux side and can we expect to see more acceleration there?

No, I would say that the bulk of our clustering products are coming from our Unix platforms in general.

Okay.

Linux is still, as I mentioned before, a very small base that's growing nicely. Linux does represent a great opportunity for us down the road as Linux becomes more and more interesting enterprise accounts then the high availability characteristics that VERITAS introduces for Linux becomes very interesting. But our real strength of our clustering product is in the other platforms in our more mature platforms on Linux.

Okay, and then Gary, maybe you can help me with just a number which was a earnings surprise, was there any one exceptional big deal in the quarter that was out of whack that you can talk about in more detail?

Yes. There was not any kind of one really big deal in the quarter. There was not any one single deal that skewed the results.

As I mentioned, and as I think Ed mentioned, we only had 12 deals over $1 million in the quarter, and none of those were, you know, by any kind of characteristic mega deals that skewed the entire results. So we made this quarter, literally, on the strength of a good, solid performance on the large deals but a really stellar performance on the volume of smaller transactions coming through both our direct sales force as well as through our channel and our channel was a real stand-up performer in the quarter as well.

That's great. And then my last question, real quick was really to Ed Gillis, a fellow [Hingamite], who is probably glad he's not here and not in Hingam right now.

But, uhm, can you maybe help us with the margins? You said margin guidance was, kind of, 21, 23%. Maybe I'm getting ahead of myself, but what are we kind of planning , what should the business model look like, I guess, longer term, and then number 1 the tax rate, can it go lower than 33%?

Well, let me -- I will deal with the last part of that first. So the -- the -- we expect the tax rate to go up from 34 to 33 as we get into '03. And I think that as we get out over the next couple of years, we can get a little bit lower on that as the international business continues to expand. I do not think we're going to see anything much below probably 30, 30 to 31. But at this point, that seems pretty far off. As it relates to margins overall, I think I'm going to really stick to the, you know, kind of guidance that we've been providing, or at least the business model that we've been running to kind of contain and manage the business, which is this 21 to 23% fence, or structure. And it has been the best way for us to try to balance some conservatism on the revenue side, while still trying to make the right investments on the spend side.

Obviously, this is a leveraged business. And when the market improves, and we can get revenues up, you know, we would who to see that reflected in higher margins. For the time being, we are looking at 21 to 23.

Great, thank you.

You know, on that -- on that question, I just would add to it. As we've typically done, and we've talked about it a number of times, we kind of band the business a little bit in that kind of 21 to 23, and really kind of waiting for a sustained shift in the market and the climate and everything beyond kind of one good quarter, you do not want to change your expense model. So we keep that band in place, it keeps a real nice discipline internally in the company that says let's pay attention to our earnings, let's pay attention to our spending and our head count but let's not alter it dramatically for minor upticks or downticks in the market. So we're not kind of, excelerating then jamming on the brakes internally, it works from a leverage on the earning side when we see upside results of revenue, works for that. It also works to keep sanity in the organization relative to a continual change of the expense models.

The only other thing I want to do was update, there was a question about France's numbers, and Lindsay Armstrong, our loyal leader of our [INAUDIBLE] regions, has called in already and added in to that and indicated that France's numbers were extremely strong and exceeded our second half of year budget. Hello?

We will take our next question from John Difucci of CIBC World Markets. Please go ahead.

Yes, thanks. Can you -- can you guys tell us how -- how the tuning of the sales force actually increased sales capacity without adding heads? Just give us a little more detail on that.

Sure, what we are able to do is really kind of start working on some of our management to rep ratios, as well as work on our S/E to rep ratios. And essentially what we did is we worked on a focused program where we actually started looking and saying after two years of kind of periodic, minor tuning and retuning and little changes to deal with the economic downturn. VERITAS like all companies had to manage to yet still deliver good results, as you do all of that tuning and changing you get a little bit out of balance. And in your ratios as far as you end up with managers that might only have one rep or two reps working for him.

So what we did this time around was we, kind of, retuned the organization and looked at the ratios and made sure that we had as much selling capacity with reps calling on accounts as we possibly could. And we did the same thing in the S/E ranks where we actually moved a number of people from what we called overlay or specialist like organizations that really respond to demand and put them back into the territories where they create demand. So there is just a general shift of the number of sales resources and sales engineering resources that are actually customer facing, dealing day to day with customers, versus managing somebody that is doing that. What that does is it increases your overall capacity, but it does not cause you to have to increase your head count.

Okay. Okay. And -- and, Gary, one other thing, on -- on customer engagements today are there any changes or shifts in customers intentions? I mean expectations for 2003 are sort of flattish at this point anyway, it seems, for a lot of companies, for IT spending. But I am just curious, are customers thinking it -- it seems like their mood may be a little bit better than 2002. Are they thinking more strategic in nature or are people still kind of just waiting and seeing?

