Gen Digital Inc (GEN) 2010 Q1 法說會逐字稿

Good day, and welcome to Symantec's first quarter 2010 earnings conference call. Today's call is being recorded. At this time, I'd like to turn the conference over to Ms. Helyn Corcos, Vice President of investor relations. Please go ahead, ma'am.

Thank you, Tom. Good afternoon, and thank you for joining our call to discuss fiscal first quarter 2010 financial results. With me today are Enrique Salem, Symantec's President and CEO, and James beer, Symantec's Executive Vice President and CFO. In a moment I will turn the call over to Enrique. He will start with a few comments about our quarterly activities and results, then James will provide financial and operational details, as well as discuss our guidance, as outlined in the press release. This will be followed by a question-and-answer session. Today's call is being recorded and will be available for replay on Symantec's investor relations website. A copy of today's press release and supplemental financial information are available on our website and a copy of today's prepared remarks will be available on the investor relations website shortly after the call is completed.

Before we begin, I'd like to remind you that our June 2008 period results included 14 weeks of activity versus the normal 13 weeks that the June 2009 quarter had. We outlined the specific financial details for the extra week for you in our press release and supplemental information. Let me briefly review this with you. Non-GAAP revenue for June 2008 quarter included approximately $75 million of one-time benefit and non-GAAP earnings per share included approximately $0.03 of one-time benefit generated from the extra week. Non-GAAP deferred revenue included a one-time negative impact of approximately $5 million from the extra week. We will exclude the impact of the extra week when comparing our June 2009 guidance and results to the June 2008 results.

Next, we'll review our non-GAAP financial results, focusing on constant currency growth rates unless otherwise stated. For the June 2009 quarter the actual weighted average exchange rate was $1.37 per Euro and the end of period rate was $1.40 Euro compared to our guided rate of $1.30 per Euro. For the 2008 quarter the actual weighted average rate was $1.56 per Euro and the end of period rate was $1.58 per Euro. For revenue and operating expense purposes, current and comparative prior period results for entities reporting and currencies other than the US dollar are converted into US dollars at actual exchange rates in effect during the respective prior period. For deferred revenue, results are converted into US dollars at the actual exchange rate in effect at the end of the prior period. We've included a summary and reconciliation of the year-over-year growth rates in our press release tables and in our supplemental information available on the website.

Given the rapidly-fluctuating exchange rate environment, I would like to remind everyone to apply the rules of thumb provided as a guide to estimating the impact of currency fluctuations on our financial metrics. It is important to note, however, that these rules of thumb will move around based on the actual currency fluctuation and the mix of our revenue and expenses. Although the divergent currency moves in the Yen and the British pound versus the Euro impacted revenue and expenses during the June 2009 period, we are not making adjustments to our rule of thumb at this point. We will evaluate the fluctuations during the September period and provide an update next quarter.

Moving on, some of the information discussed on this call, including our projections regarding revenue, operating results, deferred revenue, cash flow from operations, amortization of acquisition-related intangibles and stock-based compensation for the coming quarter contain forward-looking statements. These statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in the statement. Additional information concerning these risks and uncertainties can be found in the Company's most recent periodic reports filed with the US 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 on the press release and on our website.

Now I would like to introduce our CEO, Mr. Enrique Salem.

Thank you, Helyn, and good afternoon, everyone. Our ongoing focus on expense management resulted in earnings per share within our guided range. However, as of some our enterprise customers focused their spending on shorter-term contracts this resulted in reduced new license revenue in the period. Therefore, we ended our first quarter with lighter-than-expected revenue but with a stronger deferred revenue balance. Deferred revenue remained strong, as customers continued to renew their maintenance contracts.

During the quarter we focused on a small number of priorities and we laid the ground work to drive improved execution during the second half of the fiscal year. However, as customers focus on purchasing fewer new licenses, this has put pressure on our ability to hold margins steady during the June quarter and has impacted our view of operating margins for the remainder of the fiscal year. In line with historical seasonal patterns we expect our business to deliver better results during the second half of our fiscal year versus the first half. This is partly due to expectations that IT spending will improve in the December period, as customers spend their annual budget targets. As such, we remain confident in our strategy and business plans and will continue to focus on improving execution.

Now, I'd like to review some of the details of our results. Let me start with our consumer business, a bright spot for us in this period. I am pleased with the performance of our consumer business. They delivered 6% year-over-year growth and grew nearly 3% sequentially. We are widely recognized as having the best consumer products on the market. Our Norton 2009 products have won over 130 awards globally. No other US company has won more than a handful of awards for their comparable 2009 products.

We are continuing to drive innovation. A clear example is our new 2010 products, which feature an original approach to protection called reputation-based security. With this new capability, code name Quorum, we are able to utilize the unrivaled data from our extensive Global Intelligence Network to statistically infer the likelihood of an unknown application to be good or bad, even if we've never seen it before. "PC" magazine called the beta version of Norton Internet Security 2010 record-breakingly effective. It is clear that we're widening our technical lead over our nearest competitors. The products are expected to ship in September.

