Gen Digital Inc (GEN) 2006 Q2 法說會逐字稿

Good day and welcome to Symantec's second quarter 2006 earnings conference call. Today's call is being recorded. At this time I would like to turn the call over to Ms. Helyn Corcos, Vice President of Investor Relations. Please go ahead.

Thank you and good afternoon. With me today are John Thompson, Chairman of the Board and CEO of Symantec, and Greg Meyers, Senior Vice President of Finance and CFO. In a moment, I will turn the call over to Greg, who will discuss our financial results for the fiscal second quarter which ended September 30, 2005. He will also review Symantec's guidance for the December 2005 quarter and fiscal year 2006 as outlined in the press release. John will then discuss highlights of our quarterly performance. This will be followed by a question-and-answer session. Today's call is being recorded and will be available for the replay on Symantec Investor Relations home page at symantec.com/invest. In addition to today's press release, a copy of our prepared remarks and supplemental financial information are available on the Investor Relations website. Before we begin, I would like to remind everyone that some of the information discussed on this call, including our projections regarding revenue and operating results and merger-related activities for the coming quarter and fiscal year, contain forward-looking statements.

These statements involve risks and uncertainties that may cause actual results to differ materially from those set for the in the statement. Additional information concerning these risks and uncertainties can be found in the company's most recent periodic reports filed with the U.S. Securities and Exchange Commission. Symantec assumes no obligation to update any forward-looking statements. In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, Symantec reports non-GAAP financial results. Please note that our combined non-GAAP financial results include the historical results for Symantec and VERITAS for comparative fiscal periods. In addition, our non-GAAP results include deferred revenue that has been eliminated from our GAAP results as part of the purchase accounting for the acquisition of VERITAS and adjustments related to the fair value of assets acquired and liabilities assumed as part of the acquisition, and exclude certain non-GAAP expenses net of tax.

Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP results, which can be found in the press release and on our Investor Relations website. And now it is my pleasure to introduce our CFO, Greg Myers.

Thanks, Helyn. Good afternoon, everyone, and thank you for joining us for today's September quarter's earnings release, the second quarter of our fiscal year 2006. GAAP revenue for our September 2005 quarter was 1.056 billion and non-GAAP revenue was 1.192 billion. Non-GAAP revenue includes 136 million of deferred revenue that had been eliminated from our GAAP results as part of the purchase accounting associated with the acquisition of VERITAS. On a non-GAAP basis, revenue grew 8% over the September 2004 quarter's pro forma revenue of 1.103 billion. September quarter's fully dilated GAAP loss was $0.21 per share. The loss was driven primarily by the write-off of 284 million in IPR&D expense associated with the acquisition of VERITAS, in addition to other merger related acquisition and restructuring charges. Non-GAAP fully diluted earnings per share for the quarter was $0.23, up 21% as compared to our non-GAAP earnings of $0.19 last September.

Our non-GAAP earnings per share excludes the write-off of IPR&D, the amortization of acquired software and intangibles, the amortization of deferred compensation and integration and restructuring expenses associated with the company's M&A activities. Non-GAAP revenue by segment for the September 2005 quarter, which includes 136 million of VERITAS deferred revenue that was eliminated in the GAAP accounting, was as follows: Consumer revenue was 346 million, 10% over the September 2004 quarter. It should be noted that in the September quarter as we launched our new consumer products, we raised our renewal prices on a number of products which moved our 2006 new license sales to full deferral from what previously had been about a 70% deferral rate. The impact of this change on our revenues during the quarter is estimated between 25 to 35 million.

In addition, it should be noted that consumer sell-through during the quarter appears to have slowed as compared to prior September's. This slowing is most likely a combination of the late release of our 2006 consumer products in the quarter, a lack of high profile threat activity and competitive pressures across the various consumer channels. Because of the amount of revenue that comes off of our balance sheet, we believe that this slowdown in sell-through during the quarter did not have a significant effect on our September revenues. However, the slowing of sell-through in the period will have an effect on our outlook. Enterprise security revenue totaled $259 million, 11% over the September 2004 quarter. Strong growth from our enterprise antispam solutions and our managed security services offerings was offset by single-digit growth from our enterprise AV solutions. The lower than expected growth in our AV solutions was driven mostly by weakness across our middle and high-end AV market segments.

Our storage management segment, which includes Symantec's cloning and imaging products and VERITAS' Foundation Suite and Utility Computing solutions, delivered 254 million in revenue and grew by 6% over last September. Within this segment, we continued to see a decline in our pcAnywhere product line with revenues falling 28% from last September. In addition, solutions acquired from VERITAS comprised about 75% of the revenue and grew by 11% over last September. Data protection revenue, which is comprised of Backup Exec, Net Backup and Enterprise Vault solutions, delivered 289 million in revenue for the period and grew by 2%. Services revenue, which is comprised of consulting and education services, was 44 million for the quarter and grew 41% as compared to the September 2004 quarter. International revenues were 578 million this quarter and comprised 49% of non-GAAP revenues.

