Gen Digital Inc (GEN) 2010 Q2 法說會逐字稿

Good day, and welcome to Symantec's second quarter 2010 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.

Good afternoon and thank you for joining our call to discuss fiscal second 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 discuss what is happening in the market and how Symantec executed during the quarter. Then James will provide highlights of our financial results as well as discuss our guidance assumptions 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 at Symantec. com forward slash invest. 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.

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, stock-based compensation, as well as products, features and delivery dates contain forward-looking statements or preliminary and are subject to change. 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 US Securities and Exchange Commission. Symantec assumes no obligation up to date any forward-looking statements. In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, Symantec reports nonGAAP financial results. Investors are encourage to do review the reconciliation of these nonGAAP financial measures to the most directly comparable GAAP results which can be found in the press release and on our website. Now I would like to introduce you to our CEO, Mr Enrique Salem.

Thank you, Helyn, and good afternoon everyone. I'm pleased with our second quarter results. We are encouraged by the signs we see of stabilization in the markets we serve. This gives us confidence that we will continue to see gradual improvement in our business overt next few quarters. Challenges remain, however, for some customers in the FMB segments and in certain regions around the world. A focus on a clear set of priorities help us deliver solid results in Q2. Of these the first of these priorities is to strengthen our leadership in security. The second is to capitalize on the migration to next-generation data protection and the third is to help our customers commoditize infrastructure. The fourth quarter is to deliver SAS based solutions to our customers. Our commitment is to consistent execution underpins these priorities.

We started to see initial signs of progress in SMB security as we renewed our relationships with channel partners given the launch of our new security products. We also saw strength in the consumer segment as our business continues to benefit from our market leading products. One of the metrics that we use to track customer and partner loyalty is the net promoter score. We've seen improving net promoters scores across our business segments and geographies and we believe that this is a positive leading indicator for our business going forward. This quarter our Enterprise Security business customers noted that we've simplified the installation and improved product performance. Additionally our partners highlighted improvement in ease of doing business with Symantec. We continue to use the net promoter score feedback to deliver differentiated and improved experiences for our customers and partners.

Now let's take a closer look at the highlights from the quarter. The strength of our Consumer business was driven by strong Norton 360 sales and by relationships with eight of the top nine OEMs. In mid September, we launched our Norton Internet Security and Norton AntiVirus 2010 products further distancing ourselves from the competition. These products leverage our new reputation based security technology, code name Corem, to deliver unmatched detection of new malware. The 2010 Norton Security products have already received top reviews from respected independent testing bodies including AVG, AVcomparitives.org, AVtest.org, and test and Dennis Technology labs. The Dennis report showed that Norton Internet Security 2010 was the only product tested that achieved a perfect 100% detection rate against increasingly prevelant zero day threats, due to our exclusive reputation based security technology. In contrast the report noted that the average detection rate across all products tested was 78%. Our 2009 products won over 150 awards and we believe our new products will match or exceed that achievement.

We have many opportunities to grow our business through a variety of channels and around the world and are not dependent on any one partner or channel. During the quarter we won consumer online back up deals with Toshiba and Acer. We now have back up relationships with four of the top five OEMs. We also extended our Norton security scan distribution agreement with Adobe Shockwave and added to ISP partnerships in a win at eMobile, one of Japan's largest mobile broadband service providers. We expanded our relationship with major French retailers and with Dixons, a major European based retailer. We continue to focus on profitable partnerships across all channels and enter into transactions that make economic sense for us given our leadership position.

PC Tools allows to us broaden our access to move markets and strengthen our online capabilities. Our 2010 version of Spyware Doctor with antivirus recently won PC Magazines Editors Choice Award in the antispyware category. We have been able to leverage our Norton relationships to win additional business for PC Tools in new channels. For example, PC Tools displaced a competitor a at a leading Australian retailer, which also carries Norton products. The combination of both brands enables Symantec to reach all consumer segments. Additionally in the online channel Spyware Doctor Starter Edition has been selected the only security product for the Google Pack. This relationship enables to us gain access to Google's 165 million unique visitors. Finally we are beginning the migration of our Norton customers to our new Symantec developed and operated online store. We are carefully monitoring the transition and are pleased with the progress so far. Establishing e-commerce as a core competency for Symantec will give us better visibility to develop targeted programs and deliver more innovative products and services. As well as realize operational efficiencies and improve our cash flow and earnings per share.

Now I'll turn to our Enterprise business. During the quarter we won a number of competitive enterprise deals where we were able to cross-sell new products and services to our existing customers. We saw continuation of last quarters behavior in our Storage business. Instead of seeing customers make up front purchases of licenses for future growth, a majority continued to by for the current needs. In addition, server market deceleration continued to put pressure on this part of the business, particularly in new license sales on the sun platform. Having said that we have seen the decline in new license sales stabilize and maintenance renewals on our large install base remain strong. We continue to sell across all platforms due to our growing partnership with IBM and HP as well as our focus on long term growth areas such as Windows and Linux.