Well, you know there are two things that affect us for VERITAS, one is the evolving relationships with our customers. We are dealing more and more with the higher level management, with the CIO or the IT Directors, or in some cases even with executive management, the CFO and CEO as our clients, that has to do with moving into the trusted supplier or trusted advisor status with them. And as you do that, that inherently causes our customers to talk more strategically with us than a product by-product or month by month basis. They start talking to us about longer term storage architectures and the like.

When you look at the industry analyst trends in general with the software market and the tech spending in general, you do hear on a continual basis, I read the same reports you do, of relatively flat 2002 to 2003 spending. So the question comes is can we keep growing and in that climate continue to do better than the market? I think we can.

I also think that if you look at all the buying intention reports done by a number of firms, some of them have not been updated in the last couple of months. But certainly up to a couple months ago they were very favorable toward increased spending on VERITAS. So I think the combination of increased spending intentions towards VERITAS combined with our relationships evolving to a much more strategic level improves that situation for us dramatically for us going forward.

And then just in general, do I think that they are starting to think more about a longer term outlook on their IT plans and to some extent, you know, you -- at some point in time you get pent up demand and you just cannot keep cutting back on your expenditures. We provide critical infrastructure that has get leverage for a CIO to reduce both his IT costs from a hardware perspective, also people perspective and at the same time, improve the service levels. And so our leverage and our customers and the CIOs is really spectacular, and that helps us dramatically.

Okay. Thanks. Just one quick one for Ed.

Ed, how much of the special -- of the charge, the restructuring charge this quarter was actually a cash expense during the period?

Virtually none. It really relates to the closure of facilities which we do not expect to be complete until the June quarter. So I do not think that we will really begin to see cash disbursements against that restructuring until we start the third quarter and that will be in the 13-15 million dollar a year range.

Okay. Thanks.

We'll take our next question from Jim Mendelson of Soundview. Please go ahead.

I just have one question. Can you clarify on the deferred revenues, what the deferred license revenues did quarter over quarter?

Yeah. The deferred license revenue piece of deferred revenue is very small, so the majority of that account is -- is represented by maintenance. So in -- in a -- kind of a ballpark context, you know, we are talking the license component of it is somewhere in the nature of under 5%.

Okay.

Relatively flat when you look at it, you know, kind of period over period.

I just wanted -- that is what I wanted to get clarified. Last quarter it was down.

Yeah.

10 million and was it flat versus where it ended up in Q3, that's all.

Exactly, relatively flat in Q3 to Q4.

We'll take our next question from Neil Herman of Lehman Brothers. Please go ahead.

Hi, guys.

Could you could you talk about what your near term plans are in terms of changes from a net sales head count perspective? And what would you have to see in your business to cause you to decide to make significant changes from that perspective? And then as an adjunct to that question, if you could talk a little bit about what your preliminary plans are with respect to the completion of the Precise acquisition, and how you plan to structure the existing VERITAS sales force to, you know, sell those -- that -- that pretty big basket of precise products.

Neil, thanks.

The -- the question on the net head count perspective, you know, from a net perspective, I do not see a real kind of dramatic shift in it. It always gets a little bit kind of funky to deal with the net head count number, because one of the things that we've said we're doing on an ongoing basis is increasing emphasis in the overseas market, especially emerging markets in Europe and Asia Pacific and you get into a very different cost structure as you expand into those markets.

So to some extent, my expectation is we will keep adding heads and we will keep, on a ongoing basis, investing in sales capacity, especially in the international operations where we continue to see very healthy growth rates. Because if you do not add the capacity, do you not see the health growth rate of those. Our mix continues to evolve in the business.

As far as what I would need to see in order to kind of say, well, let's now build up capacity company-wide in sales throughout all regions, and do it more uniformly versus on real specific opportunities, there it's just, as I mentioned a number of times, kind of sustained economic and IT spending climate improvement that allows us to go out of our 21 to 23% margin band and say, "Gee, we're in a sustained scenario of predictable business and now we invest more heavily for the future." In the meantime though we do on a continual basis do these mix changes which actually change the numbers but may not change the expense model as dramatically.

Even in the U.S. we moved resources around a little bit, some of which was to get more resource into the government sector, given the phenomenal strength that we saw there. On the Precise transaction as such, you know, as we mentioned a couple of time the, we are actually in the process of trying to close that transaction.

We are working on our integration plans as we speak. And I'm really not prepared to go into too much detail on the integration plans. Our expectation is that as that transaction closes we will roll out a substantial amount of additional detail to you on just what the final integration plans are, but at this stage it would be premature to comment on those.