International revenue grew by 15%, with EMEA and Asia/Pacific Japan growing 11% and 25% respectively. U.S. revenues for the quarter were 614 million and grew 2%. The estimated revenue benefit on the September 2005 quarter from currency on a non-GAAP basis, as compared to the September 2004 quarter, was a favorable $2 million. Non-GAAP gross margin was 84.6% for the September 2005 quarter, in line with the 84.4% posted last September. The most notable cost elements within the gross margin line are consulting services, support and OEM royalties, comprising over 75% of the cost. Non-GAAP operating expenses of 645 million were 54% of revenue for the September 2005 quarter. This was the same as the expense to revenue ratio in the September 2004 quarter. The most notable element in our expense lines continues to be headcount. Headcount at the end of the September 2005 quarter was 14,557 employees, 14% higher than our combined headcount last year.

Non-GAAP net income was 273 million for the quarter. This was 16% higher than the September 2004 quarter's non-GAAP net income of 235 million. Symantec's balance sheet continues to show significant strength in relation to our liquidity requirements. Cash and short-term investments at the end of September were at 4.4 billion and comprised 24% of total assets. It should be noted that during the quarter we added 2.9 billion from our combination with VERITAS. Our most notable cash outlays during the quarter were the payoff of a $500 million short-term note associated with the VERITAS foreign cash repatriation and the repurchase of 84 million shares valued at about 1.8 billion. We expect to complete the stock repurchase by mid to late November. Cash from operating activities during the quarter was 472 million. The company's net accounts receivable balance at the end of the September 2005 quarter was 444 million. Day sales outstanding was at 34 days. This was well below our internal expectations of high 40s as we began the quarter.

The delayed release of our 2006 consumer products was the most notable difference from our expectation at the start of the quarter. GAAP deferred revenue at the end of the September 2005 quarter was 1.512 billion. Non-GAAP deferred revenue at the end of the quarter was 1.738 billion, including 226 million of VERITAS deferred revenue that was eliminated as part of the purchase accounting for the merger. On a non-GAAP basis availability products represented 28% of the balance with security products making up 1.250 billion. The security balance is up 8% from last September, although down sequentially from the June 2005 quarter by 2%. The lower than planned deferred balance has been negatively affected by the late release of the 2006 consumer products and weaker bookings across the mid-and high-end tiers of our enterprise AV business. Now I'd like to take a moment to review our outlook for the December 2005 quarter and our expectations for fiscal year 2006.

As in past forecasts, our views represent our environments as we are exiting the September 2005 quarter. To the extent there are abnormal changes in the competitive or economic landscapes over the next two quarters, the forecast would need to be adjusted. It should also be noted that our outlook has been influenced negatively by a weakness in consumer sell-through during September, the late release of our consumer products and competitive pressures across the mid-and high-end of our enterprise business. In addition, as we integrate our storage and security business, there will be pressure toward higher deferrals as we link our transactions. On a favorable note, the December quarter should be positively influenced by the holidays, a very strong renewal season for our consumer markets and what is usually a strong corporate renewal and new license period for both our enterprise security and availability business. For the December 2005 quarter GAAP revenue is estimated at 1.165 billion. This excludes 98 million of deferred revenue that was lost through the purchase of VERITAS.

Including this deferred revenue, our non-GAAP revenue view for December is at 1.263 billion, 6% higher than the non-GAAP combined revenue from last December. Non-GAAP gross margin for the December quarter is estimated at 84.6% and operating expenses should be around 54% of the guided revenue. Non-GAAP operating income for the December 2005 quarter is forecasted at 388 million or 31% of revenue. GAAP fully diluted earnings per share for the December quarter is estimated at $0.10. And then non-GAAP fully diluted earnings per share, including 98 million of VERITAS deferred revenue that was eliminated as part of the acquisition accounting, and excluding all merger related costs, restructuring charges and deferred compensation expenses is forecasted at $0.25. For the fiscal year ending March 2006, GAAP revenue is estimated at 4.153 billion. This excludes 288 million of deferred revenue that was lost through the purchase of VERITAS and 559 million of revenue related to VERITAS' quarter ended March 31, 2005.

Including the 288 million of deferred revenue lost through our purchase accounting for the VERITAS transaction and the 559 million of revenue from VERITAS' March quarter revenue, our first fiscal quarter, our non-GAAP revenue view for FY '06 is at $5 billion, 8% higher than the non-GAAP revenue from fiscal 2005 of 4.6 billion. Non-GAAP gross margin for the fiscal year ending in March of 2006 is estimated at 84.6% and operating expenses should be around 53% of the guided revenue. Non-GAAP operating income for fiscal year 2006 is forecasted at 1.570 billion or 31% of revenue. GAAP fully diluted earnings per share for the fiscal year ending in March 2006 is estimated at $0.19. Non-GAAP fully diluted earnings per share is forecasted at $0.99. This excludes all merger related costs, restructuring charges and deferred compensation expense and includes VERITAS deferred revenue that was eliminated during the purchase and includes the VERITAS March 2005 quarter results. Now I'd like to hand the call over to John, so he can provide additional clarity around the quarter and the overall outlook for the business.

