Gen Digital Inc (GEN) 2007 Q2 法說會逐字稿

Good day, and welcome to Symantec's second quarter 2007 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, ma'am.

Thank you, Lisa. Good afternoon, everyone, and thank you for joining us. With me today is John Thompson Chairman of the Board and CEO of Symantec, and James Beer, Executive Vice President and Chief Financial Officer. In a moment, I will turn the call over to John. He will discuss highlights of the results for the fiscal second quarter 2007 which ended September 29, 2006. James will discuss the financial details of the quarter and will review guidance for the fiscal third quarter and fiscal year 2007 as outlined in the press release. John will provide a few more concluding remarks before we open the lines up to take your questions.

Today's call is being recorded, and we will be available for replay on Symantec's investor relations home page, at www.Symantec.com/investors. In addition to today's press release, a copy of our prepared remarks and supplemental financial information are available on the investors 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 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 forth in the statements.

Additional information concerning these risks and uncertainties can be found in the Company's most recent periodic reports filed with the U.S. Securities and Exchange Commission. Symantec assumes no obligation to update any forward-looking statements. In addition to reporting financial results in accordance with generally accepted accounting principles or GAAP, Symantec reports non-GAAP financial results. Investors are encouraged to review the 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.

Now it's my pleasure to introduce our CEO, Mr. John Thompson.

Thanks, Helyn. Our results for the September quarter met the low end of our expectations as we continue to build a strong deferred revenue base. I believe the underpinnings of our business remain healthy and we are poised to achieve our full year financial targets. Overall, we saw a strength in our businesses in the Americas and in Asia Pacific, however, sales weakness in our EMEA enterprise business was a disappointment. Contributing to the region's underperformance were a number of factors including weak macroeconomic conditions and a number of sales execution issues across the region.

Earlier this year, we selected John Brigden to lead our EMEA operation. John is an energetic leader who has made good progress in redefining his organization and building the kind of country-level leadership team we need for the long term. He's making thoughtful moves and I'm encouraged both by the way he's tackled the task and the reception of the team. We know we have more to do but we are convinced we have the right leader at the top.

Our consumer and services groups were quite strong. And the data center management group turned in a very solid quarter. And underpinning these revenue results is very strong growth in deferred revenue, which is a very important element in our overall business model. Our value proposition is resonating more strongly than ever with CIOs. Customers around the world understand the benefits of a more standardized operating environment which enables them to reduce the complexity and the cost of managing their infrastructure. We now have tools that clearly illustrate the return on investment a customer can achieve by implementing Symantec solutions in the data center. In some cases, the analysis suggests savings upwards of $100 million. I will share a few examples of that with you in a moment.

With what's traditionally the most challenging part of the fiscal year behind us, I believe we are well positioned to achieve our full-year forecast for fiscal 2007. We have an energized team, and the demand for our solutions is evident in our pipeline. During the September quarter, we booked 280 transactions valued at more than $300,000 each, including 66 deals worth more than $1 million each. In addition, 76% of the transactions over $300,000 included multiple products or services. These metrics underscore how our sales force realignment has approved our ability to cross sell the broad portfolio of products.

I would like to highlight a couple of the larger deals that illustrates the breadth of our products we are selling customers around the world. We signed a multi million dollar deal with a global financial services firm. They purchased a combination of security and availability solutions. As we were negotiating the renewal of an existing contract with this firm, we were able to demonstrate the value of consolidating more of the client's data center infrastructure software through a thoughtful ROI analysis. The net result was a much larger transaction that was expanded to include Antivirus, Anti-spam, Ghost, Storage Foundation, NetBackup and our cluster server products.

We also gained a new customer in one of the world's leading energy companies. They worked with our consulting team to strengthen their policy and endpoint compliance initiatives. We tailored a solution for them using our Symantec control compliance suite that helps enterprises implement, measure, and maintain compliance with security configuration standards. This solution includes technologies that we acquired from both Bindview and Sygate.

We also had the biggest ever quarter in the federal vertical as we saw strength with both the Department of Defense and the civilian sector. We had several multi million dollar and multi product deals that included a wide range of products from our security and availability portfolio. One large government service organization expanded their business with Symantec and now covers endpoint compliance, storage and backup, displacing other smaller point product providers in the process.

Now I would like to share a closer look at the performance of our four business segments during the September quarter. The consumer group posted another strong quarter, growing 12% year-over-year. Growth was driven primarily by strength in our online distribution channel, and our Norton Internet Securities suite. In September, the team launched a 2007 version of our flagship Norton products. These industry-leading security applications offer enhanced technology and performance to protect users from today's evolving online threats.

