Gen Digital Inc (GEN) 2005 Q2 法說會逐字稿

Good day, everyone and welcome to the Symantec Corporation second quarter earnings release teleconference. Today's call is being recorded. At this time I would like to turn the call over to Mr. David Gennarelli, Director Of Investor Relations. Please go ahead sir.

Good afternoon and thanks for joining us. With me today are John Thompson, Chairman of the Board and CEO of Symantec and Greg Myers Senior Vice President of Finance and CFO. In a moment I will turn the call over to Greg. He will discuss our financial results for the fiscal second quarter, which ended October 1, 2004. He will also review the raised guidance for the December quarter and fiscal 2005 as outlined in the press release. John will then discuss the highlights in our performance. This will be followed by a q-and-a session. Today's call is being recorded and will be available for replay on Symantec's IR home page at www.symantec.com/invest. And in addition to today's press releases, a copy of our prepared remarks and supplemental financial information is also available on the IR website. Before we begin I would like to remind everyone that some of the information discussed on the call, particularly our revenue and operating model targets for the coming quarter and the fiscal year contain forward-looking statements that involve risks and uncertainties. These payments are based on current expectations. Actual results may differ materially from those set forth in such statements. Additional information concerning factors that may cause actual results to differ is contained in the risk factor section of the company's previously filed Form 10-Q. Lastly, in addition to reporting financial results in accordance of Generally Accepted Accounting Principles or GAAP, Symantec reports non-GAAP financial results. Investors are encouraged to review the reconciliation of those non-GAAP financial measures to the comparable GAAP results, which can be found in the press release in the IR website. And now I would like to introduce our CFO Greg Myers.

Thanks Dave. Good afternoon, everyone and thank you for joining us for today's earnings release. I am very pleased to provide you with the financial details for the September quarter, the second quarter of our fiscal year 2005. Net revenue for our September 2004 quarter was 618 million and grew 44% above the September 2003 quarter's revenue of 429 million. This quarter's GAAP earnings per share of $0.38 compared favorably to our GAAP earnings per share of $0.24 for the quarter ended September 2003. Non-GAAP earnings per share, which exclude pretax charges of 17 million from the amortization of acquisition related intangibles, deferred compensation amortization and restructuring cost was $0.41 for the September 2004 quarter. This was 52% higher than the September 2003 quarter's non-GAAP earnings per share of $0.27. Revenue by segment in the September 2004 quarter was as follows: The consumer revenue was 315 million and grew 63% over the September 2003 quarter. The quarter's growth as compared to last September, was primarily driven by the following: First, the continued growth in the threat environment despite a lack of high profile threats during the quarter. Secondly, a favorable currency effect, driven by the strength of the euro against the dollar and finally continued growth in the electronic distribution across our e-storefront subscription renewal business and OEM subscriptions. Enterprise security revenue of $225 million grew by 27% over the September 2003 quarter. And Symantec's enterprise administration revenue was 66 million and grew 36% more than the same quarter last year. This should be noted that the revenues from the acquisition of Power Quest and ON Technology contributed 19 million to the segment's performance. Excluding revenue from our recent acquisitions, the segment declined 4%. Service revenues of 11 million for the quarter grew 22% over the September 2003 quarter. International revenues of 321 million accounted for 52% of revenue and grew 51% over the September 2003 quarter. U.S. revenue was at 297 million. And the regional revenues were as follows: The Americas had revenue of 332 million and grew 38%. The EMEA region produced 201 million and grew 52%. And our Japan Asia Pacific region, had revenue of 85 million and grew 52% over the September 2003 quarter. This quarter's revenue growth was 44% and assuming constant currency from the September 2003 quarter, the effect on our revenue was a favorable 22 million. The growth rate for the quarter assuming no change in currency rates from the September 2003 quarter would have been 39%. The overall benefit to net income from currency was $11 million. Non-GAAP gross margin, which excludes deal-related intangibles, was 84.5%. This was just below the 84.9% in the prior quarter a year ago. In general, higher OEM royalties and increase in the revenue mix from our lower margin consumer products were the most notable contributors to the slightly lower gross margin percentage. Non-GAAP operating expenses, which exclude all acquisition-related intangibles, deferred comp charges, restructuring charge and IP R & D costs, were $313 million for the September 2004 quarter. As a percent of revenue this quarter's operating expense was 54.7% comparing quite favorably to the 55.2% recorded last September. In part, the improved spending as a percent of revenue has come from the scale associated with higher than expected revenue growth and lower than anticipated growth in head count. Head count at the end of the September quarter was 5,873 employees. This total included 481 employees from the acquired companies over the past three quarters. Head count growth from the September 2003 quarter excluding employees from our recent acquisitions, was 16%. Non-GAAP net income, which once again excluded all acquisition-related intangibles, deferred comp charges, restructuring charges and IP R and D costs, was $146 million. This compared favorably to our September 2003 quarter's non-GAAP net income of 91 million. Our balance sheet continues to illustrate Symantec's overall financial strength. Cash and short-term investments, net of 60 million of stock repurchase activity and $28 million outlay for the acquisition of TurnTide ended the quarter at $2.545 billion. Cash flow from our operating activities was about $235 million. The company's net accounts receivable balance at the end of the September 2004 quarter was 328 million, 103 million higher than last September. Day sales outstanding were 48 days as we exited the September 04 quarter, the same as the September 2003 quarter. Deferred revenue at the end of the September 2004 quarter was at 1.153 billion, up 434 million or 60% from last September. Given this deferred balance, or this deferred base of, about 420 million or 64% of our expected December 2004 revenue will come from the balance sheet. Now I would like to spend a moment discussing our expectations for the up coming December 2004 quarter and update our guidance for fiscal year 2005. As in prior guidance statements, it should be noted that our outlook assumes no significant changes in the current economic or competitive climates over the next six months as compared to the business climate we are currently experiencing as we exit the quarter. It should also be noted that the December quarters in the past have been seasonally strong quarters when compared to prior September quarters. We have assumed that this trend will continue. Finally, it should be noted there are a number of forward-looking statements in today's guidance. In order to clearly understand the risk involved, it is recommended that each investor review the risk outlined in our latest form 10-Q filing. As such, for December 2004 quarter our guidance is as follows: Revenue is estimated between $645 million and $665 million. GAAP EPS at the midpoint of the revenue guidance is forecasted at $0.41. And non-GAAP earnings per share at the midpoint of the revenue guidance for December 2004 quarter, excluding expenses related to the amortization of acquisition related intangibles and deferred comp charges of about 14 million is forecasted to be $0.43. It should also be noted that Symantec expects to call the convertible debt in early November. This activity will have no effect on our stated non-GAAP EPS guidance and if one assumes 100% conversion rate, this activity would have no effect on our stated GAAP EPS guidance. For our fiscal year ending April 1, 2005, we are revising our guidance to reflect the strength we have experienced in the September 2004 quarter. As such, our guidance is as follows: Revenue is estimates at $2.495 billion. This is 33% above our fiscal year 2004 results and is $90 million higher than our prior guidance of 2.405 billion. This increase is being driven by the exclusion of revenue from our previously announced acquisitions and by the strength of our consumer releases in the September quarter. Forecasted growth by segment for the full year is as follows: In the enterprise segment, 24% growth -- enterprise security segment. In the consumer security segment, 44% growth. Enterprise administration, 25% growth and our services segment, 19% growth. Deferred revenue is expected to be between $1.3 billion and $1.35 billion. GAAP earnings per share are forecasted at $1.54. Non-GAAP earnings per share for the fiscal year ending March 2005 excluding the amortization of acquisition related intangibles, deferred comp charges, restructuring charges and IPRD cost of 456 million is forecasted at $1.64 per share. This is up 39% over fiscal year 2004 and is well above our prior guidance of a $1.57. Now I would like to hand the call over to John to give you additional details on the quarter.