From a distribution perspective, we are continuing to be focused and thoughtful when competing for OEM business. This quarter, we strengthened some of our OEM relationships and added several new ones. We expanded our relationship with Sony in three key areas of their business. First, Norton Internet Security is shipping on all Vaio systems in the Americas. Second, Sony is offering North American customers a protection suite that includes Norton Internet Security and Norton Online Backup. And third, Sony made its Norton Online Backup agreement global, expanding into two new geographies. Also, HP is now shipping a 30-day trial offer of Norton Online Backup preinstalled on all consumer desktop and PCs worldwide. And finally, we started shipping Norton Internet Security on all Lenovo Think-branded systems in an exclusive multiyear agreement. We believe our top-notch security products, combined with our strong partnerships, will enable Symantec to experience continued success in the consumer market.

Now, I'll turn to our enterprise business. Let me start with our security business. We started shipping our SMB offering in May but due to the ratable nature of our security business, we expect to see a gradual benefit on our top line as customers adopt this new offering. During the quarter we focused sales and marketing resources specifically on the SMB market. We created an SMB specialization in North America and plan to roll out a similar focus in EMEA and APJ regions during the September quarter.

We launched an aggressive campaign in which we reached over 18,000 partners through technical training events, site demos and joint partner sales calls to educate and train our partners on our new offerings. The initial feedback from our partners has been very positive. Account managers at major resellers, such as CDW, praise our ease of installation, service and technical support. In addition, just as you've seen in our consumer business, initial reviews of our enterprise security solutions have been strong. "PCWorld" recommended our products specifically for small businesses.

Our endpoint management business posted sequential growth this quarter, as we saw combined security and management deals. We expect to see strong activity during the second half of the fiscal year when Asset Management Suite 7.0, the last component of the Total Management Suite, is shipped. Furthermore, we believe the upcoming launch of Windows 7 will benefit our business over time. We are well positioned as we've migrated millions of units in the past and have built best practices to make the upgrade transition smooth and cost effective for customers.

Our software-as-a-service business posted sequential growth. as the sales organization continues to build traction with these services. We're starting to to leverage cross-selling opportunities for our online securities solutions within the Symantec customer base. We will continue to expand our portfolio with new SaaS offerings.

Moving on to the Storage and Server Management area, with the continued pressure on IT professionals to do more with less we've seen fewer new data center projects resulting in fewer new license purchases. Nonetheless, our value proposition remains strong, given our software's ability to work in a heterogenous environment. Our software management tools allow customers to lower costs and get better ROI from their hardware infrastructure. As a result, our global pipeline for Storage Resource Management is currently three times larger than this time last year.

Our "Stop Buying Storage" campaign is fueling this potential as we help organizations significantly reduce or eliminate near-term storage purchases through the identification and reclamation of unused capacity and the implementation of thin provisioning. We saw a steady provision of our backup and recovery products during the June quarter. It is clear that customers see our commitment to help them reduce data, minimize complexity and commoditize infrastructure. Through our de-duplication Everywhere campaign Symantec is moving de-duplication closer to information sources. Integrating de-duplication technology is already available in NetBackup and Enterprise Vault and will be available in the new version of Backup Exec later this year. We will continue to develop advanced de-duplication features through our OpenStorage Technology APIs that provide an industry-unique interface that allows our partners to integrate with our backup technologies. Also this quarter, we're shipping a new version of Net Backup that extends our leadership into Windows enterprise segment and supports Microsoft Hyper-V.

In conclusion, we remain confident in our strategy and business plans and will continue to be disciplined in our actions. We're focused on delivering superior products with an emphasis on improving the customer experience. We're being more disciplined in our selling approach by making improvements to the deal review and account planning processes. We've laid the foundation for improved execution during the second half of our fiscal year.

I'll now turn the call over to James to provide the financial details of the quarter.

Thank you, Enrique, and good afternoon, everyone. Unless otherwise noted, please be aware that all of the growth rates I will be discussing have been adjusted to take account of currency effects and the extra 14th week of activity in the June 2008 period.

GAAP revenue was $1.43 billion. Non-GAAP revenue was $1.44 billion and declined 4% versus the June 2008 period. We saw fewer large transactions this quarter, as customers put the emphasis on maintenance renewals over committing to new licenses. It is important to note that the US dollar strengthened 12% against the Euro as compared to the year-ago period, reducing our International revenue as measured in US dollars. As a result, foreign currency movements negatively impacted non-GAAP revenue by five percentage points year over year or by approximately $75 million. However, currency affects positively impacted revenue as compared to the guidance we provided on May the 6th. Had currency effects remained at our guided rate for the June quarter, non-GAAP revenue would have been $1.42 billion.