As a testament to our leadership in the security suite arena, Norton Internet Security 2007 won the coveted PC Magazine Editor's Choice Award. In a head-to-head competition, versus all end market security suites, NIS 2007 came out the clear winner. Our world class security protection was touted for the superior firewall, improved antispam capabilities and the reduced consumption of valuable system resources. I'm very proud of the team's success in continuing to deliver a solution that's head and shoulders above the competition.

We delivered the world's first comprehensive online transaction security solution, Norton Confidential. This product provides consumers with unprecedented dual level protection against the most dangerous tools in an attacker's tool kit and that is fraudulent web sites, phishing web sites and eavesdropping crime view. Norton Confidential is the only online transaction security system designed to protect consumers at the moment they are transacting over the web.

We are also coming up to the anniversary of our auto renewal program in North America. That's now rolled out in EMEA and the process will begin for the Asia Pacific region in 2007. Our consumer product portfolio continues to expand, and strengthen to meet the changing needs of our customers. Symantec is out innovating the competition with new products, new partnerships and expanding distribution channels.

Now, let's take a look at the data center management group. This segment performed solidly, growing 8% over the same period last year. Growth was led by our storage foundation solutions. Our data center products continue to show impressive strength driven by customers' demands for standardization. While large organizations today are straining under the complexity of their infrastructure, Symantec's Storage Foundation Suite lets customers standardize on a common software layer to manage their heterogeneous storage environments.

We are focusing the sales and marketing efforts on the Global 2000, since it's here that we have been able to show our customers a tremendous return on their investment through standardization. While standardization has been primarily a storage foundation story, we are starting to apply this approach more broadly. Specifically, in the NetBackup market. We are encouraged by the early positive feedback from our customers.

Our services group posted another strong quarter growing 14% year-over-year. The consulting group played a key role in the number of the deals for us during the quarter. Using our consulting services, a large U.S. government agency has now standardized on our managed security services and deep site response technology, to give it a realtime view of the online threat environment. The agency also will utilize our on-site training services to optimize their own malware intelligence resources.

We recently announced an exciting joint initiative with Accenture. We teamed with Accenture to create what we are calling the Accenture Symantec Security Transformation Services which will build and implement data security systems for companies grappling with the increasing complexity of managing risk in their IT environment. This will be a global initiative comprised of consultants from both companies focused on three key areas, compliance, security monitoring and management, and application security.

Going forward, we will look to further expand the capabilities of our services group, which I believe will continue to be an integral part of our total solutions set for large enterprise customers. We have a trusted brand and are establishing ourselves a strategic advisor to our customers. In the September quarter, our security and data management group posted moderate growth versus last year, and experienced a modest rebound from last quarter's year-over-year decline. Our e-mail security and our policy compliance offerings performed well. We are starting to experience good traction with our end point compliance offerings as well as our Bindview policy compliance products. Both of these technologies were acquired earlier this year.

Our Enterprise Antivirus continues to be a significant contributor in this segment; however, the sale of content filtering technologies is a part of a much broader strategy we call Security 2.0, which is all about protecting corporate information, both structured databases and unstructured files and documents. I know some of you were able to attend our security 2.0 event earlier this month. At this event, we outlined our vision for protecting our customers from the next generation of threats, targeting their information and interactions. Our view of Security 2.0 brings together an ecosystem of products, services and partnerships to help our customers remain confident in today's security world.

At the event, we also announced our plan to deliver two new products that address data leakage, a rapidly growing concern for today's CIOs. First, the Symantec Mail Security 8300 series, a next generation mail security solution, that helps organizations protect against data leakage, while ensuring compliance with external regulations and internal corporate policies related to e-mail content. This is a solid example of how Symantec is focusing its offerings on the most important threats of today, to address the growing and changing demands of our customers. Additionally we announced the database security product, a new solution that reduces risk to information stored in major enterprise database management systems. It provides realtime fraud and data leakage detection, as well as auditing capabilities to address growing compliance requirements for secure information access. With the changes we made in our sales coverage model, the new products emerging from our labs and the level of enthusiasm we hear from our customers and partners alike, I believe our results for the September quarter leave us poised to deliver on the full-year outlook.

Now I will turn the call over to James for detailed review of our financials.

Thank you, John and good afternoon, everyone. GAAP revenue for our September 2006 quarter was $1.262 billion, non-GAAP revenue grew approximately 7% versus the September 2005 period to $1.275 billion. Foreign currency movements positively impacted non-GAAP revenue by almost $22 million in the September 2006 quarter, as compared to September 2005. Sequentially, foreign currency movements had a $6 million impact on revenue.