Our stop buying storage campaign continues to resonate well with customers. They value our unique ability to reduce storage costs by better utilizing existing storage and by commoditizing hardware. As customers are challenged to do keep costs down while managing increasing volumes of unstructured data many are turning to scalable high performance cloud storage solutions. Our File Store solution released this month capital leases on this trends. File Store enables customers to scale their environments at a lower cost through operational efficiencies and the commoditization of hardware. The product integrates natively with our net back up and end point protection solutions, eliminating additional server requirements for back up and security, something no other competitor offers. Our product has the fastest performance bench marks according to a third party test. Customers such as Taobao, China's largest online auction site selling over 4.5 million items per day, are already using File Store to support their business.

Now moving on to our back up and recovery products, NetBackup the number one information management solution for the enterprise delivered steady performance as customers move to next-generation data protection. For example, we won a large multi-year contract with a global financial institution which included back up and archiving as well as storage, end point management and multiple service offerings. Earlier this month we began shipping NetBackup peer disk 6.6 which includes several new features such as Deduplication for V Mware and Oracle as well as granular restore functionality for Microsoft Exchange. This release allows us to further help customers reduce data volumes, complexity and infrastructure costs. In our Enterprise Security business, we are continuing to see traction in the large Enterprise segment with several competitive displacements. For example, at a large US telecommunications company we leveraged the full value of our product portfolio to deliver a consolidated solution of security, compliance, storage and back up products.

In the mid market we continue to engage and educate our partners on the small business edition of Symantec Endpoint Protection which was launched in May. During the quarter enrollment in our SMB specialization program exceeded our expectations. We are pleased with our first quarter of small business edition bookings. As you know this activity will benefit our revenue over the next 12 months. We expect this trend to continue as increasing number of our channel partners become trained on our products. We posted double-digit growth in our Federal business as the fiscal year for the US Federal Government came to a close. For example, we won a multi-year contract with a government organization which includes DOP and mail securities solutions. Internationally, in a partnership with Volvo IT we won a competitive displacement at the city of Stockholm for approximately 145,000 seats.

Another key initiative Software-as-a-Service posted sequential growth as we continue to leverage cross-selling opportunities for our online security solutions within the Symantec customer base. We saw increased sales of our hosted web security offering as web-based attacks remain a leading source of new infections.

Now I'd like to take a few minutes to discuss the progress we've made over the past six months on improving sales force productivity and integrating technologies into core products. In a focused effort to increase overall sales productivity we continue to improve account planning, deal review and resource utilization in order to drive higher close rates. These improvements coupled with marketing campaign alignment enable our sales force to focus on customer relationships and cross-sell the portfolio into the install base. We continue to focus on producing high quality integrated products and look forward to several upcoming offerings. We expect to launch our Backup Exec System Recovery 2010 product with our new virtualization and Linux options for the SMB market by the end of the year. In addition we expect to release Symantec Data Loss Prevention 10 in December with the industry's first open DOP platform integrating our hosted e-mail services. We expect Backup Exec 2010 scheduled to be available by the end of our fiscal year to include integrated add-on options and Deduplication and archiving capabilities. Plans for NetBackup 7.0 include integrated Deduplication add-on option which will allow Deduplication directly on the media server as well as, and as long as expected to be released by the fiscal year end. Both of these releases provide options that we will be able sell to knew and current customers shouldn't benefit our cross-selling capabilities in fiscal 2011.

We are focused on delivering industry leading products, integrating technology, cross-selling the portfolio and improving sales force productivity. I am confident we have laid the foundation for solid execution during the second half of our fiscal year. Now I'll turn it over to James for a review of our financial results. James?

Thank you, Enrique, and good afternoon everyone. I'm pleased to report that Symantec achieved solid second quarter results in each of our key financial metrics, both on an as reported basis and after adjusting for foreign exchange. Despite a tight IT spending environment, our business continues to generate strong cash flow while our focus on cost management resulted in better than expected earnings.

Now I'll review the financial details of the September quarter. Unless otherwise noted all of the growth rates I will be discussing have been adjusted to take account of currency effects. NonGAAP revenue was $1.48 billion, and declined 2% versus the September 2008 period. We are encouraged by the improving trends in our maintenance revenues and by the sequential stabilization of our license revenue. Consumer business continued to perform well while our Enterprise Security business also improved sequentially and we are encouraged by the initial signs of progress in the mid market security segment. We saw better than expected results from our public sector vertical especially in North America and increased volumes from financial services and telecommunications companies. The US dollar strengthened 3% 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 nonGAAP revenue by one percentage point year over year or by $14 million. However, currency effects positively impacted revenue as compared to the guidance we provided on July 29th. Had currently effects remained at our guided rate for the September quarter, nonGAAP revenue would have been $1.46 billion still above our guided range.