Thanks, Greg. Our September quarter results came in slightly ahead of our expectations, driven by large deals and demand for our market leading solutions. This performance demonstrates the value of having the diversified set of offerings that help customers solve real business problems while strengthening the security and availability of their IT infrastructure. I'm pleased with our team's performance during our first quarter of combined operations. With all we have ahead of us, the team's ability to stay focused on delivering a solid quarter is a great starting point for our new company. We just passed our 120th day since closing the VERITAS acquisition. During this time, we aligned our sales management team, sales territories and compensation plans. The sales forces have followed a strategy of stay in your lanes in order to minimize any disruption to customer relationships during this transition period.

This creates a solid foundation for an energized and highly motivated sales force of over 4,000 people worldwide to cross-sell the new opportunities that exist. We will implement a number of modest changes in the second half of our fiscal year to test the overall plan to create one fully integrated sales team as we start our new fiscal year. As many of you know, I spend much of my time meeting with customers and partners around the world. I'm encouraged by the number of companies that have opened their doors to hear our story, even when we didn't have a previous relationship. In addition, we have an opportunity to speak with our existing customers about a broader range of solutions that can help them better manage their infrastructure. Customers are very interested in understanding how the new Symantec can help them solve their biggest IT challenges, managing complexity, cost and compliance. I actually leave tonight for Europe where I will speak with the European Research Board, a group of the most highly respected CIO's across the region.

Like them, we see a number of areas of opportunity to enhance automation, create higher resiliency, tighter product integration and improved manageability. I'm very encouraged by the first four months of operations as a combined company. We've learned quite a bit over this short period and I'm confident this will help us execute on our plans as we go forward. We're extremely pleased with the number of big deals we signed in the September quarter. On a worldwide basis, the total number of transactions valued at more than $100,000 reached 843, including 67 deals worth more than $1 million, versus a combined 25 deals over $1 million in the September 2004 quarter. In addition, more than 40% of these transactions included multiple products or services and continued to be driven by the depth and breadth of our product and services offerings. One of the nation's top five banks is a great example of a company that saw value in the breadth of our solution set. We've signed a multi-year, multi-million dollar transaction with them that includes several of our industry leading security and availability products.

We believe they and other enterprises, like Interwoven and Land America, recognize the value of being able to purchase a wide variety of leading security and availability products from a single vendor, reducing the complexity of managing multiple vendor relationships without sacrificing product quality and functionality. Other customer wins during the quarter included a variety of industries and verticals around the globe. Some specific customers include the United States Air Force, Unisys, Advanced Micro Devices, the City of Chicago, Constellation Energy, First America Corporation, the Virginia Community College System and Coop Danmark, a leading consumer goods retailer in Denmark. Our partner centric model has been a key element of our success. We have been working closely with our partners to design new programs to maintain business momentum, keep the best of each company's legacy programs and leverage the existing investments partners have made in our technologies.

Partner feedback during our recent North America Partners Summit and our various other partner advisory board meetings, have been very positive. Based on our partners' input, we've also recently introduced deal registration and new joint packages to help drive our joint success around the globe. Our partners see tremendous opportunity to expand their business with Symantec. Now let's turn our attention to the five revenue segments that Greg outlined earlier: Data protection, storage management, enterprise security, consumer, and services. We're pleased with the performance of the data protection and archiving products. Healthy customer interest was driven by ongoing demand to meet compliance requirements around records retention. Our market leading solutions provide customers the capability to effectively protect, recover, manage and archive important mission critical data.

We launched a new version of Backup Exec, 10d, which provides a continuous data protection solution for the SMB market. With Backup Exec now available through our online store and all the positive feedback we've received from analysts and customers, we expect strong demand in the coming quarter. An example of our engineering team's collaboration is the combination of LiveState Recovery with Backup Exec 10d. This represents the most comprehensive data and system protection solution for the Windows environment, enabling administrators to quickly recover from both data and system losses. Our high-end enterprise protection, Net Backup, performed in line with our expectations. We recently shipped Net Backup 6.0, which provides deep integration with network appliances, near store systems and snapshot technologies. Enterprise vault, our leading e-mail management and archiving solution, experienced another record quarter. Strength was driven by robust customer demand for regulatory compliance solutions and technology that helps to better manage the e-mail environment.

Turning to the storage and storage server management segment, the positive results were driven by clustering and storage foundation technologies. The increasing trends toward data center consolidation and adoption of disaster recovery strategies continue to drive our performance. Customers turn to our storage management solutions to effectively manage their infrastructure and the ongoing expansion of our Linux offerings should help sustain our growth. The overall solid performance by data protection, storage and server management is a clear indication that we remain well-positioned to extend our market leadership. Now I'll take you through the security side of our business. During the September quarter, weaker than expected bookings were caused by a combination of product transitions and increased pricing pressure in the mid-tier and high-end of the enterprise security segment. Pricing pressure was apparent as we saw unit volumes grow faster than the underlying revenue across the segment. Obviously in these segments we will have to sharpen our pencils and compete to win.

While we never like to rely solely on price as the lever for winning, you should expect to see a much more aggressive Symantec during the December and March quarters. The addition of whole security, a leading provider of behavior based security and anti-phishing technology will be an important element in changing the game. With the vulnerability exploitation window now down to six days, the addition of this technology will allow us to detect and mitigate unknown threats based on their behavior, thereby not requiring traditional signatures to ward off day zero attacks. With the closure of our acquisition of Sygate, we now have a much stronger endpoint compliance solution. With Sygate in our portfolio, Symantec extends its desktop security offerings and we are now the industry leader in this important new category, ensuring that only secure endpoints access the network.