The September quarter's diluted GAAP earnings per share was $0.12. Non-GAAP diluted earnings per share for the quarter were $0.26. International non-GAAP revenue for the September quarter grew 10%, versus the year ago period, to $637 million and represented 50% of total non-GAAP revenue. The Americas grew 5%, Asia Pacific, including Japan grew 11%, and the Europe, Middle East, Africa region grew 8%. As John mentioned, the EMEA region posted weak results, declining 3% from the June quarter. Excluding currency effects, EMEA revenue grew by 4% year-over-year.

Now I would like to move on to revenue by segment for the September '06 quarter. Consumer revenue came in at $395 million, up 12% versus the September 2005 quarter and up almost 3% sequentially. It's important to note that although launching our 2007 products on time was an important objective for the consumer team, it did not have a material impact on revenue in the September quarter. Growth was driven primarily by strong electronic distribution activity from our online store, subscription renewals and upgrades.

From a product perspective, the growth was driven by strong sales of our Norton Internet Security Suite. Electronic distribution channels represented nearly 70% of consumer revenue, and grew 22% versus the September 2005 quarter. Norton Internet Security revenue grew nearly 50% year-over-year and 7% sequentially. Norton Internet Security remains the single largest product contributor to our consumer category. Now generating approximately 56% of total consumer revenue.

Moving on to our enterprise segments, our security and data management revenue of $484 million grew by 1% over the September 2005 quarter. Our IT policy compliance products experienced the largest year-over-year gains. These solutions continue to lead their respective markets. Our e-mail archiving products also posted double digit growth. The data center management business generated revenue of $342 million, growing 8% from the September 2005 results.

As John mentioned, the storage foundation family of products continued to deliver solid double digit percentage revenue growth. And our services group posted another strong performance, increasing revenue to nearly $55 million, up 14% from the September 2005 quarter. Services represented approximately 4% of our total revenue. Non-GAAP gross margin was 83.2% for the September 2006 quarter. Gross margin was lower than expected for two reasons. First, the costs associated with replacing the Norton 2006 products with the new 2007 versions. Last year these costs occurred in the December quarter. And second, some final obsolescence charges associated with the appliance lines we exited earlier this year. We expect to see improving gross margins during the second half of the fiscal year.

Non-GAAP operating expenses were $723 million for the September 2006 quarter. Increased spending in our consumer, services and information systems areas was offset by our focus on expense management, including reduced hiring. We also expect to see improving operating margins during the second half of the fiscal year. GAAP net income was $123 million for the September 2006 quarter. Non-GAAP net income equalled $259 million. Symantec exited September with a cash and short-term investment balance of almost $3 billion. Approximately two-thirds of our cash resides overseas.

During the September quarter, we paid $520 million to retire the Veritas convertible notes. Also during the quarter, we completed our plan to repurchase approximately $975 million worth of our shares. We bought back approximately 53 million shares at an average price of $18.32. To summarize our repurchasing activities so far this year, the $1.5 billion program related to the convert is now complete.

We purchased a total of 90 million shares at an average share price of $16.63 and we completed half of the $1 billion program. So far we have purchased nearly $520 million worth of our shares, or almost 30 million shares as an average price of $18.11. During the December quarter, our share repurchase activities will continue. We expect to repurchase approximately $250 million worth of our stock by the end of the calendar year and then complete the $1 billion program by the end of the fiscal year.

Our net accounts receivable balance at the end of the September 2006 quarter was $562 million. Days sales outstanding, or DSO, was 40 days in line with normal seasonal trends for the combined business. Cash flow from operating activities for the quarter is expected to be between 250 and $260 million. This is lower than cash flow from operations of $318 million in the September 2005 quarter, primarily due to lower income tax benefits during the quarter just closed, resulting from stock option effects. This quarter's cash flow is also lower than the June 2006 cash flow from operations, of $354 million, primarily due to changes in the accounts receivables balance. We expect to see improving cash flow from operations during the second half of the fiscal year.

Our capital expenditures for the quarter are expected to be a positive $14 million, as planned spending was more than offset by proceeds from the sale of our Milpitas, California, site. GAAP deferred revenue at the end of the September 2006 quarter was $2.228 billion. Non-GAAP deferred revenue at the end of the quarter reached a record $2.25 billion. In fact, non-GAAP deferred revenue grew $512 million or almost 30% as compared to the September 2005 quarter, and grew versus June 2006. On a non-GAAP basis, enterprise products represented roughly 60% of deferred revenue with consumer products accounting for the remaining 40%.

We expect about 58% or approximately $780 million of our December quarter revenue to come from the balance sheet. As we have discussions previously, we are on schedule to complete later this quarter the final major integration task of the Symantec Veritas merger. The integration of our two ERP systems into a single enhanced system will allow us to implement new buying programs, drive operational efficiencies and create a platform from which we can work to improve the ease of transacting business with our customers.