Thanks, Greg. As you heard, this marks another quarter of strong financial performance, underpinned by great execution in all of our major business segments and geographies. Before I go into the details on the quarter, I thought I would make a few comments about the current threat environment. We recently issued our sixth Internet security threat report, which provided an analysis of trends in Internet attacks, vulnerabilities and malicious code activity during the first half of this year. The report is based on data from our DeepSight threat management system, our managed security services customers and data from over 24,000 security devices deployed in over 180 countries. The study documented approximately 4500 new viruses and worms, that's four and a half times the number from the same period last year. This trend demonstrates that malicious code activity and virus activity is continuing to grow and not slowing down. It continues to be a driver for both our consumer and enterprise segments. Perhaps more interesting was the determination that the time between the announcement of a new vulnerability and the release of exploit code has continued to decline, now standing at 5.8 days. This means that organizations have less than a week to patch vulnerable systems, which in many cases is just not achievable. As you may recall during the September quarter last year, the Blaster worm wreaked havoc on networks around the world and drove an estimated 35 million in revenue up side for us. This year no malicious event captured the media's attention the way Blaster did. However, the total level of malicious activity continues to grow exponentially and our performance reflects that activity and the growing awareness level around the world. More and more, our customers are realizing they require both security and availability solutions to ensure the integrity of their information. Our enterprise business turned in a very strong quarter, growing a robust 29% year-over-year. Breaking it down we saw 36% year-over-year growth in our enterprise administration business and 27% year-over-year growth in our enterprise security business. And our services segment grew 22% over last year. On a worldwide basis, we are closing bigger deals, driven by the depth and breadth of our product and services offerings. As evidence, the total number of big deals we had, that is transactions valued at $100,000 or more, increased to a record 316%, a huge increase over September quarter of last year. Broken down, we had 68 deals over $300,000 and 10 deals worth more than $1 million. In addition, 56% of these transactions included multiple Symantec products or services. Some of our new enterprise contracts in the US included Storage Tech and Park Nicollet Health Services. Some international enterprise (inaudible) were high I- net, a service provider in the Australia New Zealand territory, Alenia Spazio, an Italian aerospace company, TELCEL, a wireless operator in Mexico. PartnerRe, an international reinsurance group and All Nippon Airways. This diverse group of companies illustrates the traction we are seeing in our global business enterprise business across many verticals around the globe. Our core antivirus business had another strong quarter and this continuing strength was reflected in a recent IDC report. In both the United States and throughout Europe IDC proclaimed Symantec as the market leader in the secure content management category for both the consumer and enterprise segments. I'm proud of our team's leadership performance in the face of tough competition. On the hardware front, we started shipping our new intrusion prevention appliance, the Symantec network security 7100 series offering multi giga-byte intrusion prevention. Available in three models, the 7100 series delivers varying levels of performance to meet the different bandwidth needs of our customers. CRN magazine awarded the 7100 series top honors and a five star rating. This product was released late in the quarter and we immediately saw very good traction. One significant win was the South Florida Water Management District. It represents a three-year seven figure deal that displaced a leading intrusion detection company, which had been very well entrenched. We were especially pleased with this deal as our services team drove it. The engagement was a total solution sell that included the 7100 for intrusion prevention, intruder alert for host based detection, all complemented by our managed security services and consulting services. Our 5400 series of integrated security appliances continued to gain acceptance in the marketplace. Sequential revenue growth was 43% and we closed a number of very nice six figure deals including two with large energy companies. We also had impressive growth with our new Symantec gateway Security 300 series which saw unit volume increase more than 50% from the June quarter. The 300 series is targeted more towards the SME market segment. This quarter we plan to role out our 400 series of integrated security appliances. The 400 series will expand our segment focus to include the remote branch office environment. It will deliver all the capabilities of the 300 series, along with central management functionality. On the secured e-mail front, the integration of Brightmail and TurnTide has gone very well and we've experienced great traction across the board in the enterprise segment. Recent wins include a wide variety of vertical markets. We recently landed a significant multi-year multi-million dollars deal with the US Army to provide our Brightmail anti-spam solution for their Intranet, which has over 1 million mailboxes. This competitive win displaced the incumbent primarily due to the performance and exceptionally low false positive rate of the Symantec Brightmail Solution. We also launched our new online anti-fraud service call the Symantec online fraud management solution. This is a comprehensive solution that helps financial institutions and online retailers mitigate e-mail related fraud and protect their brand. Our enterprise administration group generated approximately 66 million in revenue for the September quarter, which represents a 36% increase versus the September quarter of last year. Key to this growth was the contribution of our recent acquisitions of PowerQuest and On technology. Our enterprise administration products are earning high marks from our customers, as well as industry watchers. Live state recovery, a new release of the B2-I protective product was recently honored with the data protection product