Looking at our geographic results, international nonGAAP revenue of $750 million represented 51% of the total and was equal to the year ago period. The Asia Pacific, Japan region was up 3% while the Europe, Middle East, Africa region declined 1% and the Americas declined 4%.

Now I'd like to move on to our nonGAAP revenue by segment. The Consumer business generated revenue of $465 million, up 6% versus the September 2008 quarter. This is the second quarter in a row that the Consumer business has generated 6% year over year growth. And illustrates the positive impact our industry leading products and dual brand strategy are having on our results. Electronic distribution represented approximately 80% of consumer revenue. Our premium priced Norton 360 suite now accounts for 35% of consumer revenue, having grown 43% versus the reported results in the year ago period. Our action to bring our e-commerce store in-house will further bolster consumer revenue and cash flow growth in the future. Across our Enterprise business we generated a total of 279 transactions valued at more than $300,000 each, up 7% sequentially, and 70 transactions worth more than $1 million each, up 32% sequentially. The Storage and Server management group generated revenue of $563 million, declining 8% as compared to the September 2008 quarter. This year over year change was in line with the June quarter results driven by the continuation of the customer buying behavior that we discussed last quarter and by the decline in service sales. Our Security and Compliance group generated revenue of $348 million, down 1% year over year. Endpoint security posted good sequential growth as more Enterprise customers purchased our protection suite and our new small business edition started to penetrate the SMB segment. We are pleased by the strong net promoter scores reported by customers and partners for our new SMB product. Our Services business unit generated revenue of $103 million, equal to the September 2008 quarter results. We saw growth in our consulting and managed securities services segments. We continue to focus on improving the cost efficiency of our services operations and we are pleased with the contribution improvements that the group has made during the past few quarters.

Turning now to margins. NonGAAP gross margin was 85.9% for the September 2009 quarter, up 20 basis points as compared to the year ago period. On nonGAAP operating margin of 29.2% was equal to the result generated during the September 2008 quarter driven by disciplined expense management. NonGAAP net income was $294 million resulting in fully diluted nonGAAP earnings per share of $0.36 for the September 2009 period. We exited the September quarter with a cash position of approximately $2.3 billion. Cash flow from operating activities generated $226 million in the September quarter, and we spent $120 million to repurchase 7.9 million shares as an average price of $15.22. We remain confidence in the strength of our cash flow generation and committed to returning value to our shareholders. As a result our Board of Directors has approved a new $1 billion share repurchase program. Our net accounts receivable balance at the end of the September quarter was $688 million. Days sales outstanding, or DSO, was 42 days. NonGAAP deferred revenue at the end of the September 2009 quarter was $2.91 billion, up 4% year over year driven by strong maintenance billings. Foreign currency movements positively impacted nonGAAP deferred revenue versus our guidance. Net foreign exchange remained at the guided rate for the quarter. Deferred revenue would have been $2.86 billion still above our guided range.

Now I'd like to spend a few minutes discussing our guidance for the December 2009 quarter. We are assuming an exchange rate of $1.47 per Euro versus the $1.32 per Euro we experienced during the December 2008 quarter, equivalent to approximately an 11% currency tailwinds. Also note that the end of period rate for the December 2008 quarter was $1.39 per Euro, equivalent to approximately a 6% currency tailwind versus our $1.47 per Euro assumption. Our guidance also assumes a common stock equivalents total for the quarter of approximately 820 million shares, and an effective tax rate of 29.5%. Recent movements in several key exchange rates have changed the rules of thumb we provide to assist analysts in estimating the impact of currency fluctuations on our financial metrics as follows. For each $0.01 strengthening of the Euro versus the US dollar, we now estimate that we receive a revenue benefit of $4 million versus the previous $4.5 million benefit. Similarly, operating expenses rised about $3 million rather than $2 million therefore it takes a $0.10 strengthening of the Euro to generate an incremental $0.01 of earnings per share versus the previous rule of thumb which only required a $0.05 strengthening of the Euro. There is no change to the deferred revenue rule of thumb of $7 million for each $0.01 movement of the Euro.

For the December 2009 quarter we expect nonGAAP revenue to be in the range of $1.485 billion to $1.515 billion as compared to be in the range of $1.54 billion as compared billion during the December 2008 quarter. At the midpoint of the guided range we expect revenue to decline by approximately 2.5% year over year. NonGAAP earnings per share are estimated to be between $0.36 and $0.37 as compared to $0.42 in the year ago period. Approximately $0.02 of dilution is related to our new e-commerce solution while another $0.02 of dilution is related to a projected increase in OEM, PC unit shipments, which in turn results in higher placement fees being incurred by Symantec during the December quarter. Clearly higher than expected PC unit shipments bode well for our Consumer business over the long run.