Now, I would like to spend a few minutes discussing our guidance. In summary, we are reaffirming our previously announced fiscal year guidance. Given the current business environment, and an exchange rate of $1.24 per Euro, our forecast for the December quarter and FY 07 are as follows: GAAP December revenue is estimated between 1.315 and $1.345 billion. Non-GAAP revenue is estimated between $1.325 and $1.355 billion. GAAP earnings per share are forecasted between $0.14 and $0.15. Non-GAAP earnings per share are estimated between $0.29 and $0.30. We expect fully diluted common stock equivalents to be 962 million shares.

For the full year, we are continuing to forecast GAAP revenue of between 5.1 and $5.3 billion. Our non-GAAP revenue guidance is expected to be between $5.2 and $5.4 billion. We expect GAAP earnings per share to be between $0.46 and $0.56. Non-GAAP per share continues to be projected between $1.06 and $1.16. We expected fully diluted common stock equivalents for fiscal year 2007 to be 992 million shares.

Lastly, we are reaffirming non-GAAP deferred revenue and cash flow from operations expectations for FY 07, specifically, we expect deferred revenue to be in the range of $2.4 to $2.6 billion and we expect cash flow from operations to be in the range of $1.5 to $1.7 billion. In summary, we feel encouraged about the long-term prospects of our business and we are on track with our previous estimates for the fiscal year.

And with that, I would like to hand the call back to John.

Thanks, James.

I would like to highlight a couple of significant partnership agreements we have entered into recently. These partnerships are an important component of Symantec's growth strategy as we establish strong ties with leading companies whose products and services complement our offerings. This allows to us leverage our combined strength and focus on common customers and common competitors. Last month, we announced a strategic technology and go-to-market partnership with Juniper. Symantec and Juniper are collaborating to reduce the cost and complexity of deploying unified threat appliances, as well as endpoint compliance and access control solutions.

We also signed a new partnership with Dell, with the creation of Secure Exchange, an offering that brings together hardware, software and services in a full solution that protects and archives e-mail environments. Secure exchange takes time and complexity out of deploying a secure, reliable exchange environment with extensive archiving capabilities. The offering will include Symantec's Mail Security 8300 series appliances, Mail Security -- Symantec Mail Security For Exchange, Backup Exec and our enterprise vault product.

Looking ahead in the consumers segment, it's clear to us that the trend of financially motivated threats will continue, as will the overall movement towards doing more online. We will continue to provide protection to consumers as we have in the past, but we have expanded into other areas of protection to give consumers confidence and trust while they operate online.

Norton Confidential Online Edition, a version of Norton Confidential, is designed for partner companies to be delivered online to their customers. This will be our first product where we partner with enterprises such as financial institutions and online retailers to provide protection to their customers. This creates a new distribution channel for us, and gives our partners the ability to protect their customers online transactions and interactions.

Finally, on our July earnings call, I discussed our intent to expand in India. We have decided to augment our presence there, with an additional facility in Chennai, capable of housing up to 1,000 Symantec employees. Chennai is a major commercial and industrial with a rich talent pool. In fact, we already support a portion of our consumer mission from Chennai. Additionally we have decided to expand our presence in Pune, capable of accommodating up to 2500 employees. With these facilities we expect to double our investment in India over the next few years.

in summary, I remain enthusiastic about our position as we enter what is the strongest part of our fiscal year. Moreover, I'm confident that the team will achieve the guidance we have affirmed today. Our optimism is based on several facts. One, our enterprise pipeline is stronger than ever. Our sales force is becoming more efficient. The number of large deals we are signing continues to increase. Our consumer business continues to deliver leading products. We have a broad portfolio of products and services that address the top concerns of today's CIOs and we have a trusted brand that gives us the opportunity to earn the right to be a strategic advisor to our customers around the world. Now, it's all up to us to execute.

I'll turn it back to you, Helyn, to open it up for questions.

Thank you, John. Lisa, will you please begin polling for questions?

[ OPERATOR INSTRUCTIONS ] We will pause just a moment to allow everyone an opportunity to signal.

While Lisa is polling for questions, I would like to announce Symantec's plans to attend the following conferences. Goldman Sachs on November 8th, CSFB on November 28th, Lehman on December 5th and JP Morgan on December 13. For a complete list of our investor related events, please visit our events website calendar on the IR web site. Lisa, we are ready for our first question.

We will go first to Adam Holt with JP Morgan.

Good afternoon. My first question is about, revenue versus deferred revenue, particularly on the enterprise side. I was hoping maybe you could help us reconcile what looks like bookings that came in a little bit better than expected with deferred revenue a little bit ahead of expectations, with a little bit of weakness in the enterprise, and I was wondering if you could talk about how you manage what gets recognized in the quarter versus what goes into deferred and whether there were any transactions that you thought you might see in the quarter that end up going into the balance sheet.