In addition to foreign currency effects the June 2008 period had an additional $75 million of revenue from an extra 14th week of activity whereas the June 2009 period consisted of the usual 13 weeks of activity. Looking at our geographic results, international non-GAAP revenue of $722 million declined 5% and accounted for 50% of total non-GAAP revenue. Asia Pacific Japan was up 1% while the Americas and Europe, Middle East, Africa region declined 3% and 7% respectively.

Now I'd like to move on to our non-GAAP revenue by segment. The consumer business generated revenue of $453 million, up 6% versus the June 2008 quarter. Electronic distribution represented approximately 80% of consumer revenue. Results were driven primarily by strong activity from our subscription renewals, OEM partnerships and online channels. Norton 360 accounted for more than 30% of consumer revenue and grew 35% versus the reported results in the year-ago period. The Storage and Server Management group generated revenue of $553 million and declined 8% as compared to the June 2008 quarter, driven by fewer storage management license sales. Our Security and Compliance group generated revenue of $342 million and declined 4% year over year. We moved our Software-as-a-Service offerings out of the Services group, leaving our services business to account for 7% of total revenue. Services generated revenue of $96 million and declined 15% compared to the June 2008 quarter.

Turning now to margins, non-GAAP gross margin was 85.5% for the June 2009 quarter, flat as compared to the year-ago period. Our non-GAAP operating margin was 28.5% due to lighter-than-expected revenue in the June 2009 quarter. Versus the year ago period operating margins were flat. GAAP net income was $73 million for the June 2009 quarter. Non-GAAP net income was $285 million. The June quarter's fully-diluted GAAP earnings per share were $0.09. Non-GAAP fully-diluted earnings per share for the quarter were $0.34, within our guided range. The June 2008 quarter EPS of $0.40 included a $0.03 benefit due to the extra week of activity.

We exited the June quarter with approximately $2.2 billion in cash and cash equivalents. During the quarter, we spent $123 million to repurchase nearly eight million shares at an average price of $15.59. Our net accounts receivable balance at the end of the June quarter was $619 million. Day sales outstanding, or DSO, was 39 days. Cash flow from operating activities for the June quarter was $371 million, primarily driven by strong collections and expense controls. Excluding the impact of the 14th week and foreign exchange movements, operating cash flow grew 1% compared to the year-ago period. GAAP deferred revenue at the end of June 2009 was $2.97 billion. Non-GAAP deferred revenue reached $2.98 billion, up 2% compared to the June 2008 figure and above our guided range. Foreign currency movements positively impacted non-GAAP deferred revenue versus our guidance. Had foreign exchange effects remain at the guided rate for the quarter, deferred revenue would have been $2.91 billion, still above the midpoint of our guided range.

Now I'd like to spend a few minutes discussing our guidance for the September 2009 quarter. We are assuming an exchange rate of $1.40 per Euro for the September 2009 quarter versus the $1.49 per Euro we experienced during the September 2008 quarter, equivalent to approximately a 6% currency headwind. Furthermore, please note that the end of period rate for September 2008 was $1.38 per Euro, equivalent to approximately a 1% currency tailwind versus our $1.40 per Euro assumption. Our guidance also assumes a common stock equivalence total for the quarter of approximately 820 million shares and an effective tax rate of 29.5%. For the September 2009 quarter we expect GAAP revenue to be in the range of $1.395 billion to $1.445 billion. Non-GAAP revenue is estimated to be in the range of $1.4 billion to $1.45 billion as compared to revenue of $1.52 billion during the September 2008 quarter. At the midpoint of the guided range we expect revenue to decline approximately 4% in constant currency terms.

GAAP earnings per share are forecasted to be in the range of between $0.14 and $0.16. Non-GAAP earnings per share are estimated to be between $0.32 and $0.34, as compared to $0.37 in the year-ago period. At the end of the September quarter, we expect GAAP deferred revenue to be between $2.747 billion and $2.847 billion. We expect non-GAAP deferred revenue to be between $2.75 billion and $2.85 billion, as compared to $2.7 billion dollars at the end of September 2008. At the midpoint of the guided range we expect deferred revenue to grow approximately 2% year over year in constant currency terms. We expect about 70%, or approximately $1 billion of our September quarter revenue to come from the balance sheet.

In closing, we'll continue to stay focused on effectively managing costs. However, at the end of the June quarter we saw more customers focusing their spending on shorter-term contracts, which resulted in lower new license revenue and lower reported operating margins year over year for the quarter. This has both influenced our thinking around setting guidance for the September quarter and impacted our view of the full year. As a result we are now projecting our reported FY '10 operating margins to decline between 100 and 150 basis points as compared to FY '09.

And now I'll turn it back to Helyn so that we can take some of your questions.

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

(Operator Instructions).