award at a large European trade show event, dedicated entirely to data management. Our customers are especially impressed with the speed with which live state recovery can restore a crashed server. Literally in minutes. PC magazine in the U.S. and Germany's computer bill put Norton Ghost 9.0 through its paces in a bakeoff against the competition and Ghost captured the top spot on both sides of the Atlantic. The review points to a number of enhancements and features such as hot imaging, incremental backups, the ability to restore the system to the state it was in at a specific time. All of which are important functions in helping customers maintain the integrity of their systems environment. Our services business generated approximately 11 million in revenue in the September quarter, an increase of 22% compared to the same period last year. Our largest component, the largest component of this group, our managed security services business grew 24% year-over-year. The MSS market is entering an interesting stage. The pricing environment is very unstable and undisciplined, I might add, as we regularly see competitors, new and old, vie to buy market share, regardless of the underlying costs of the service. In our view, the current pricing environment is not sustainable and we will continue to monitor it and compete aggressively, but with an eye towards value delivered, not price. As most of you know, we announced and closed the acquisition of two services companies in the last few months. The first of these is @stake, a leading digital security company with offices in the US and Europe. @stake brings Symantec a great group of skilled consultants experienced in vulnerability and risk assessment. By joining forces we significantly expand our consulting organization, there by allowing us to help our customers better secure their applications. We also announced and closed the acquisition of Lyric Associates, a UK based consultancy that offers expertise in assessing the security needs of highly complex global networks and designing the architectures and policies to secure those networks. Both of these acquisitions increased the capacity and capability of our global professional services group. They also represent a strong complement to our current technology offerings and tremendous opportunities for a network of partners. As Greg mentioned, our consumer business grew to a record $315 million, a 63% increase compared to the September quarter last year. The Norton brand continues to show its strength in the marketplace. Our suite product, Norton Internet Security grew a 148% year-over-year, the value proposition of the suite versus single point AV products continues to resonate well with our customer base. Together with our partners we continue to focus on migrating our customers to the more feature rich suite, thereby offering better protection to address the rapidly changing threat environment. Once again, the retail distribution channel accounted for the largest share of consumer revenues. Even with the tough compared to last year, it achieved very, very strong year-over-year growth. Electronic distribution, OEM, and subscription renewal channels contributed 159 million to revenue in the September quarter, an increase of 85% over last year. On the product front, we continue to add features and functionality to all of our software offerings and during the quarter the consumer team released seven new versions of our award winning Norton products, a truly impressive feat for our team. Just last week Norton Personal Firewall 2005 was honored with PC Magazine's Editor's Choice award for the fourth time in five years. Norton Antivirus 2005 won the Editor's Choice award for the ninth consecutive year. now that's a phenomenal one, the consistency like that just doesn't happen. We have a team of fiercely dedicated security and software experts that pride themselves in building the best products in the world. One important new offering for our OEM partners is Norton Security Center. It monitors the users' PC to ensure that anti-virus and firewall protections are installed and functioning properly. It not only detects and displays the status of Internet security programs from Symantec but those from other security providers as well. Importantly, it also enhances the users experience by offering one step remediation if the product is not activated or is out of date. Symantec has OEM agreements with many of the world's largest PC manufacturers and the Norton security center is now shipping with three major PC vendors and we expect others will be added over the next few quarters. Our products and our brands are the most trusted names in Internet security and the fact that these PC manufacturers are working with us to provide their customers with a safe and easy to use environment speaks volumes about their confidence in us. Finally, next week we are planning an important marketing launch that will focus on the security and availability of digital information. Digital information has become a powerful and influential phenomena affecting our lives in many ways. In fact, many believe a substantial part of the world's economy revolved around the use of and movement of digital information. It is the powerful enabler, but only if it is both secure and available. We must trust the integrity of the information we've come to rely on to make important business and personal decisions. And as our Internet security threat report suggests, this information is under attack more than ever before. Our marketing campaign will focus on a concept we are calling information integrity. Our objective is to demonstrate to customers how the solutions we offer today can help them improve the confidence they have in the integrity of their digital assets. So in closing, I'd say we had a very solid quarter, capping off a terrific first half of our fiscal year. As we heard -- as we head into what traditionally has been the strongest half of our fiscal year, we are very confident in our outlook. Our confidence is underscored by our board's decision to announce a two for one stock split, our third in three years, as well as the extension of our $60 million quarterly buyback program through the March quarter of 2006. Our company with the diverse customer base, broad product portfolio and network of value added partners continues to demonstrate its ability to outpace the industry. I'm certain these strengths, coupled with our team's strong focus on execution will lead to another record year. So, Dave, I will turn it back to you.