Then, any comments on the pipeline?

Pipeline continues to look really good. You know, it is -- it is pretty typical of what I call a Q4 to Q1 pipeline, and it is obviously reflective of the decline that we talked about going from Q4 into Q1 based on the overperformance. But, you know, for Q1, it is a good, healthy pipe line, and we think it is right in the, you know, kind of the range we needed to be in in order to deliver the results based on the expectations we're setting.

Great. Thank you very much.

Sure thing.

And we'll take our next question from Sabrina Riche of Georgia Banks. Please go ahead.

Good evening. Thank you.

First of all, could you update us a little bit on the Adaptive Storage architecture? Last spring, at the analyst meeting you talked about that, could you give us an idea of how that is working out for you and maybe how your product introductions are coalescing to form this architecture?

Okay.

I would say that is the first highly technical question we've gotten. That is great. So the Adapt-a-Software architecture was a framework that we announced at our VISION conference back in April of last year, which really put a framework around our technology. At the -- at the core of the adaptive software architecture was a combination of backup and recovery services, disaster recovery technology, high availability and storage management.

And essentially what that architecture allowed us to do is have a common set of services that allow a customer to take our software and adapt very readily their IT environment, either for a mixture of various application environments, or a mixture of various hardware environments, whether that be various servers, networks, operating systems or storage devices. And where Adapt-a-Software architecture really became a interesting framework is when we started talking about the acquisitions of Jareva but even more particularly the acquisition of Precise.

When you think about Precise, one of the goals of Adapt-a-Software architecture was to actually start moving up into the application space and introducing the whole concept of highly available applications. So that architecture and framework had a phenomenal impact on our desire to move up into the Precise products for application performance management. And at the heart of the whole strategy is a software-centric approach for customers to get the flexibility of - you implement the software once but it can manage and control multiple different hardware environments and multiple different application environments. And so relative to our products aligning to that, everything really aligns to it pretty well today and it is a core motivator of the expansion of the precise technologies.

One of the things that you mentioned when you introduced that was the layering software onto switches in the network and working with Cisco, is there any update on that relationship and any products out of that?

Yeah. In general, the work we've we've been doing with a number of providers, not just Cisco, but many of the small startups and others, I think it is now over 30 different partners in what we call our VERITAS powered program. And this is the program where we actually take our storage software traditionally running on the server and actually make it - allow it to run in the network device itself.

We are doing a tremendous amount of work with a large number of network providers. As we've said all along relative to revenue opportunity, you really have to kind of gauge the revenue opportunity that we have in the network switch marketplace as storage and networks converge. You have to look at that in the context of when do these players actually deliver their technology to market, and how successful will they be.

Clearly adoption rates of network based storage from a - from that perspective of highly intelligent network switches, you know, there is some level of complexity to the technology that will, you know, cause the uptick to be a little bit slower than everyone would like. So that is really a longer term revenue opportunity for us. You for, with we think about -- our kind of '03 forecast and look at it, we do not factor in a lot of revenue for that kind of technology at this stage. We think it is longer term investment.

Okay. One more question on storage management. Your competitors, like EMC have the ability to, of course, bundle their software with their hardware and VERITAS makes the argument well we can manage heterogenous environments. Are you seeing in fact customers doing that managing heterogenous environments and how do you overcome that attach rate that happens EMC and the other vendors?

Well, generally, I mean, mostly what EMC is calling software today is really technology that is more of a firmware orientation that actually runs on the storage array, it does not actually run on the server. And very view of their products and solutions are actually heterogenous.

So again it goes back to the earlier question on the competitive landscape. The products we see competativly in the market have not shifted dramatically. If the products have not shifted dramatically, the bundling opportunities for those vendors has not shifted dramatically either.

With that -- with that said, the way you overcome it is generally, CIOs want to manage all of their environments with a single strategy or technology and not run the EMC environment with software from EMC, their Hitachi environment with software from Hitachi, and so forth. What VERITAS does, it comes back to the architecture, we give them a software-centric approach to manage a heterogenous environment that adapts their architecture for the future and it's an incredibly positive sale. It shows up when you start looking at the multi-platform business that you see.

What you see is our multi-platform number out there, we have started releasing that, being 10% of our deals right now. You know, that is just the indicator of people that are buying that way. You could almost assume the vast majority of people buying are Unix Software Solutions, a lot of them, probably more than half, or the majority I would say, buy on the basis of, they have the flexibility to move it to other platforms in the future, and license it and do everything the same way on every platform. So a predominant motivator.