While is polling for questions I'd like to update you on a few upcoming events. We'll be presenting at the Pacific Crest conference on August 10th, at the Citigroup conference on September 10th and at the Think Equity conference on September 16th. We will be reporting our fiscal second quarter results on October 28th. For a complete list of our investor-related events and activities please visit our events calendar on the IR website. Tom, we're ready for our first question.

Thank you. That question comes from Todd Raker with Deutsche Bank.

Can you guys hear me?

Yes, we can. Go ahead, Todd.

So, Enrique, if I look at the growth profile of Symantec today, clearly it's been disappointing. Some of that's macro driven, but how much is competitive driven? Can you give us insight in terms of where you stand competitively in the various business units and how we should think about holes in the [POD] portfolio or challenges going forward?

So, Todd, as I look at it, if I look at the consumer business I'm pleased with how we did there. The products are doing great. We are widening our lead there. 130 awards for the Norton family of products. Clearly, the very best on the market and so I think we're doing well there. I think that team has put a beta out that is outstanding. The initial review from "PC" magazine is probably one of the best reviews I've seen in the last several years if not ever. So, I think that team is executing very, very well.

If I turn my attention to the enterprise business for a moment and I look at large enterprise, I think what I see is our security business, specifically EndPoint, the current version of SCP is doing well. Had a number of displacements in the quarter where we've replaced competitors and I think that is continuing to do well for us. I think the storage business in large enterprise, specifically where we're definitely doing well, the most recent data from IDC that was published in Q1 showed that we actually gained market share in Q1,that's the IDC data. And I think what we are seeing, though, is in large enterprise, that a lot of the contracts used to be a three-year kind of deal. We're seeing people buying licenses for one year at a time and so that's specifically putting pressure on the business. But I do see that we're performing well in large enterprise around storage.

And if I move to the mid market, we shipped SEP small business last quarter. I think that that has been received well by partners. I think there's more work to do in SEP in the SMB segment with the SEP product line to get it into the marketplace and to continue to drive the adoption. And so if I continue to see a place where we should see improvement over the next several quarters it would be in the SMB segments and that would be a place where I would tell you we're improved what we've got. Now we've got to go close the business and I think you'll start seeing that results in a ratable nature given what I see the security business's current revrec policy. So my sense thought is the biggest area for improvement that's in our control is in the SMB segment around our SEP offering and I think the product's there, I think our partners and the reviews have been good and now it's a matter of closing the business.

Okay, and one quick follow up. What percentage of revenue in this quarter came off the balance sheet? I know you guys are guiding for 70% in the September quarter but what was the metric this quarter?

That would have been just a little shy of $1 billion or so would have come off the balance sheet.

Okay. Thanks, guys.

Yes.

Thanks, Todd.

our next question is from Sarah Friar with Goldman Sachs.

Good afternoon. Two questions for you. Enrique, as you look at the pipeline and what you're seeing in the business, do you think you're at a point where you're starting to at least see a trough, a more stabilizing? And then I have a follow up just on the year margin guidance.

Hello, operator?

I'm sorry --

I'm still here.

Sarah's there and I can hear you.

You're there.

One moment, please.

Thank you, Tom.

Thanks, Tom. So, I think when you look at our pipelines I think our pipelines right now we definitely see the ability to support our -- the guidance that we've given. You know what, my sense, Sarah, is I look at IT spending I do think people are still looking for the short-term ROIs. I don't think that that's changed in anything that I've seen in demand. I do believe that, at least in some of the discussions I've had, that we will see a year-end budget flush. How meaningful it will be is yet to be determined, but I do see some strength going into the back half of the year. But again, I'm comfortable with where our pipelines are right now for the current guidance that we've given.

We'll take our next question from Kash Rangan with Merrill Lynch.

I have a follow up (inaudible).

Hi.

Go ahead, Kash.

Sorry, Kash.

Okay. Thank you very much. I wasn't sure if Sarah was asking another question or not. I was curious, if you could quantify SMB as a percentage of your Security and Compliance business unit just as to gauge how much of an incremental impact you could have with the SEP for SMB? And also secondarily, if you look at the storage business, maybe that's where you're feeling most of the macro impact relatively speaking. We're hearing from other software companies they're definitely starting to see some stability and potential signs of improvement. I was wondering if you guys are seeing that in a lag way, you're not seeing that or perhaps you're seeing that but not quite confident that you want to talk about it on the conference call? Just give us some color commentary if you look at forward looking [tone of business] and how some of the indicators might or might not improve? That's it for me. Thanks.

Sure. So, Kash, on the first question, I would say roughly about 40% of the Security and Compliance segment is in the SMB. That's a rough number and that'll vary quarter to quarter. I think your comment is right on the storage and what we're seeing from a -- specifically server sales and how much demand -- incremental new demand is in the marketplace. But I also think that in those agreements, customers historically -- and when I say historically, prior to the last several quarters -- had bought new licenses that were let's say for a three-year period. So, let's say if they were buying 1,000 new servers a year they'd buy 1,000 agents for each of those second and third years. What they're doing now is they're saying I'm buying the agents for the current year and what I'm confident I'm going to deploy. So that's the distinction that I think we're seeing in the difference.