Thanks, John. Operator will you please begin polling for questions? While the operator is polling for questions, I would like to announce that Symantec plans to attend the following up coming conferences; Prudential Technology Conference in New York on October 28, the Morgan Stanley Software and Internet conference in Phoenix, on November 2nd and the Goldman Sachs Software Conference in New York on November 8th. And for complete list of the investor related events please visit our events calendar on the IR web site. And with that, operator, we are ready for the first question.

Thank you. [Operator Instructions]. We will go first to Chris Russ with Wachovia Securities.

Hi, guys. Question John, regarding the Brightmail acquisition. What does demand look like for anti-spam currently? Is it as strong as you expected? Also if you could, may be quantify the contribution from Brightmail in the quarter? And then is Brightmail helping to sort of spur sales for your overall gateway Antivirus solution?

Brightmail did very, very well in the quarter. Candidly, better than our expectations. While we have not announced nor do we plan to announce the specific numbers around Brightmail. I just ask that you trust me that it was well above our planned level. With respect to whether or not it is helping us in other areas, the Brightmail solution today is still a stand-alone solution. While it has been re-branded, we still sell it as a stand-alone offering. Over time, the team certainly would expect to integrate it into the gateway security solutions both in the appliance and our mail security offering that integrates with AV.

Okay. And you mentioned that large win with the U.S. Army. Was that, did that contribute to the quarter? Or is that something that is going to be recognized over time?

It contributed some but remember, Brightmail is a ratably recognized business. And so its contribution to the quarter was de minimus.

Okay. And in the past you have mentioned the year-over-year growth rate for just enterprise anti-virus, you know which is the largest portion of enterprise security? What was that percentage this quarter?

It was about 30%.

About 30%. Okay, thank you.

And we will go next to Sarah Friar with Goldman Sachs.

Hi, this is Elizabeth Wesson for Sarah Friar. I wanted to ask a question on your growth rate for the individual business section? You have suggested that growth rate for fiscal year 05 in the consumer business will be 44%. And given the 63% consumer growth in this quarter and 66% last quarter and then heading into your seasonally strongest quarters, it seems somewhat conservative. Just wondering why the conservatism in there. And then on the enterprise administration growth rate if I'm not mistaken, it looks like you have taken that down slightly. Why the downward revision there?

Well, let me make a couple comments and then I will turn it over to my buddy with the numbers here.

Okay.

The first of which is, we have never been conservative. We have always tried to give you our best view of the market. And as we head into the second half of our year, particularly around the consumer business, we are facing some very, very challenging compares. And so I think it would be inappropriate for us to assume that the growth rate in the first half will continue in the second half, given the size of the compares that we have got.