Also on the M&A front, we're in the process of acquiring BindView to offer customers the broadest most comprehensive end-to-end solution for policy compliance and vulnerability management. BindView's agent-less security compliance software compliments our agent-based solutions. The combination of Sygate and BindView further demonstrates our commitment to help customers reduce the cost and complexity of policy compliance. We believe our new technologies, coupled with a more aggressive tact on pricing, can get our core AV business back on track. Our non-AV security business grew 28% compared to the September quarter last year. Growth in this segment was led by our e-mail security and anti-spam solutions. As promised, we delivered our first bundle of security and availability products to the marketplace in August. This establishes Symantec as the only company addressing the full range of business and IT needs for critical messaging systems. We won several large deals with Fortune 500 companies and with ISPs for the mail security [80100] traffic shaping appliance.

Customers value this unique approach to reducing the amount of spam before it reaches their infrastructure and, hence, reducing their overall costs. Taking a look at our security appliance business, overall it was off slightly from the September quarter last year. We believe this is due in part to purchase delays in anticipation of our new security appliances that we had launched mid-quarter. Yet we remain optimistic that new product offerings will drive momentum for this group of solutions. With the August launch of the third generation integrative security appliance, the Symantec Gateway Security 5600 series, we are raising the bar once again in terms of functionality, manageability and security. While the product just recently started shipping, we're seeing excellent early traction both domestically and internationally. Our 7100 series of intrusion prevention appliances continues to gain momentum.

We also continue to see good synergy between the 7100 and our MSS business with several customers opting for the 7100 to be managed by our services team. In addition, the 7160, our high-end intrusion prevention appliance, recently achieved the highest out of box scores in security effectiveness and near 100% scores for its other key capabilities in the test by the NSS Group, a leading independent security testing facility. The threat environment continues to evolve, as do the devices that are under attack. Malicious attacks have evolved from being disruptive to systems to be much more fraudulent activity. Today any device that connects to the Internet is potentially subject to malicious and potentially fraudulent activity. As mobile phones acquire more computer like capabilities, they also become more vulnerable to these attacks. To date mobile security threats have not been prolific. Symantec, however, has been working to stay ahead of the threat curve and already has products available for multiple platforms, including Symbian, Palm OS, and Pocket PC.

For the past two years, Symantec has been working with Nokia to develop mobile security technology and systems for mobil devices. And in October we expanded our agreement to provide Symantec mobile security on Nokia's series 60 SmartPhone, in addition to the N70 devices they're already embedded in. The overall performance of our consumer business reflects weak sell-through at the retail level, influenced by our decision to delay the release of the 2006 products. Customers continue to choose our more complete security solution, Norton Internet Security. The suite is now a larger part of the overall consumer mix, representing 42% of consumer revenue and posting growth of 35% versus a strong September quarter a year ago. Our electronic distribution channel generated 210 million in revenue and grew 32% versus a year ago period, the growth reflects the ongoing trend as consumers migrate their purchases to online channels.

Our consumer base currently stands at over 50 million users worldwide. With our tremendous brand awareness in major markets around the world, we believe that the Norton brand will continue to drive consumers to Symantec, hence we don't intend to compete on price in this market segment. We have a number of strategic partnerships with leading retail brokerage firms and financial services companies as a part of our online customer security program. These firms now offer their customers Symantec's comprehensive online protection. This program enables us to reach further into the consumer market to provide a variety of security tools and solutions to customers conducting online transactions. During the September quarter, Symantec signed a co-marketing agreement with E-Trade Financial to offer Symantec's Internet Security solutions and resources through E-Trade's online security help center. Our channel strategy has always been to place our products in all channels where a consumer might consider purchasing a security solution.

Today we are hands down the leading solutions against viruses, spam, and other malicious attacks at the gateway level of ISPs. We partner with over 150 ISP's around the world at the gateway and protect over 370 million computers or e-mail accounts worldwide. These partnerships are mutually profitable to Symantec as well as our partners. In addition, we work with over 75 OEMs around the world, providing yet another way for consumers to purchase our security solutions. During the quarter, we extended our relationship with several OEM partners, including a multi-year agreement with HP, who would include our security solutions to protect consumer and business users worldwide. Cisco Linksys brand will protect their routers with Norton Internet Security 2006. And Sony's operations in EMEA will ship both Norton Internet Security 2006 and Ghost on its Vaio machines beginning in January. Going forward, we believe our consumer business will continue to be an important cash flow and profit generator for our company.

We are focused on managing this business carefully and strategically and continue to explore new ways to grow this important segment of our business as the consumer security market matures and becomes more price sensitive. And finally our services business grew 41% year-over-year to nearly $44 million. This business unit is an essential enabler of new product sales. Our services business will continue to grow as we broaden our product lines. Just yesterday we announced the availability of Symantec's Secure Application services, our new consulting service that provides organizations with the ability to design, test and maintain the security of business applications. In today's growing regulatory environment, these services will provide unmatched expertise in helping customers meet and exceed compliance initiatives.