I think as far as demand, look, I think that as I talk to IT buyers around the world they definitely are interested in what we're selling. There's definitely demand and I think that there is probably more confidence on the buying side. I think Q1 -- calendar Q1 was a quarter where we definitely saw buyers being a little bit more anxious. I think we've become a little more confident in the ability of their businesses to perform. I think there's definitely continued interest in both the secure and storage businesses. And so maybe that's what you're seeing or picking is that there is a little more confident in the buyer than we've probably seen in the first two quarters of the calendar year.

Great. Thank you very much.

We do have a question from John DiFucci with Go -- I'm sorry, from JPMorgan.

Thanks. Just a quick follow up there to Kash's question, Enrique, just so I understand this. So, you're getting -- people are buying less capacity. They're not buying future capacity. They're buying the next year's worth of capacity instead of the next three years worth of capacity and because of that you're seeing -- it takes the same -- almost the same amount of cost other than the commission that you have to pay the salesperson so that's why you're -- that's a negative impact on margins. Do I have that correct because I didn't quite understand what you guys were talking about on the call until you just said that.

Yes, let me -- there's two components to it. I think you definitely hit -- I think it's true, the expense structure will be in many ways comparable. But also you get a little bit less revenue yield because you're basically saying you get the revenue for one year instead of getting revenue for years two and three. Because the way revenue recognition works is that if you get paid for the licenses, so let's say I buy the 3,000 agents for the three years, the 1,000 for each year, if that gets paid up-front which is how customers have typically done it, we recognize that revenue in period. And so what it does is -- this effect of what we're seeing is the expense side of it's pretty comparable, maybe a little bit different on commissions, as you said, but the amount of license revenue in period is going to be a little bit lower.

Okay. And just one thing, because on this same subject, a couple of times, both you and James mentioned it. I just want to make sure because it almost sounded like you were paying -- talked about maintenance mix and it almost sounded like you were paying similar commission rates on maintenance renewals as new license and I want to verify that that's not the case.

Yes. No, we -- it' s -- definitely there are differences in what we pay ultimately and it varies not only by license versus maintenance, it also varies on what we do per segment, so there's definitely differences. So, if there's something there we should dig into on the statement we made we'll look back at that, but there're definitely differences.

And with the lower revenue that we reported in periods absolutely came lower commissions.

Yes.

Okay. Okay, thanks. Just one quick follow up and it goes on with a couple of the other questions, too, because I just want to be clear here. The numbers coming out here really do imply that Symantec hasn't seen the bottom yet because it looks to me, anyway, on an organic constant currency basis that your growth rates have declined and they continue to decline and they actually continue to -- it even looks sort of like it is going to get worse so you get a little confidence in it but, in fact, it's even a little bit worse than that. So, how much of that -- obviously you're trying to do some things to change the operations of the Company and improve the efficiencies but we're not seeing that yet either. Just curious, are there some secular issues in some of your businesses that just -- you can control some of the things but there's some you just can't.

Yes, I think -- it's definitely -- we spend time analyzing what are all of the different dimensions of the business by product line, by segment, and I do think, as we look at the current environment, I don't expect that people are going to start buying years two and three again any time soon. I just don't think that's going to be a big change and so that's one thing I would tell you that I think will be consistent probably through this year and maybe we'll see a little difference in December. But in general, I don't expect to see a change there in the September quarter because they're going to do what they did in June as far as the term of the agreement. As far as -- yes, go ahead.

Just because -- on that one point that's important, so that is in the guidance but it wasn't -- I guess, in the guidance for the June period you would assume that they were going to continue to buy at I guess longer terms than they actually did.

Correct. Correct.

Okay. Thanks.

Yes.

And we'll take our next question from Phil Winslow with Credit Suisse.

Hey, Phil.

Hi, guys. Just a question back on license revenue. It has been an area of softness for a couple of quarters now. When you look going forward, what do you think the license revenue growth rate is for the next couple of quarters and can we actually get back to the point of growing license revenue year over year and what do we really need to get that? Is it a turnaround in the small midsize business or some sort of stabilization in storage?

Yes, I think you're on the right point. I think we've got to see the SMB segment improve and I think the comment I was -- in my earlier comments is that there's a ratable nature to securities, so as we start booking business in security, you'll see that in revenue over a period of time. I think that the other thing that is important for us to continue to do to drive new license is we've got to do a better job, in my opinion, of cross selling the portfolio. I think we have to get -- we're in every major account in the world and we've got to get more of the portfolio and so that speaks specifically to one of the priorities that I've set for our team, which is on the integration of our technologies, and so how do we bring Enterprise Vault and NetBackup together? How do we bring Enterprise Vault and Backup Exec together because what that does is we can go back into the base and sell those products. And so my sense at this point is, the thing that's going to help us drive -- improved license is more work in the SMB segment and better cross selling.