With respect to the enterprise administration business, we are quite pleased with the way PowerQuest and On are performing. But underneath that is a pcAnywhere product in the segment that is declining far more rapidly than we had anticipated when we booked our plan and gave you our guidance back in February of this year. So what this new updated segment information reflects is our best view of each of the segments based upon historical performance and a future outlook for a particular set of products that are coming under stress, particularly pcAnywhere. Greg, you want to comment more?

Sure, just a couple of comments. On the consumer product lines, recognized we don't assume events in our forecast. So we are fundamentally assuming run rate businesses to accelerate for seasonal up lift. So, we do forecast seasonal up lifts. And John is very correct when he says the comparable are going to get very difficult. The Blaster had a significant increase on our December 2003 numbers. And that comparable will be tough to sustain 60 plus percent growth rates again. Secondly on the SEA side, the low end of the PCA market continues to run into some very stiff competition and SEA is down slightly because of lower, lowend growth rates on pcAywhere.

Great, thanks, guys. And then just quickly a follow-up question on the spam market. How big is an opportunity do you think that is for you longer term relative to the anti-virus market? And then in terms of pricing in that market, are people willing to spend as much per seat as they are in anti-virus?

Well, they have been varying market forecasts for the size of the anti-spam market. As we were doing our analysis to look at acquisitions in this space, which led to the decision to acquire Brightmail, there were some market analysts that forecast numbers as big as a billion dollar market by 2006-2007. Our sense is that customers over time will look for a more integrated solution, not an AV or AS solution and hence, that's why the capability that Brightmail brings to us is so fundamentally strong particularly at the gateway.

As far as pricing, today those offerings can be priced discretely. However, we are not convinced that over time that level of discrete pricing will be maintained. We are certainly seeing that in the consumer markets, but we haven't seen it yet in the enterprise segment.

And we will go next to Rob Owens with Pacific Crest Securities.

Hi guys, great quarter on the enterprise front.

Hi, thanks Rob.

Actually this is Jake Rossman(ph) for Rob.

Okay, Jack.

I have a few questions. If you could kind of breakdown the enterprise business a little bit more and what you saw particular strength with. Was it more on the AV or was it in actual appliance based?

Our AV was strong, as I noted from the prior question and in my planned comments. But we also had good strength in the appliance side of our business. If ever there was a soft spot, which I believe is seasonal, it would be in the management technologies because ESM, which is the principal offering for us in that space, those tend to be longer sell cycles. Customers are motivated more in the December quarter, if you will, than in the doldrums of the summer.

We have good performance in the anti-spam segment. In addition to that, if you come out of security, still in enterprise, what we saw was good MSS performance, 24% growth there and good performance with our PowerQuest and On Technologies.

Okay. And then what were you guys seeing on the inner intrusion prevention with the 7100 series? And how are sales going with that?

It's early. It only has been in the marketplace now about 60 days. We had one very, very large win, one that I was quite pleased with because it showed the full capability of Symantec. Our technology, our ability to manage customer's environments after we helped them go through the consulting process to figure out how to deploy the technology. That's the kind of solution-oriented sell we have been striving to position Symantec to be able to take advantage of. And the 7100 over time we hope will be a big contributor to our overall revenues.

Okay. Also on your DSOs, I noticed it increased eight days. Was that just mainly due to large deals that closed like in the last few weeks?

Well, actually on a year-over-year basis it was consistent with the September quarter last year. And so, looking at it sequentially, you might see a modest increase, but year-over-year it has the rhythm consistent with prior years' performance.

Yes, sequentially DSO in September will always be higher than say the prior two quarters. And the reason is as we reset our entire receivables as we re-launch all of our consumer products. So fundamentally the channels are sending back the old products and then restarting their aging with the new products. The 48 days is a very good number as you compare it to September 2003.

Okay, thanks, guys.

We will go next to Michael Turits with Prudential Equity Group.

Hi, guys, it's Mark Griffin (ph) here for Michael. Just one specific before I go general. Right now I understand the revenue is de minimus, but will that be going into the enterprise security segment? Is that where that's going to be?

I couldn't hear you. I am sorry. Can you speak up?

I am sorry. The Brightmail, I understand the revenues were de minimus this quarter. But will that be going in the enterprise security area?

Yes, it will.

Okay.

I never said they were tde minimus. I just said we weren't going to break them out.

Well, I think Dave said there were minimus there or somebody else was not correct?

Now, the question was regarding one particular deal.

Okay, then. That's, that's good to know, good to clarify. Thank you. You commented on pricing in the services area. Can you comment on the pricing environment in the rest of the business? Say enterprise security, more specifically?