In summary, I'm pleased with the September quarter results which came in slightly ahead of forecast. However, we did experience below-average bookings in our security business during the period, which is driving us to adjust our non-GAAP fiscal year 2006 revenue guidance to $5 billion. However, we are maintaining our non-GAAP earnings per share estimate of $0.99. Looking ahead, we believe that Symantec's unique balance of financial strength, cash flow generation, product leadership and global presence truly positions us as a company that is built to lead and built to last. Our customers view our products as critical, must-have solutions as they seek to improve the availability, security and regulatory compliance of their IT operations. The key to long-term success in the software business is ongoing strategic investment and innovation. And we intend to continue to take good business risk.

Our technology investments and strategic technology acquisitions are designed to enhance the features and functionality of our existing products, as well as extend our product leadership by creating innovative solutions that we can sell to customers around the world. I'm certain these strengths, coupled with our team's strong focus on execution, will lead to yet another solid year. And now I'll turn it back to you, Helyn.

Thank you, John. Deanne, will you please begin polling for questions.

Thank you. [OPERATOR INSTRUCTIONS]

While the operator is polling for questions, I'd like it announce that Symantec plans to attend the following upcoming conferences, the Goldman Sachs conference in New York on November 8th, the Credit Suisse First Boston conference in Phoenix on November 30th, and the Lehman Brothers conference in San Francisco on December 7th. For a complete list of investor-related events, please visit our events calendar on the Investor Relations website. Deanne, we are ready for the first question.

Thank you. We'll go first to Ed Maguire of Merrill Lynch.

Yes. Could you comment on the source of some of the pricing pressure that you've seen, particularly in the mid-market. Are there new competitors or is this a new dynamic you're seeing in the market?

I don't think there are any new competitors in particular in the market, Ed. It's the same bunch that we've competed with for many, many years. I think what we have here is perhaps a set of opportunistic moves given all of what we were trying to get done where, in effect, half our team was managing a part of their business that they only new 50% of. So I take this only as a shot across the bow. We'll get a lot more aggressive this quarter and I would expect this business to turn on the dime.

Thank you. We'll go next to Peter Kuper of Morgan Stanley.

Great. Thanks very much. John, you've spoken about the consumer business. That's clearly an important business from the cash flow and profit center point of view. And you said you're seeing it mature from price sensitivity. Yet I think you guys have been trying to raise prices on renewal, things of that nature, are we going to see either a lowering of the retail price or more rebate activity? What should we look for to kind of get indications that that's playing out?

Well, if you go back to what we announced, Peter, just a short time ago, we did lower the AV retail price from 49.95 to 39.95 because we think for AV only, which is becoming a necessary but not sufficient security solution for consumers, we think there is price sensitivity there and hence having a lower retail price is important. However, if you look at what we did for the 2006 product, the 2006 product now is a fully deferred model which allows us to introduce new product function as well as the ongoing updates into the market place. That product is analogous to what other services might be in the market and is priced at or slightly above what other services are. So we think our pricing is in line with where the market is. But you can be assured that we're not going to chase low-dollar yield transaction in this market place. We're going to move the puck to where the real opportunity is, which is around preventing online fraud and a range of other new types of attacks that consumers have to be concerned about.

Okay, thanks.

Thank you. We'll go next to Tom Berquist of Citigroup.

Thank you. You talked a little bit about some of the new appliances that are coming out on the enterprise and SMB consumer side. I'm just curious, can you talk a little bit about what you are seeing out of Cisco and Juniper and some of the more networking oriented companies. On the security side are they stepping up as competitors or falling off a bit and how do you feel your solutions compare there?

I'm quite pleased with the performance of the 7160 and the whole 7100 series of appliances. More importantly, the 5600 series, which is the new integrated device that we announced, some in the marketplace call them UTM's or unified threat management devices, its performance and its functionality is very, very strong. Candidly, if you were to go back with me some three to four years ago when we first introduced this concept, many in the market said that people don't buy security that way. Quite frankly, you can find few credibility vendors in the market today that don't have an integrated gateway appliance. And so our issue is to make sure that we can innovate around the things that we've already done and extend our lead. And regardless of who enters the market, we think there are segments where our technology and our brand and our distribution capabilities certainly should give us, at least, an on-par if not slight advantage over those players.

Got it. Okay, thank you.

Thank you. We'll go next to Sarah Friar of Goldman Sachs.

Just to go back to the consumer side. Obviously, you've talked about pricing becoming a bigger issue at the low-end of the market. Could you talk about your overall pricing expectation as you look out through fiscal year '06 and have you assumed in your guidance ASP declines on the consumer side and could you maybe just tell us what that consumer growth rate is for fiscal year '06?

We have not anticipated any further price erosion in the consumer markets. Remember, I think the problem here this quarter was a function of our decision to delay the introduction of the product at the retail channel, which is a channel where we are historically very, very strong. And while there is price pressure across the board, it's no more there than normal, quite frankly. You have some regions in the world, as we saw in the June quarter, where you get more aggressive attacks by local players. But that's not abnormal and our team has become accustomed to dealing with that. I think long term, it is reasonable to expect that the consumer business is a mid-teens, maybe high-teens growth rate business, and I think that, given the cash that it throws off, that would be a phenomenal contributor to our top and bottom-line.