Well, Adam, I think the -- the answer here is that we don't make decisions about what goes to deferred or what gets recognized. That's a function of the accounting principles and accounting standards that we follow. So it's not an arbitrary decision that we get to make at the end of the quarter. However, we have set up a business model over the course of the last few years that acknowledges that the value of our deferred revenue pool will streamline and stabilize reported results over time, and hence, it has a dampening effect in the early term as we are setting it up but delivers consistency and predictability over time.

If ever there was a statement of weakness in the quarter, it would be more transactions that we had in our forecast or expectations that did not occur, particularly in Europe. And it is in that part of our business that we saw weakness, that quite frankly, impacted our ability to hit the mid or high end of the guided range. We are pleased that we were able to come in at the low end of the range, but we are disappointed that we couldn't get better performance out of Europe.

And if I could, my follow-up is along that line. As you look into the December quarter, in the guidance for the December quarter, is the expectation that you see a recovery in those regions that were weak, or have you taken a more conservative view of close rates, et cetera, as you built out the December quarter guidance for Europe?

Well, certainly we -- I think it would be fair to say, Adam that much of the problem in Europe was isolated to one particular region. Although you could find a country or, a team that didn't perform as they would have forecasted but the single largest problem was in the central region, which is Germany. Now, Germany is suffering from its own set of economic woes, and we have our own set of issues there because we have chosen to make leadership changes because of our dissatisfaction, quite frankly, with the way that part of our business has been performing. That being said, the reaffirmation of our forecast suggests that we have -- we believe appropriately covered ourselves for what the results are likely to be in Europe.

Great. Thank you.

We'll go next to Heather Bellini with UBS.

Hi. I actually just had a follow-up to Adam's question regarding the pipeline and your comments that it's stronger than ever, and he was referring primarily to your business in Europe. But if you look overall across your business, can you give us an idea directionally or talk to us a little bit about what you saw for a close rate this past quarter, across the board in your enterprise business and are you seeing an uptick in your close rates for the December quarter in order to make the midpoint of the revenue guidance? Thank you.

Well, Heather, we don't typically talk about close rates. I mean, you will have a number of transactions that are in queue for a given quarter that may or may not close because they may push.

Right.

So one of the real issues with any enterprise sales force is do you have enough deals in the pipeline that have a reasonable enough chance to close that you can hit the forecast for the quarter? And in -- as was the case in the Americas, we saw deals push, but they did pretty well. We saw deals push in Europe, but they just did not have enough in the pipe to cover what the expectations were for the quarter.

My sense is that our enterprise pipe line is clearly larger than it's ever been. That's a statement of both number of transactions and value of the revenue that underpins those transactions. And most importantly, our sales team is now starting to be able to sell across the portfolio. Sales productivity is up. Our customer relationships are strengthening. Our attrition rates are down. All of those things would lead us to believe that we can certainly deliver the forecast that we put on the wall.

Okay. So directionally, would you comment on whether the close rate would be up or down from last quarter?

I -- I really don't know.

Okay. Thank you.

We'll go next to John Walsh with CitiGroup.

Good afternoon. Just on the large deals, up sequentially, the million dollar plus, and the -- I think the over $300,000 were basically flat but on a year-over-year basis, they are down quite a bit. Is that primarily associated with the recognition now of deals and putting a portion into deferred?

No. I -- I think you may not be quite correct there. The -- the deals greater than $300,000 were actually up year-over-year, around 15%.

Okay.

And the million dollar deal figure, which was 66 in this past quarter, was at 67 in the year ago period. So really very close to flat at that level, and we talked in the past about how we feel as though the transactions of greater than $300,000 are probably the best indicator as to the progress that we have made in terms of sales force integration.

Okay. That would speak to the multiple products and the sales force being realigned going forward. So you think that metrics on a sequential and year-over-year basis to start to uncover some of those multiple product deals?

Well, certainly, yes, the focus is very much on leveraging the breadth of product portfolio that we now have as a Company. I think that has resonated well with CIOs and other IT executives during the past quarter, and really, as John just talked about, the strengths of the product pipeline that we see. Our view is that that resonating effect will increase as we enter the -- the busier time of the year.

Okay. Just one quick follow-up, on the consumer side with Vista, could you give us an update on where you are at with Microsoft there? Thanks.

Well, all of our products will be Vista ready. So when Microsoft ships the final bits to OEM manufacturers, we will certainly have products in their hands shortly thereafter. Many of the statements that have been published or reported about Microsoft's plans are certainly encouraging to us. We now want to see more of the action that underlines or underpins those statements.