And then also, just a salesforce efficiency perspective, obviously you have a salesforce that sells for security storage but then also product specialists, would you ever consider splitting that salesforce back up, ala Symantec and (inaudible), focusing on storage and then one on security?

I think that we're always look at what improvements we need to make and in the large enterprise and the biggest customers in the world, we tend to really believe that you've got to have one account manager that's trying to work across the organization. That doesn't mean that there isn't an opportunity for -- you called it splitting lanes, but having a group of people who just focus on security and a group of people who focus on storage. And so they're -- we're always looking at that. We've actually done a couple of tests recently that we started to see if there's some improvements in overall sales productivity, but it's something that we've done in very small areas. It's going to take us a little bit longer to determine if that yields an efficiency so I wouldn't expect anything like that as far as a change in this fiscal year because these are the kinds of things that we have to measure very carefully. But you're on the right theme, which is we are going to focus on how do we improve overall productivity at the Company and how do we improve productivity in our sales and marketing functions.

Great. Thanks.

We'll take our next question from Rob Owens with Pacific Crest Securities.

Yes, thanks. On the margin front, Enrique, you talked about five points in five years and obviously this year is a bit of a reset, but is there still the focus around expense controls and revenue growth that should get you that type of target in your view?

So, Rob, I think at this point we absolutely believe that our goal, as stated, is 100 basis points of margin improvement per year. This year, I think you said it correctly, is that we're looking at a little bit different environment and so the notion of 500 base points over a five-year period, starting from where we have currently set the expectations is what you should expect.

And then second, can you talk about the linearity in the quarter and just how it started versus how it ended?

Yes, I think when you think about the linearity this quarter tends to be fairly weighted toward the month of September, because specifically in Europe, you get significant holidays in both July and August --

I was referring to the June quarter. I'm sorry.

I'm sorry, misheard you. So in the June quarter, I don't think I saw anything dramatically different in the area. We keep very close eyes on that and I think the overall thing that I did see was what I'd mentioned on the new license but maybe, James, do you have other data?

Well, you saw, obviously, the year-over-year decline on our constant currency 14th week adjusted basis for the Storage and Server Management group. A higher proportion of sales in that group tends to come right at quarter end.

And with regard to that you talked about shrinking duration but do you guys think you're seeing any deferral in front of the major upgrades that are coming in the second half, specific to the storage business?

You know, Rob, I haven't seen -- the field hasn't commented on that. We are prepared for the Windows 7 migration, but I don't expect that to see until potentially a few months after the initial release. What I'm hearing from a few customers is the concept that they may not wait for service pack one and given the work that we've done historically with our Altiris technology I actually expect us to be in a great position to help customers with that migration. Rob, I just want to go back on the first question you asked just to be -- make sure I'm clear is we are still saying that we're looking to drive 100 basis points of margin improvement on average over a five-year period starting from this new reset point. And while this year, we may -- we're at the new levels that James described, that's our long-term goal.

All right. Thank you.

We'll take our next question from Brent Thill with Citi.

Hey, Brent.

Hey, Enrique. Can you just comment on the international markets, obviously it's an important stream of half your revenue. Do you see Europe bottoming out in the second half of this year, are you still predicting a tough second half for Europe?

Yes, I think when I look at it, you've got the -- the UK is a very financial services dominated market and so I think that that's going to continue to be a difficult market. I've also seen -- outside of Europe seen some weakness in Japan. That market has been fairly sluggish and I don't know how quickly that's going to turn around. But I think the UK definitely will continue to be financial service driven and that market is not as healthy as we've seen in the past. And I think, Germany also has struggled and we'll see how quickly that can turn around.

Okay. And just -- as a quick follow up on the maintenance renewals, I think you said they were still strong but now considering the shorter duration is there more strain as you go back to the renewal that you're seeing on some of the new cycles, or is there really nothing new on the maintenance renewal side?

No, no, I'm actually -- I'm pleased with the strength of the maintenance renewals. I think the price points and the actual renewal rate has actually been where I would expect and has not changed from what we saw 12 months ago or in the June quarter of the previous fiscal year. The specific issue is more on the duration of new contracts.

Okay. Thank you.

We'll take our next question from Adam Holt with Morgan Stanley.

Thank you. Two questions about the consumer business. It sounds like you had an improved performance in the quarter, net the difficult comparison in currency, when would you expect to start to see the impact of some of the recent investment on the OEM side? And then secondarily, does the more conservative operating margin guidance include more aggressive investments in OEM deals or is it principally due to the revenue production?

Yes, I think -- let me comment on the first. I think that we continue to work on the improvements, Adam, in the consumer business. I think that team is product side strong and you should expect to continue to see us improve, what I would call the overall performance of that business. (inaudible) on the financial side, but it is very ratable so everything we do in consumer takes obviously a little bit longer to materialize. But I'm pleased with that performance. I think your comment about operating margins, I think what we're planning for really is the current environment, what you saw in licenses, and we wanted to make sure that we took into account what we saw on the -- in the previous quarter.