Candidly, we didn't see anything that was out of the norm with respect to product pricing in the quarter. We continue to compete for spot transactions and you'll see a one-off deal occasionally. I would say in the main, pricing was fairly constant. I suspect in the managed security services space, what you are seeing is a fairly crowded market now with market growth being a little bit below what might have been forecasted by some of the industry analysts. And therefore, the crowd of competitors are thrashing around trying to find any deal that they can book. We are going to be a bit more disciplined than that. And we are going to do deals where we think we deliver real value and can extract real cost, or real price, if you will, from customers for that value.

Okay. The other question, do you expect in the same enterprise security area any year-end budget flush? And in more general, the overall IT environment, do you see the deals getting, the cycle stretching out? Do you think there'll be a budget flush this quarter and you know just the environment out there?

Well, security has been an environment where customers have continued to spend over the last few years. And so I don't anticipate any extraordinary increase in spending in the December quarter compared to what the historical performance has been of the segment over the last two or three years when the overall IT environment has been fairly tight. We did see a few transactions in the federal government in the September quarter that were a function of fiscal year ending money, but that's more the exception than the rule. I wouldn't say that's going to necessarily portend anything huge or big for the commercial segment in the December quarter.

Sounds good. I appreciate it. Thanks.

And next to Todd Raker with Deutsche Bank.

Hi, this is Brian Fackly (ph) for Todd. Just a quick a question with regards to Service Pack 2, can you talk about any impact you are seeing on the consumer business are there from a renewal rate standpoint or from a higher cost standpoint?

Actually we have seen no impact yet from Service Pack 2 to speak of. And if anything, we believe that as Microsoft puts more marketing energy and muscle behind Service Pack 2 and security, we would expect to see up ide there. We have the most powerful brand and the best set of products in the area. And so as more awareness is generated we expect to be an enormous benefactor from that process.

Hi, John, it's Todd. Can I follow up with another question?

Sure. How are you doing, Todd?

I am doing well. Nice quarter.

Yeah. Thank you.

If you look there is an announcement out of Dell this afternoon talking about bundling spyware; Firewall, AV in one capability in their product starting November. And the implications are in the announcement they are going to bundle it for free although the vendors that they work with will be able to charge for an ongoing subscription. Can you give us some insight; one, into that particular situation and two, if you talk more broadly about the spyware issue? Since it is a massive issue and no one has got a product that adequately addresses it. How are you guys see yourselves planned in the spyware market?

Well, let me talk about the OEM preload market in general. The standard model for most companies is to preload a trial version of a product, be it ours or someone else's, free for a period of time, if the customer decides they don't want it at the point of sale. Hence when they are on the phone with a support rep or a contact rep. And then we as the supplier or some other supplier is given the opportunity to remind that customer over the trial period of the value that they've gotten, hoping that they'll sign up, if you will, for the service for the next 12 months. That's been the Dell model in any -- and many other company's models for quite some time to come. So there's nothing there that is new, particularly new.

With respect to spyware it is a rapidly growing problem. Our products today detect the presence of many of the malicious code problems associated with spyware. The challenge is the clean up tools and the management process for cleaning these things up in a large enterprise environment. While we have some detection capability today, you'll see a broader offering from us in the very, very near future.

Okay. Thanks, guys.

Next to Daniel Cummins with UBS.

Thanks. Just following up on that, broader in the sense of real strong remediation capabilities, John?

That's the number one issue.

Right, okay.

That is the number one issue. That applies both to consumers and enterprises. And at the enterprise level, what you need is the manageability of that remediation capability. And you'll see that in both our consumer offering and our enterprise offering very shortly.

Great I wanted ask about the 5400 and integrated appliances you know obviously you guys have been a pioneer thinker and doer on this for a number of years. I am a little surprise to see a number of industry observers kind of giving a edge apparently at least to Fordanet (ph) in terms of market share and capability. What are you thinking about here in terms of the product's capabilities and its - how well it is favored in the channel and how much revenue do you kind of see coming from the 5400 in let's say calendar 05.

Well, we don't give product forecast, revenue forecast as you well know. But let me comment about the 5400. You're right to suggest that we have been innovators here and you are right to suggest that it's an important product for us. Where we have seen shortcomings have been in the perception of the performance of the firewall in particular, and companies that have chosen to implement an ASIX oriented design, have been able to get better performance out of their product than we have been able to get out of ours.

And so in performance sensitive environments where they want to run many, many of the apps, hence it carries six or seven apps in the box, performance degrades over time and an ASIX basics base design will yield better performance. We will continue to look at ways in which we can enhance performance, but we intend to be in this business for a while to come and we intend to compete with Fordanet and others who may not have the same global scale or capability that we do.

Thank you, John.

We will go next to Peter Cooper with Morgan Stanley.

Great. Thanks very much. Two quick things and the same thing here. We talked before about the competitive environment. John, if you talk a little about Trend Micro, and their stuff, they mentioned some strategic wins "against you", and maybe we can interpret what that means and then of course you have the CA Microsoft they were putting into XP, it looks to me I felt it was a significant move by Microsoft. Any comments on that?

No.

You never have no comments John, come on.

I guess when you're the biggest in the space, you're always everybody's target. So if people want to pound on their chests about winning a deal against us, more power to them.