Their desire now to provide APIs to disable defender where we have the code to be able to do that, that's a very positive step. Their statements that they will provide APIs to allow us to turn off the Windows Security Center, we think that too is a positive step. We have not seen all that we would like to see around kernel access or how we will manage in a 64-bit environment with patchguard, but they made statements that certainly represents significant movement from where they have stood for the last year to two years. And so while progress has been made, it's our opinion that there's more that needs to be done to demonstrate true evidence of the commitment.

We'll take our next question from Sarah Friar with Goldman Sachs.

Good afternoon, guys. John, just a bigger picture question first on the enterprise security area. What is the disconnect between when we do a lot of market growth surveys and so on, people talk about their security budgets still growing 10, 12% and yet you are setting 1% growth year-over-year. I guess you should be benefiting in consolidation with the bigger vendors. Over time should we see those growth rates come together as you hit your stride better?

I think some of this, Sara, is a function of where customers might be investing and clearly, you have seen in the securities space, for the more well-established firms, lower growth rates over the last, I would say, several quarters to a year. That being said, in the segment of the security market where we have the largest portion of our revenue, that is antivirus or content filtering, it's clear that unit volumes are relatively flat to down slightly, and that price points continue to follow kind of the seasonal or annualized pattern of erosion.

And so you got -- if you don't have rising volumes and you have normalized price erosion, you are going to see the lower yield. So our investments have been focused on moving the needle into compliance and moving into technologies that are more about data leakage and new areas for customers and we think that's where we'll get revenue lift in the out quarters, as we see a continued erosion, if you will, in the revenue yield in the core AB business.

Got it. And then just a quick follow-up on the margin side. James, you said you expected gross margins to trend higher now that you have gotten rid of some of the one-offs I think you said. What is a reasonable expectation for the second half? Is it back up closer to 85% gross margin where you were for fiscal year '06?

Well, Sarah, I'm afraid I'm going to have to dodge that question. I think I will just leave it at the fact that we would expect gross margins and operating margins to both be trending up, as we -- as we are in the seasonally stronger half of the year? And we'll work on it.

Okay. Fair enough. Thanks.

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

Hey, guys, two follow-up questions on the consumer side. First, in terms of the Vista question that was asked earlier, I'm not so concerned in terms of what Microsoft is doing but how do you think from a unit perspective, introduction of the new OS will affect your business. Do you see it as a potential catalyst or do you see a potential slowdown around the holiday until it actually ships?

Well, it's my sense that the market excitement around the new release of an operating system has become less and less since windows 95. And, candidly, I don't see people lined up, running into the stores to buy a Vista-enabled machine. And so I don't know that it's going to have a pausing effect or, quite frankly, an afterburner or booster effect on our business at all.

Okay. And then second question for you on the consumer side, can you give us some feel for when your OEM relationship with HP comes up for renewal? And what kind of impact is that having on your business? If you look at incrementally new customers, how much of that is being driven by HP versus other channels?

HP is certainly our largest OEM partner. They are also the largest provider of PCs to consumers in the world so that relationship is awfully, awfully important to us. I would rather not talk about the date terms associated with the contract, because it is between us and HP.

And can you tell us if it's up in the first half of the calendar next year?

No it's not.

We will go next to Phil Winslow with Credit Suisse.

Just looking back to your European operations, you mentioned some slippage on the enterprise side. I wonder if you could mention if there's any distinction between more security sections of your business or the storage side? And also on the services line, down a couple million sequentially. Wondering if anything's going on there and what's your expectation for growth going forward.

Well, we believe that our services business will clearly hit our guided target for the year. The fact that it's down sequentially has more to do with the seasonality of that business than anything. It's a people-based business. The summertime is, in fact, time when people take vacations and therefore, there are no billings associated with their activity. So I'm not at all bothered by the sequential decline in services. That's just the norm, if you will, for people-based business.

With respect to Europe, I think the statement that was made by one of our guys, really does reflect some of what's going on there, and that is, our European team has lost their security swagger. They have not quite figured out how to embrace the totality of what we have in our portfolio, and take those offerings to the marketplace in the same manner that we have been in other parts of the world. That's unfortunate, but it's something that will be fixed in due time. So I'm not worried about it long term.

Okay. Great. And then also just on -- back to the cost of goods sold line, I wonder if you could discuss your long-term expectations there.

Well, again, I think we'll just leave it at the fact that we certainly believe that we can improve past the 83.2% that we recorded in this quarter.

Great. Thanks.

We could next to Walter Pritchard with Cowen and Company.

I guess I calculate the non-GAAP deferred revenue up about $6 million. I wonder, James, if you could tell us the currency impact on the non-GAAP deferred revenue.

Let's see, the currency impact between this point, end of September and the end of the previous quarter?