This heterogenous strategy has worked for other vendors, and a pure software player with the heterogenous offering in the breadth of our solutions is that it's just an ideal business model. I love it.

Great, thank you.

We have time for one last question. We will take that from Jason Atler from Thomas Weisel Partners. Please go ahead.

Yes, thank you. Question, my -- the first question related to guidance.

Gary it seems like you are more positive about the business than on the last call. And yet your Q1 to Q2 guidance being flat speaks to me of maybe overconservatism given that there is seasonally, usually, a much better quarter in Q2 than Q1, so could you elaborate on why you have flat revenue guidance for Q2 and then we'll start with that.

Okay. Well, you know, that comes back to some of the spending questions earlier about has there been any phenomenal change or anything else? I think when you look at the industry reports out there that suggest relatively flat IT spending in general, and most of them cite that if there is going to be an acceleration, it's gonna be in the later half of the year. You know, we are really kind of aligning to what the industry analysts are telling us on visibility into the future based on their surveys and they're talking to lots of CIOs and our discussions, so when we look at it we look at Q1 and we say, Q1, as we mentioned has a sequential decline going from Q4 to Q1 based predominantly on seasonal spending but also the overperformance that we had in the 4th quarter. We had set an expectation around that potential for a decline if we had a strong Q4, and then going into Q1 the question is is there some economic or IT spending motivator out there in some significant way to change the trend going from Q1 to Q2. The answer is, right now, we cannot see a huge one.

As I mentioned, in the prepared remarks though, you know, I -- I definitely, and you said it as well, I definitely feel more optimistic about the outlook on 2003 than I did during our last call. You know, I continued, you know, to like the momentum we saw on our business in Q4, and I loved the -- the performance levels we delivered on the 4th quarter and our ability to demonstrate the leverage of our expense model, adding to the EPS was great, but, again, you know, you can call it conservative, you can put lots of adjectives around it, our viewpoint is, trying to accurately predict and not get ahead of ourselves. Yet, we are in a situation where we can leverage any opportunity that is out there. I hope we see much more upside and we are well prepared to take advantage of it.

For Q4, you would just characterize it as unexpected budget flush. Is there any other drivers, maybe for the backup business that you can talk about that may have created the outperformance?

It is really actually pretty hard to, kind of, call it even budget flush. I know that is the term that gets thrown around. I think, there is several things that contribute, there is the seasonal spending or the seasonal focus of our sales organization, you know, qualifying for club, trying to get off to the club event, meet their quota numbers, maximize their annual comp, that plays into it.

The other question is, did we have budget flush or did we have pentup demand based on two years of relatively stagnant spending. People at some stage you need solutions, and you need to implement your infrastructure and you need to get on with your IT operation. Did we see that? Or did we see what is characteristic of budget flush?

As I said, last quarter, I'm really not sure what it is, or -- and I'm also not totally convinced that in 2001 we had budget flush either, because in 2001 you had the September quarter that was interrupted by the tragedy of September 11th. Did you have budget flush last year, or did you in fact not have budget flush, you had left over spending from Q3. So there is just not a great way to trend line Q4 back to last year or even the year before.

So, you know, our belief on it, some seasonal spending, seasonal behavior of the sales force, pent up demand for our products, you know, lots of things contributing, probably some level of budget flush for some customers. But predominantly just kind of a seasonal nature of the business. And, going into Q1, you know, we continued to like what we see, but we're not going to get ahead of ourselves in any of our forecasts or projections.

There is nothing special that happened in the backup market that you can point to, NetBackup the new version of NetBackup or anything extraordinary?

New version of products never hurts you. I've never known them -- unless they don't work, but that has never been the case with our products. We had a very successful NetBackup 4/5 rollout. And as I mentioned, we just had a very successful launch of Backup Exec product, which is really our first major global launch we've done of a product. We had phenominal turnout in Japan, in the Netherlands, in several locations we were turning people away from the launch, simply not having big enough rooms to accommodate everybody.

That is a product that is heavily through the channel. It's a great product to throw into the channel earlier in the year, and I would expect and hope that we see some nice momentum out of the Backup Exec product into the channel as we go into the next year.

So I think, again, we have a plush pipeline of new products and platforms going into the year, we have a full year to sell them. All of that contributes to the momentum. But we are going to be a -- conservative until we see it.

Thank you.

Sure.

That concludes the question and answer period today. At this time, Mr. Bloom, I will turn the conference back over to you for any additional or closing remarks.

Okay. Thank you very much. And thank you everyone for participating in today's call. We're thrilled with our results from the quarter, and remain optimistic about 2003. Thanks again.

That does conclude today's conference. We thank you for your participation and you may disconnect at this time.