Okay, great. Thank you.

Thank you. We'll go next to Todd Raker of Deutsche Bank.

Hey, guys. A quick follow-up question on the consumer business. When you gave guidance last quarter, you said the transition to the subscription model would be about a 40 million deferral impact, I believe, this quarter. And in your prepared commentary, Greg, I think you said you would see about 25 to 35 million of that impack in the numbers just reported. Two questions for you. One, given that are you seeing much of that impact, what really was the impact of the timing here for the '06 product? And secondly, given the delayed shipment of the '06 product, is there a chance that you will see that business pick back up here in Q4 and it was really just a timing issue and not loss business?

I think two things. If -- if we had shipped our products as we expected early in the September quarter, we would have most likely incurred somewhere around the $40 million that we had in our 92 million of guidance associated with going to fully deferred. The fact is we shipped these products almost in the last day of the quarter, or very close to that. And as a result of that, there are still some inventory accounting that were left around the 2005 products that are still in the channel. We think of the 40 million we probably incurred somewhere between 25 to 35. And the reason it is a range is there is so much obsolescence accounting that goes into this, that it gets very difficult to peg it to an exact number. However, it will play itself out in the December quarter. And the totality of this thing is in the December guidance and finishes itself in this fiscal year. That's about it.

And I think in the commentary, you guys commented on some competitive developments, you didn't say pricing on the consumer side. Can you comment on trends, introduction here in the Dell relationship, is that having any impact on your expectations?

Well, quite frankly we didn't have Dell, a position with Dell last quarter and therefore we did not forecast that for this quarter. So clearly it could have a modest impact, but it's more about new customer acquisition than it is the base of some 50 million consumers that we have around the world. And so our focus is, let's look for those channels where we can mutually be profitable and try to sell into those channels products that do more than just antivirus but protect customers from a new range of threats and deliver the kinds of functions that we think consumers need, like recovery capabilities, like cloning and imaging capabilities, all of which are important, not just from a security point of view but from a PC health and hygiene point of view.

Okay. Thanks, guys.

Thank you. We'll go next to Phil Winslow of Credit Suisse First Boston.

Hi, guys, just back on the consumer piece of the business. I was wondering if could you give us a sense for, just from a channel's perspective, you mentioned retail being light for your direct downloads and OEM channels, how those fared during the quarter? And also given that the products were shipping late in September, I was wondering if you could comment on what you've seen so far in October just with retail sell-through?

Well, we're not going to comment on the December quarter. We're here to talk about the September quarter. But with respect to the performance in September, clearly the electronic channels performed very, very well. The weakness in our consumer business this quarter is principally around the retail channel, where, make no mistake about it, it is a very important channel and we are the largest player in the channel. And so had we done better there, the overall performance of our company would have been much better.

But any noticeable change with that actual new product in that retail channel now?

Well, the product's been in the channel now for a little over four weeks and we'll comment on the performance of the December quarter when we report the December quarter results.

All right. And finally, just with the new releases of Backup Exec and Net Backup upcoming here, just wondering if you could talk about that data protection line and how you sort of see that playing out over the course of this year.

Yeah. The Backup Exec 10d product is a very, very important product for us. It is, in our opinion, the most complete Windows backup and recovery solution in the marketplace and its targeted principally at the small and medium business segment where those customers need the capability of continuous data protection that many large enterprises have found a way to cobble together, if you will, in many instances. And so we think that BE, our Backup Exec 10d is a terrific product. In addition to that, having it available in our electronic stores makes it a heck of a lot easier for consumer and small business customers to buy a product, where here-to-fore it was not available to them that way. So this is one that we're going to watch very closely because it could represent one of the revenue synergy items associated with the VERITAS transaction.

Great, thanks, guys. Thank you.

We'll go next to Heather Bellini of UBS.

Hi, thank you. I was just wondering if could you comment a little bit on what type of seasonality we should be expecting for the December quarter. This used to be a very seasonal one for VERITAS and I was wondering if you are expecting that to change given that VERITAS is on a different fiscal year now. Thank you.

I don't think we expect any change in seasonality. We will see a very strong enterprise December quarter, especially as they get some level of budget [flushes] as CIO's are spending their budgets to their calendar year-end targets. In addition, I think that it is an extremely strong renewal period that's kind of coexists with new license opportunities as some of these corporations have expanded. And then in the March quarter you'll see, I think, a different phenomenon from VERITAS, which is it is the end of our quarter bearing season and you will see some push by the sales force to try to maximize their own earnings potential, and therefore you would probably expect a weaker June period in terms of seasonality trends. The consumer business is obviously going to be extremely hot in what is the Christmas season. The only question is will it be as hot as we hope it can be? And we will see some strong consumer spending in the March quarter, which is typical for us. So I think as a company what you're going to see seasonally is probably a weaker June period, from the totality of the company then you've seen in the past. But probably a stronger combination in December and March with the VERITAS asset.

Okay. Great. Thank you.

Thank you. We'll go next to Adam Holt of JP Morgan.