Okay.

Every time I get a chance to stomp on Steve, I do.

What about the Microsoft CA thing. Even just generically we are worried about pricing pressure in most enterprise class products, consumer has been the exact opposite. Are you seeing major pricing power year-over-year now. Will this change those dynamics at all or are you not worried about that in your future?

There's an old adage, you get what you pay for. If they are giving it away for free, they must not think its worth much. We have not seen a slowdown in our consumer business. It grew 63% in the most recent quarter. This is a business that a few years ago was a couple hundred million dollars a year. This year it will be over a billion dollars.

And so it's hard for me to imagine that Microsoft's entry or some little deal they are doing with someone else is going to cause people who have come to trust our brand and trust our products to turn their back on us. One, we are not going to sit still and allow that to happen. Two, there is enormous value that has been created here that we are not going to just walk away from because Microsoft decided they wanted to do something.

All right, fair. Final thought, you mentioned data integrity, which is been something we have been looking for some time now. Could you just clarify a little more on what products people are looking for in that you would offer? There's a number, of course, but the highlights that you may think you benefit from the final adoption towards protecting the data itself?

The concept actually is information integrity. What it focuses on is the marriage between the security technologies and services we have and the availability products and services that we offer. So in the security domain it's the classic set of products tied to a set of management capabilities, but in the availability domain it's about server and storage backup and recovery capabilities. It's about provisioning of devices and understanding the state of devices. It's about doing those things in a realtime basis so you can mitigate the risk associated with either a system or network outage or attack.

So it's tying together all of the capabilities that we now have in our portfolio, both from the product point of view with security and availability products and from the services point of view with this incredible team that we are building around the world.

Gotcha. Thank you and congratulations.

Thank you.

Next to Joseph Craigen with Needham and Company.

John, based on what you had to say earlier in the prepared remarks about wanting to migrate consumers into the suite, I am assuming that played into not racing renewal prices on the suite. If so I know it's still early here, but what have you seen so far with upgrade rates from AV to the suite and also what are you seeing with renewal rates on the AV?

If you notice that Norton Internet security product continued, as I stated in my planned comments, it's record triple digit performance, 148% year-over-year revenue growth for Norton Internet security. Our customers see the value in the suite. Because it protects them from a broader range of threats than ever before. And if rebate coupons and some of the other things we watch are an indication of their interest, I think we are doing just fine. The real measure is, how rapidly is NIS or Norton Internet Security growing, juxtapositioned to our more traditional AV product in the consumer space

And just kind of from a high level here with this price increase, what are you thinking overall the impact of this price increase will be relative to previous price increases?

Well, on a percentage basis it's clearly not as big as prior years. I mean, this is $5 on $20, whereas last year it was $5 on $15. And so, what you'll see is the inherent boost to revenue from a growth rate point of view start to dampen down somewhat as the base gets bigger, from which we are upgrading or renewing our customers But, what it does say to us is that at least so far, over the last three or four years that we've done this, there is real value in what we deliver. And consumers are willing to pay incrementally more as long as we perform.

So should I interpret that to mean that on a percentage basis the increase may not be as big, but on an absolute dollar basis it may be?

Well, I'm not going to talk about future pricing here. I'm only talking about what we've done so far. As you well know, we do our analysis of demand and market elasticity every year as we look to launch new consumer capabilities. We'll make a determination next year as to whether or not there's demand and elasticity from which we can deliver more product. This year we only raised the AV price because our motivation was to try to convince our customers to see the value in the suite. And we believe that's important for them, because it gives them better protection.

Okay, thank you.

[Operator Instructions]. We will go next to Walter Pritchard with SG Cowen.

Hi, John, just on the large deal activity, I noticed a pretty big pick up in that this quarter. You had some commentary around that in your prepared remarks. I was just wondering if you could you expand a little bit on that? I calculated maybe even large deal activity doubled year-over-year just trying to get a sense --

It was over double, Walter. It was 130-some percent increase over last year. What it says is what we've known all along is that an investment made on a sales rep today starts to bear big fruit six to nine months from now. And we have been building this sales team around the world for the last three years. So they are starting to hit their stride. You couple that with a broader product portfolio and more services capability, they have a lot more confidence now to go in and sell the Symantec solution as opposed to an AV product alone.

I think our regional leaders around the world and Tom Kindra (ph) is our new sales leader have worked on the lot of the processes to improve our visibility into the pipeline and how we manage the pipeline for transactions. I'm quite pleased and I would forecast that that trend is going to continue.

Okay and then on the services side of your business, you made two acquisitions. Are you satisfied at this point that you have enough services capabilities or should we expect to see you--

I'm never satisfied with anything, Walter. You should know me by now. The reality is, the demands for security solutions, products and services, far outstrips the market's capabilities. Ours and everyone else's. So where we see opportunities to add services, perform professionals to our team, our product technologies that will distinguish us, we will continue to do that.

Okay. Thanks a lot.

Next to Tom Burke with Smith Barney.