Yes, sequential.

That would have been, let's see -- gosh, I want to say about 2 or 3%, 2.5, something of that nature.

Okay. Okay. And then gentlemen, on Norton Confidential, you just launched that product this quarter. I wonder if you could give us any sense of early read on that and what types of customers are you seeing buy that. Is it a new customer or is it someone who has bought NAT or NIS from you. And more around the revenue model around the new confidential online service that you are contemplating.

Yes, with respect to Norton Confidential, it's just way, way too early to talk about results. We literally launched the product near the end of the quarter and so nothing in the September quarter results of any material -- in any material way reflects Norton Confidential. The Norton Confidential Online Edition is targeted at our enterprise customers who will buy the product for distribution to their online customers. And so it's a way for them to help deliver confidence, if you will, which is one of the real challenges that we are starting to see with all of the fraud and identity theft activity that's going on around the world. Mostly in the U.S., I must admit. And so this is a slight change in the model, but it's one that allows to us monetize the relationship with the consumer in a different way than we have in the past.

And also let me just confirm on the first question that you asked, since the end of the last fiscal year, we have seen appreciation of around 5% in -- in terms of the dollar/Euro relationship. So between the end of the fiscal year of '06, and the end of the September quarter, you should use a 5% number.

Great. Thanks a lot.

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

Hi. Two quick questions. James, obviously everyone wants to know where gross margins are going. Could you at least tell us watt impact was for the discontinuation of the appliance and maybe that impact?

Well, we're not breaking out the -- the dollars, per se. I would say that was the smaller of the two items that I mentioned.

Okay. And, John, maybe one follow-up question for you. If you look at the new consumer product coming out, and I know it's early to talk about pricing, but can you talk directionally how you see it going to market and educating users, trying to get them to upgrade, obviously, to what I would assume to be a higher feature, higher price point product. Can you talk directionally about those comments, I guess?

Yes, before I go there, let me -- let me make a comment on the question on margins. I think as our business mix continues to evolve, hence as we add more services to our solution portfolio, the optimization point for this company is more about its operating line, operating margin line, not just its gross margin line. And so I think you guys, as you analyze our company have to have expectations that we're going to manage OpEx to deliver the right operating margins that delivers the right net income that delivers the right EPS. And we'll do whatever we have to do at the OpEx line, given whatever the gross margins become at the top. Now, on Norton 360, I assume that's the product that you are asking about.

Yes.

We are in a control beta, rather extensive control beta, i might add right now, where the most significant feature addition in that product compared to what we have in the market today, is online backup. And it's our belief that there are many, many, many, more customers out there who have interest in not just backup, but online backup, because of the potential ease and convenience that it might offer them for not just their MP3 files and their digital photos but targeted at small business users who may have five to ten PCs in their operation. We have not priced the product yet. We certainly have a range of expectations, as to where the product will be released, but we're not going to disclose that until we're ready to release the product itself. We think the first target buyers are, in fact, existing Symantec, either NAV, or NIS users. We also think it represents an opportunity for us to go back into some of the OEM manufacturers that we have worked with in the past and offer them a different kind of solution for them to consider versus what some of our competitors might have.

Great. Thank you.

We'll go next to Katherine Egbert with Jefferies.

Thanks. And thanks, John. I was actually going to ask about the operating margin. If I good to the midpoint of your guidance, it looks like it will be up 150 basis points in December and then flat from there in March. Is that right?

Well, again, we are not going to try to get into the specifics of how we see the margins moving around in the next couple of quarters, but, again, we think the trend at both the operating and the gross line is solid.

A quick question on the European business. Does that business come back, or are you losing some market share?

We very much have looked through the deals that pushed, and are of the view that those are still available to us. In fact, a good number of those have already come through the door. So, no, we are not losing these transactions to other competitors.

Okay. And then last question, when is the beta of Norton 360 going to be out?

There's a control beta in the marketplace right now. It's got just shy of 20,000 users who are working with our engineering team. As we continue to iterate that, we'll put out a press release when we are ready for an extended beta and that would be a beta that would hit tens of thousands of people around the world. And just keep watching your screen.

Okay. Will do. Thanks.

We will go next to Ed Maguire with Merrill Lynch.

Yes. Good afternoon. I was wondering if you could comment on what the impact of exiting the UTM market may have had on your security business and also talk about your expectations for the ramp up for the alliance with Juniper.

Well, clearly, we booked less business there this quarter, Ed, than we did in prior quarters by a marginal amount, but it's not a whole lot that it will make a material difference in the Company's reported results. So we wouldn't want to hide under that rock, suggesting that because we exited the UTM business, that's why our security and data management group is weak. There are other issues that we have to continue to work on.