Good afternoon. Also had a question on the data protection front. What -- when would you expect to see bookings accelerate for the Net Backup release? And what do you think data protection can grow as you get further into that cycle?

Well, we think the data protection segment is mid-to high single-digit growth rate business for us. It is historically performed that way. And as the market leader, we think we are in fact a standard bearer for what growth might look like. Net Backup 10d is a, as I said earlier, a very solid product. It is relatively new in the market. And we have great hopes for it. And the fact that we've been able to open up the aperture on the electronic channel, as well as the things that we are doing with our traditional channel partners, that should give us some leverage here in the December quarter.

Just if I could, a follow-up on some of the growth rates. If you look at the segment growth rates that you talked about for consumer, data protection and extrapolate on the storage management side, it would look like there's a higher revenue growth level than we're currently looking for this year. Would you expect next year to accelerate from a revenue growth perspective versus '06?

No, I don't. I think where there may very well be some leverage for us in this business is going into accounts that have Backup Exec and trying to cross-sell LiveState Recovery. Or going into accounts that have the LiveState technology and trying to sell either Backup Exec or Net Backup. So our teams are motivated now to look for the cross-sell opportunities that might leverage, if you will, the total portfolio. But I don't want to try to forecast a significant uptick in the aggravate market growth rate, particularly when you consider that we represent 50% or more of the total market.

Great. Thank you.

Thank you. We'll go next to Michael Turits of Prudential Equity Group.

Question on cash flow, 472 million, came in pretty strong this quarter. Greg, first, can you walk us through the components of that from net income, and also do you still expect to get $400 to $500 million per quarter and so $1.6 to $2 billion for the year?

I mean, clearly when you look at -- when you look at the net income generation of the company on a non-GAAP basis, for instance of -- let me grab my numbers here so I get them right -- of 273 million and then you couple on top of that the intangibles or the non-cash outlays like depreciation. I think you're going to see somewhere between $4 and $500 million as long as our revenue streams continue to grow in the -- in the mid-teens areas, you're going to see pretty solid cash flow grow in the $0.5 billion range is what I would guess. And I feel pretty comfortable in the $4 to $500 million range. So from a -- from a pure cash play point of view, this puppy is continuing to do what we've always wanted it to do, which is solid, solid penetration in our markets with a whole lot of cash coming out of the business.

All right. And so for the effect of the consumer switch, should we now take it down from 72 million, down by -- by roughly 10 million for the full year, so 62 million for the full year?

62 million for the full year? I'm sorry, I'm not resonating with that.

Well, you -- you brought the -- in this quarter it was really supposed to be a $40 million effect of the consumer business model shift and you went to 25 to 35, so midpoint 30.

The point is 92 million for the full year and the channels will sort themselves out in December and we'll have about a $12 million effect, probably, in the March quarter. We'll exit at about $92 million effect from the pricing change.

All right. Thanks.

Thank you. We'll go next to [Gorgie] of Thomas Weisel Partners.

Hi, guys. Quick question here. You have made three acquisitions during the quarter, right? What do you expect in terms of contribution from these acquisitions for the year?

Our expectations on both Sygate and Whole Security are fairly modest this year. Whole security was essentially a technology buy, with little or no revenue associated with it. Sygate has a growing business that we feel very, very good about being able to put into our channels, both our direct and our reseller channels . But on a relative basis, its contribution to a $1.2 billion forecast will be very, very modest.

And then you guys sort of talked about a little bit about pricing pressure in SMB. Is it primarily AV new business or there's something else there?

I don't know that there's a difference in the mid-market between new and renewal. There is -- it is one of the least penetrated markets. And so what you see is pricing pressure for all deals, either renewals or new transactions in that segment of the market.

Thank you.

Thank you. We'll go next to Shaul Eyal of CIBC World Markets.

Thank you and good afternoon. John, during your comments you talked about some modest changes that are about to be made to the [INAUDIBLE]. Can you elaborate a bit on that front?

Well, we've had a strategy in place through the first 120 days or so of what we call stay in your lanes, which meant if you sold VERITAS, continue to sell VERITAS. If you sold Symantec, continue to sell Symantec. We think, based upon customer feed back and what we've heard from some of our reps, that there is an opportunity between now and year-end to start to have a given rep manage the totality of the portfolio for a select set of accounts. And we will certainly work towards that because that allows us to test some of the ideas that we had around compensation, around opportunity identification and opportunity management, and to test how our overall specialist model will rollout as we execute this fiscal year and move into next year. But those will be modest, because quotas are set. And the last thing you want to do is introduce at this point in time something that changes the way the rep calculates what he or she might make for this fiscal year. So we'll do it where it makes sense and make sure that we can learn from the process.

Fair enough. Thank you very much.

Thank you. We'll go next to Walter Pritchard of SG Cowen.

I just wanted to return to the comment around antivirus on the enterprise and pricing. Just trying to figure out what makes you so confident that's somewhat of a temporary situation and not just an overall sort of new reality in that market that lends it a lower growth rate?

Walter, I didn't suggest at all that it was temporary. I said temporary in terms of our playing on price. We will change the pricing model for the company to be more competitive. Now if that ends up being a lower overall yield in terms of the revenue for that segment, it will be what it will be. But we're not going to abandon the large enterprise segment because of price. However, on the consumer side, given the margin leverage and the operating returns there, we don't plan to take the same pricing tact, for sure.