I'd just add to the first question, Adam, that the OEM arrangements that we've won in this past quarter that we noted and in the previous quarter, as well -- we have a very good batting average in the last couple of quarters in particular -- they'll start to help us in the back half of this fiscal and then in the first half of the following fiscal year. So, the HP deal continues to perform well for us. Obviously they've been taking share from Dell in recent times and so we've continued to be pleased by the performance of that arrangement and that's been more of a driver of current performance.

Terrific. Thank you.

We'll take our next question from Walter Pritchard with Cowen and Company.

Hi, James. Just wanted to go back to the comment around the shorter term licenses driving part of the shortfall, I'm wondering if that was -- first of all if that was something that was seen both across security and storage or just security?

I would say it was (inaudible) both of the businesses so when we're seeing customers really taking the attitude that they'll spend on what they need for their more immediate needs and that's very much driven by budgetary constraints and those impacting really all aspects of the IT department.

Got you. And then just relative to the accounting treatment on those licenses, they sound a bit to me like term licenses given that customers are buying multi years and that's their option, but yet it sounds like you take that up front. My impression was the vast majority of your license revenue was perpetual in nature and I guess just trying to understand the accounting treatment and then how widespread this licensing is within the base year of the license revenue?

We're gener -- you're right, we're generally talking about perpetual licenses. There are just -- in the smaller deals that Enrique has been referring to, there are just fewer of them and so there's less to take (inaudible) revenue.

Okay, great. Great. Thank you very much.

We do our license commitments on a per user or a per server basis.

We'll take our next question from Aaron Schwartz from [Lattimer]..

Good afternoon. I just wanted to substantiate the comments you made about the pipeline and the license outlook. As you start to convert that pipeline of revenue and as the revenue environment gets a little more favorable, should we expect your model to become increasingly ratable if you have some success in bundling transactions?

There may be some trend towards that but any movement there would be relatively gradual based upon the scale of our overall business.

Okay. And the second question I had was on the Altiris business. If you could just help us out in terms of walking through the mechanics of that business. Are most customers that have already purchased current with the maintenance so they wouldn't have to relicense it -- the product around Windows 7, or does that have a lower maintenance attach rate to where this would create a product cycle for you?

As I look at it I'm pretty sure that our maintenance agreements around Altiris are consistent with the rest of our business and so I don't think I see anything that would indicate that customers would not be on maintenance. Now, we shipped the Client Management Suite and Server Management Suite for Altiris at the end of the March quarter and so we're just at the very beginning of the -- what I would call the upgrade cycle to the 7.0 product. Other comment that I made today is that we've still got one more component, the suite to ship. That'll complete the Total Management Suite and so my expectation is that we're still just at the beginning of that upgrade cycle.

Okay, and that should accelerate with the Windows 7 release?

I think that'll motivate people to absolutely make sure that they're current and can use the new tools to do the migration.

Okay. Thank you.

Yes.

We'll take our next question from Brian Freed with Morgan Keegan.

Thanks for taking my call. You guys have talked a fair bit about growing the SMB side of things. Can you talk a little bit about the impact on both gross and operating margins from a shift more toward a channel centric model and what are your targets for business direct versus indirect in your -- outside the consumer side of things?

Well, the channel's always been a really important part of our overall distribution picture and I would characterize what we're really speaking about here as getting back to the type of strength that we had in this domain 12, 18 months ago. So, I don't think that there will necessarily be a material shift around the margin profile of the business overall. I think we can do better in SMB now that we have our new product out there, as Enrique said earlier, generating very strong reviews. Ease of installation is a particularly important aspect for small, medium-sized businesses, obviously. So, I think we've got some share of win back. We can do that with the new product that we have. And as we build that share, then clearly, that should help our margins to some degree, but I think we're more returning to where we were in a competitiveness standpoint 18 months ago.

Okay. Do you have any specific targets for that mix over time?

The mix between the direct and SMB?

Between direct and channel driven.

I think when you think about our business, at this point, my expectation is that we are going to see an increasing percentage of our business go through the channel and that is my expectation and that's the message that we've communicated internally and externally to our partners. And the reason is that given the breadth of our portfolio and some of the things that we are doing at this point, I'm convinced that our partners become increasingly important and that means that we'll see more business going through our channel.

Any follow ups, Mr. Freed?

No, thank you.

We'll take our next question from Michael Turits with Raymond James.

Hey, guys, two questions, one on revenue and one on cash flow. On the revenue side I just wanted to take another shot at the second derivative question. Since some other tech and software companies seem to be seeing an easing of the declines, or a slight improvement, and you didn't, it got worse this quarter, is it clear that your worsening is from macro or do you think is worse than a competitive situation?