The relationship with Juniper, we believe, can leverage both companies' strengths. Juniper is a terrific hardware provider at the network tier, have a great relationships with a lot of the large network operators and as you think about the emerging world, where the switching fabric has become very fast, and therefore, what they need to provide is more content, or more performance and capability in the switch, our software products start to make more sense for them. And so being able to deliver our intrusion prevention products, our content filtering technologies, all of the things that we do from a software perspective, on their converged Junoesque platform is going to be a boost, I think for both companies. Now we are talking about a program that doesn't start to deliver revenue, I suspect, for another couple three quarters, given that there's still engineering work that has to be done.

Okay. And a follow-up on -- actually on operating costs. You had spoken about some new facilities expansion in India, and just -- from the very high level, what are your thoughts towards head count expansion? Are you looking to move any of your existing positions offshore and at least, for this fiscal year, what are your hiring plans?

Well, we have been on a fairly aggressive ramp to hire through the first half of the year. Candidly, hiring will slow in the second half of the year, because we think we are about right in terms of net adds. Now what we'll be doing is hiring to address attrition. With respect to India, we have had a well-established position in Pune for quite some time, both Bindview and Veritas had large, large engineering populations there and we've grown those populations since acquired both companies. What we thought we needed to do was to spread out a bit so we were not so dependent on one location for our skilled people and hence, Chennai represents the second site. It's not unlike what any Company would do here, even in the U.S., much less in India. We expect that over the course of the next few years, the population in India could reach 3500 to 4,000 people, which is double what it is today.

We'll take our next question from Gregg Moskowitz with Susquehanna Investment Group.

Good afternoon. John, with the level of marking sped in light of onecare, is that what you are expecting in Q2 and how are you thinking about consumer marketing activities over the rest of the fiscal year?

Yes, thanks, Gregg. The -- the largest increase in spending this year, from a marketing perspective, or product management perspective, quite frankly, has been in our consumer business. And I think the results of the consumer business certainly reflect that that investment was well timed and well placed. Now, it would also suggest that we can't rest on our laurels because we don't think that Microsoft has fired all the salvos that they have just yet.

So we'll continue to monitor activity at every channel level, at every distribution outlet, with every partner around the world to make sure that we are incentivizing them the right way, and we are putting the right marketing air cover in place for our partners to move our products. But I think the team has done a terrific job of not just delivering great products, but getting the noise out and the news out so that we are able to drive, 13 -- 12, 13% growth for a business that, you know, annualized well over $1.5 billion.

And just a follow-up for James. The bookings number overall was certainly solid in the quarter. On deferred revenue, the mix was a little more skewed towards longterm than I was expecting. I wonder if there's anything that drove that up more.

No, other than the types of bookings that we were able to bring in during the quarter. So this is being -- this is a consistent trend, I would say, actually, in recent times, and I would expect that they could well continue. Certainly the length of a lot of our enterprise deals is increasing and we are pleased to see that. So that's the sort of trend that underlies all of this. Certainly, the largest deals tend to have the longer terms.

We will have time for one more question.

Today's final question comes from Chris Hovis of Morgan Keegan.

Yes, if you look at the guidance for the full fiscal year, what would you characterize as the factors that dictate whether you command the low end or the high end and which factors, maybe macro conditions, versus things in your control?

Well, Chris, as is the case in every single quarter, the thing that influences where we land is how well we execute around the world. How well we build products, how well we support customers, how well we engage in our consulting business, whether or not our sales force is on point and able to close the deals in the forecasted time frame that they have, put before me and the sales leadership team. So this is all about execution. There's no place for us to hide if we don't make these numbers. It will be a function of us not delivering on what we said, hence us not executing.

A couple other things, obviously that just mechanically will drive the figures will be things such as the exchange rates. We are using $1.24 per Euro in the guidance that we have offered this afternoon. And, of course, the share price will dictate a couple of things. First of all, how many shares we're able to buy back over the next six months, and then also the number of common share equivalents that we will include in the denominator of the calculation. That's going to drive the number of stock options that count in the denominator as well as the number of shares that would be driven by the convertible debt. So there are some mechanical elements to the calculation, but as John says, really top line execution. And close focus on the our spending is going to be the key.

All right. Thank you.

And this concludes our question-and-answer session. I would like to turn the conference back to Mr. Thompson for his final remarks.

Thank you very much for joining us on the call this afternoon. While the results certainly achieved the low end of our guided range we know we have more work to do specifically in Europe to improve our performance to hit our full-year guidance. I'm quite pleased with the strength of our pipeline and productivity of our sales force and the excitement that we see in our channel partners and in our customers and confirm and reaffirm that we can make 5.2 to 5.4. Thank you very much.

This concludes today's Symantec conference call. You may now disconnect.