Okay. Thanks.

Thank you. We'll go next to Chris Russ of Wachovia Securities.

Hi, good afternoon. I may have missed this but did you talk about the stock buyback in terms of how much has been spent so far and what the average price has been?

This is Greg, Russ. And we did. We roughly purchased 80 some odd -- 84 million shares at an aggravate of 1.8 billion. Given the activity we've had through the October time frame, it's clear to me that we will be done with the $3 billion stock repurchase by the middle to the latter part of November and so we will have accomplished our task.

Okay. Great. And the weakness in the mid market and the SMB markets, is that just security, John, or are you referring to storage as well, like with Backup Exec?

No. My reference was just to the security business.

Just security, okay. Do you think we're at the point where the traditional retail channel, which is obviously sill a sizeable portion of your business, obviously less than 50 now as OEM and online has taken over, is this channel finally starting to become cannibalized by the online distribution channels, the ISP channels, PC OEMs, et cetera.

I don't think that at all. And, quite frankly, I think our performance in the September quarter was as much self-inflicted as it was anything. We didn't ship the product when we needed to. And as a result the channel performed as you would expect when it doesn't have new product. So I think a better proxy for our performance or the performance of retail will be what happens in December, not what happened in September.

Okay. And then finally Greg, with the move to 100% ratable revenue recognition in the consumer business what now is the percentage of revenue that flows from your balance sheet, either in the September quarter or what you expect it to be in the December quarter?

Well, including VERITAS, we're just slightly north of 50% coming off the balance sheet.

Just north of 50. Okay. Great. Thank you.

Thank you. We'll go next to Stephen Mahedy of Banc of America Securities.

And this will be our last question.

Thank you. My question would be as relates to some of the reaction to the competitive pressures and what that means for the bottom-line. It seems like there's still areas of expense control within G&A and sales and marketing. I'm wondering if you are going to give it up a little on the gross margin and can you make it back on some of those other expense lines, which basically nets out to the bottom-line as a non-event?

Well, if you reflect on the forecast that we just gave you for the full year, what we said is that the revenue number will be reduced by about 130 million from our prior view, yet we'll hold the EPS estimate of $0.99. What that says is that we're going to yield a lot more synergies out of this transaction than we had originally anticipated. We found those or identified those over the course of the last 90 days or so, and we're go execute them now, as opposed to allowing the underlying operating returns of the company to fall short of our expectations or perhaps yours.

Do you have a new estimate relative to the 100 million of expense synergies that you had kind of laid out before?

No, we don't.

And the last question will be as it relates to the guidance and some of the expense control, what are some of the assumptions on currency, are they the same, kind as what you were putting together in kind of the June time frame?

Our currency assumptions remain the same. We always leverage off of the end rate of the quarter we're exiting. So, in this case if Euros are a proxy, it would be $1.20 to the Euro level.

Okay, thanks. And finally just on the growth rates it look like certainly within EMEA and Asia/Pac there were some particularly strong markets there. Could you comment on any of the end markets in those regions?

We don't typically forecast or comment on specific country performance. EMEA was at about 11% overall, APJ was at about 20 or 25 and, quite frankly, North America had its softest performance that we've seen, at least as Symantec, for a long, long time with only 2% growth. I think, quite frankly, the team in North America is energized to do a heck of a lot better than that.

Okay. And the 11% in EMEA and the 25% in Asia/Pac and Japan are those constant currency?

No, they were as reported.

Thank you that will conclude today's question and answer session. At this time I would like to turn the conference back over to Mr. John Thompson for any additional or closing remarks.

Our first full quarter of operations as a combined company has been an exciting time for all of us and, actually, it is no different than many of the quarters Symantec has experienced over the last six or seven years. The results over that period in revenue and earnings growth have been just absolutely phenomenal and employee growth and investor interest have certainly tracked our financial performance. Throughout that time, Greg Meyers has been a terrific partner. He has helped me set and execute the strategies for growth of our company and has guided the financial decisions of the company with a sure and steady hand. So it is with regret that I announce today that Greg has decided to retire from Symantec. He joined Symantec in 1993 as director of financial planning and analysis and was appointed CFO in January, 1999, just three months before I joined the company. He has been a great ally and partner in building the company to the point where it is. And we will certainly miss his wisdom and sense of humor, as a member of our senior leadership team. Greg will be with us through the end of the December quarter and will be available to consult with us throughout the balance of the fiscal year. With Greg's departure, Steve [markowski], our VP of Finance, will become the Acting CFO and we will start an external search to identify the potential candidates to follow in Greg's foot steps. Greg, I know your family has wanted you to do this for some time, man, but I have to say that we're going to miss you greatly here at Symantec and we know that your move to become a gentleman farmer down in [Gilroy] won't produce garlic but may produce some wonderful wines. So thanks so much for all of your contributions to Symantec and best wishes for your continued personal and professional success. And I want to thank all of you for joining our earnings call today. Thank you very much.

Thank you for your participation. That does conclude today's conference. You may disconnect at this time.