This is Peter Gayne for Tom Burke. Great quarter guys. Just a question on the non AV enterprise side. You gave a lot of great color. Can you talk about A) about the competitive landscape you're seeing in the different markets, B), you gave a growth rate for the enterprise anti-virus side, would you be willing to give a number for the non-AV side?

We don't track and post numbers on non-AV growth. But let me - I think a better way of thinking about the looking at the environment is just look at what all of the companies in the space have talked about. The big networking company said their security business was down 2%. Another smaller networking company with a big appliance business said theirs was down 10% over their expectations. A couple of smaller integrated appliance companies missed their forecast.

So it speaks to how challenging, perhaps, the market is for some. We have done okay. Could we have done better? Certainly. I would have loved to have done better. But I'm pretty pleased with our performance in the face of what appears to be pretty tough time for everyone else in the marketplace.

Okay, great. Just a second question in terms of cash flow, you didn't give a cash flow statement this quarter. Could you talk about operating cash flows and your CapEx for the quarter.

Operating cash flows for this quarter -- from operating activities were 235 million which is an extremely good quarter for a September quarter which is usually a tough cash period for us as the channels start to re-morph themselves on the receivables side as we as we launch new products. Cash at 2.5 billion was up by orders of magnitude sequentially. I don't know, we are starting, the scale of the business when it comes from cash is starting to get very powerful. We continue to want to invest in OpEx at a higher rate, we continue to want to hold our margins flat. Still when the revenues scale beyond expectations, this machine will produce a ton of cash.

Okay and the capital expenditure side, do you have a number there, too?

Yes, I do. The net change was -- on a net basis was $9 million and that's fundamentally around some investment in some facilities and some investments in internal customer facing software programs.

Great. In the future can we expect to see a cash flow statement with the release or will we have to wait for the Q for that?

You'll have to wait for the Q.

Okay, thank you.

Next to Gary Spivak with Stanford Financial Group.

Thank you, I echo my congratulations on the quarter.

Thank you.

Couple of questions relative to Microsoft, John. First, with SP2 and the interaction between Norton Security Center and the Windows Security Center and how do you see that playing out overtime or in the near term as well. And then if you can just comment on other things that Microsoft is doing in things like storage and disk management and how you view that?

Well, with respect to the Norton security center, I think the fact that a number of leading OEM manufacturers have chosen to pre-load our solution on their machines, given some of the functional advantages that it has speak volumes to both our relationship with them and the technology that we are able to deliver compared to Microsoft. And so, I'm sure as has always been the case with Microsoft, they will continue to enhance their product. And our challenge is to make sure that we continue to outrun them, as we certainly have in the security domain for a long, long time

With respect to their planned actions in the storage management space, they made an announcement a number of weeks ago for a set of offerings that as best I could tell are targeted for late 2005. And so I suspect a lot will change for us and for them between now and then. Let's just watch this space.

Okay, thank you. a

[Operator Instructions]. Next to Nitsan Hargil with Friedman, Billings, Ramsey.

Good evening, guys. Congratulations.

Thank you.

A question, are you willing to break out for us possibly the revenues -- the total revenues you recognize from all the different acquisitions you've done over the past year, so we can have a essentially an apples to apples comparison?

No, we cannot.

Okay. Also in the past you gave us an indication that about 85% of the business was connected to anti-virus. Can you give us an update on what that number is now?

Actually that number is a bit lower now. That number is somewhere in the 75 to 80 range now.

Okay. Thank you very much.

Okay.

And next to Garrett Bekker with Tradition.

Hi, John. Just with the 71 series coming out, I was just curious as to maybe what your thoughts were on that market. I know from past conversations you had commented on maybe pricing being a little unstable and maybe some concerns about the health of that market. I was just wondering what your views are on that right now?

Well, I don't think my views have changed just because we've got a new product. I hope our outlook changes. But the reality is the whole intrusion detection and intrusion prevention market has been just very, very tough for everyone and may be more so for us. I say part of that is our execution. Part of that is just the market.

Okay, great. Just one question. With respect to Microsoft and Cisco, it seems like they have been a lot more visible in terms of making more noise and also Cisco has been running a lot of TV spots about security. As they seem to be making more of a push on the security front, I'm just wondering how that may impact you guys in terms of maybe your marketing spend or some marketing campaigns you might run in the future?

Well, we think that the work that Cisco and Microsoft are doing around the NAK, NAP programs, hence those compliance initiatives to try to drive a standard, is a good thing. That will be good for us. More importantly, it will be good for our customers. And so the fact that they have had a joint announcement, I think the industry in general should view that as a positive. With respect to their marketing activities, well I wish I had their marketing budget. Because if I did, given our products, we would blow their doors off.

Great. Well, thanks very much.

And that does conclude today's question-and-answer session. At this time I would like to turn the conference back to Mr. Greg Myers for any closing or additional comments.

I just want to thank everybody for participating today. And if you have any further questions, please direct them to Investor Relations at 418-517-5175. Thank you.