I think from a competitive perspective we're in a good position. I am very pleased. As I speak with our team I definitely get the sense that people are very confident in the portfolio. We are seeing license weakness, as we've talked about, and it's really driven by the duration of what people are going to buy right now. I would say it's the best product we've had in a long, long time. And the "Stop Buying Storage" campaign, which drives sales of our Storage Resource Management tools, is building a very good pipeline.

And then the question on cash flow, the maintenance is stronger than new license and deferred was actually pretty good this quarter , so how should we think about what will happen with cash flow for the year? You would think that would be -- would look slightly better than what we would see on the income statement. I know you're going to have a higher cash tax rate but ex that higher cash tax rate can you give us any sense of direction on how cash flow might hold up last year to this

Well, clearly, the impact of the lower license activity that we've been discussing thus far this afternoon also feeds through into cash as well. Obviously cash is always going to be lumpier from one quarter to another. But as we were mentioning, customers are under their own budgetary constraints and they're buying more for their immediate needs and so I think there will be a linkage between that thought and cash flow.

Okay. Thanks.

We'll take our next question from Daniel I'ves with Freedman, Billings, Ramsey.

Can you just speak to the second half. You talked about reacceleration and growth and just talk about what sort of profile we'll see on the top as well as on the margin, (inaudible) sequentially throughout the year?

As far as -- sorry, I want to make sure I'm clear on the question. The profile.

Yes, you talk about second half reacceleration, right, so how should we think about it ramping after we get through next quarter?

Yes, I think the way I look at it and the way we've been thinking about it is we think that there's clearly our business is seasonally driven into the December quarter and then we go into the March quarter, which is our fiscal year end, and so that's one of the things we're expecting. We're also expecting that the macro economic environment will still see a good year-end budget flush, which we saw last year, and so I expect that to happen again.

Yes, I'd say that the March quarter is generally relatively flat versus the December quarter. It's the December quarter where we tend to see a more significant ramp up sequentially, both around top-line revenue, around the margin generation capability, therefore of the Company the two are clearly very much linked.

And just address margins?

Yes. So, again, margins, I would expect them to be building sequentially between the September and December quarter and then March to December, much more of a flatter to down. In this last year, we saw down sequentially between December and March and I wouldn't be surprised to see the same type of pattern this year.

Thanks.

We'll take our next question from Steve Ashley with Robert W. Baird.

Just like to ask about the Information Management business. First of all, how that performed relative to your expectation and if that business was also impacted by the license duration phenomena that hit the storage business?

Yes, I think when you look at our business, the position that we have in the Information Management Backup and Recovery is continuing to do well for us. Customers are continuing to move to the disk-based capabilities, our pure disk offering is doing well. We're also seeing that de-duplication is top of mind for customers. The work that we've done to move it closer to what people are trying to back up, so closer to the source, I think is proving to get people very interested in that technology. Now, there is the exact same impact because people buy -- and customers buy the backup agents and they're buying backup agents for their various servers, and so that definitely has the same impact that we talked about on the storage side.

Great. And then just lastly a housekeeping question, James, do you know what the FX impact was on operating expenses year over year?

Year over year that would have been of the order of $50 million, if I'm remembering that correctly. We can confirm that for you.

Thank you.

Tom, we're ready for our last question.

Yes, ma'am, and that question comes from Tim Klasell with Thomas Weisel Partners.

Yes, good afternoon, everybody.

Hi, Tim.

First question has -- can you guys hear me?

We can hear you now, yes.

Okay. First question has to do with -- just a housekeeping one. How did Backup Exec do during the quarter since that's more of an SMB-focused product?

I think that when you look at it across the geographies I think it was consistent with the last quarter, what we've seen and my expectation is we're in an upgrade cycle for that product as we go into the integration of some of the archiving capabilities but I haven't seen anything that's concerning in BE.

Okay, good. Glad to hear the maintenance renewals remained strong but are you seeing customers want to see shorter payment periods, particularly for the large maintenance contracts?

Shorter payment periods for the maintenance.

For the maintenance or let's say a large NetBackup, three-year maintenance contract, are you seeing them wanting to pay on an annual basis or seeing any impact there?

Well, maintenance is usually paid for an an annual basis anyway so nothing really has changed in that regard. And we've been very pleased really with our collections statistics, our various credit profiles with our customers.

Okay. Great. Thank you, that's all I have.

Thanks, Tim. Well, thanks, everybody, for joining us on the call today. We've clearly laid the ground work to drive improved execution and we're going to continue to focus on tight expense management. We are excited about the new products that we'll be shipping later this year and some of the improvements in some of the products specifically are the Consumer 2010 products, Backup Exec 2010, NetBackup 7.0 and the Altiris Total Management Suite. I look forward to providing you another progress report next quarter. Thank you very much.

This does conclude today's conference call. We appreciate your participation. You may disconnect at this time.