We continue to expect that our operating margins for fiscal year 2010 will decline between 100 and 150 basis points as compared to FY '09 as we stated on our previous earnings call. We expect nonGAAP deferred revenue to be between $3.0 billion and $3.05 billion; as compared to $2.96 billion at the end of December 2008. At the midpoint of the guided range we expect deferred revenue to grow approximately 2% year over year. We expect 68% or $1.02 billion of our December quarter revenue to come from the balance sheet. In closing I'd like to emphasize that while we are pleased with our September quarter results we are focused on executing effectively quarter after quarter. We will continue to drive our topline priorities while effectively managing our costs. And now I'll turn it back to Helyn so that we can take some of your questions.

Thank you, James. Will you please begin polling for questions?

Thank you. (Operator Instructions)

While the operator is polling for questions I'd like to update you on a few upcoming events. We will be presenting at the following conferences this quarter. Lazard, NASDAQ in London, Credit Suisse and Raymond James. We will be reporting our fiscal third quarter results on January 27. For a complete list of all of our investor related events please visit our events calendar on the Investor Relations website. Gwen we are ready for our first question.

We will go first to John DiFucci with JPMorgan.

Thank you. Nice job here, guys. Just a question here on the consumer is up 6%. We also saw Microsoft's results, saw some consumer strength both in Windows and in XBox. Just want to do just get a gauge, you're through the beginning of this quarter anyway and if this really has legs coming forward, how much of an impact do you think the new OS coming out is going to have here, has it carried over? And it does sound, I just want to verify that it does sound like the Enterprise business, anyway, may have stabilized here and at the same time just judging from the deferred revenue changes relative to other years that people still though are buying for what they need today.

So, John, when you look at the Consumer business I think our products are again the best products on the market. We've won over 150 awards for the 2009 products and the 2010 products we believe are even better given the technology I mentioned that we code named Corem, which brings in our reputation based security technology which is a big differentiator for us. As you know, the new threats are really the zero day attacks and we think we've got the best solution for that type of attack. That same technology will also become available in our Enterprise products. So the Consumer segment is doing well I think based on the strength of the products themselves. And I think the consumer buying behavior for us has continued to do well over the last several quarters and I expect that to continue. I think on the Enterprise side you use the word, we've started to see stabilization, I think that's right.

I also am pleased with the progress we are making with our end, new endpoint security product in the SMB segment. So definitely some positive signs but the environment still continues to have some folks who are concerned about their IT spending. But overall we are definitely seeing stabilization.

Thank you.

We'll go next to Kash Rangan with Merrill Lynch.

Nice to see a sequential improvement in all your businesses. Just two quick questions for you, one maybe if you could give us an update on the OEM deals that you might have secured. During the quarter I think you provided the last update of the analyst day back in June. I was wondering if had you an update now. Also with NetBackup of 6.6 and Backup Exec to be launched or launched between the two, how much of the forecast for the December quarter hinges upon any pent up demands for these products or are you actually being conservative with your projection for the December quarter not really including any material amount of business from these two back up products? That's it for me. Thanks.

When we think about the OEM business, we continue, we continue to make sure that we are going to do deals that we feel are profitable and make business sense for us. I think the OEM deals that we did were more focused on the online back up business. The deals with Toshiba and Acer now gives us relationships with four of the top five OEMs. And that's what we are definitely making some very good progress there. I think with regards to NetBackup 6.6 and BESR, the new Backup Exec System Recovery both these, the BESR release is coming out now and so from an impact perspective on the quarter it's minimal impact.

So I would be right in assuming that you have not assumed a reasonable amount of contribution from these new products in your forecast for the December quarter?

Yes, we have not.

Okay. Great. Thanks.

Next, Sarah Friar with Goldman Sachs.

Thanks so much, nice quarter. Enrique, on the Storage side I think you mentioned that the portion of the business that comes sold on the sun platform is starting to show some signs of stabilization as well. If that's the case what do you think is now a normalized growth rate underpinning your Storage business now that we are starting to get through that headwinds of sun?

I think that, Sarah, the sun platform especially on the risk side, the sun risk processor side has continued to flatten out is the way I would put it. I don't know that it's stabilized, I don't know that it's going to turn, I don't expect it to. And so my expectations is more about what are all the things we can do with our storage business on some of the other platforms. And some of our new solutions like File Store and getting on to other platforms like Windows and Linux. So I'm less focused on what's happening with the sun platform and really looking at how do we move customers and how do we support customers on some of the other platforms.

And maybe just a follow up because when I think of that business I think of it as kind of a one side back up and recovery and the other side then the storage management, what we were kind of just talking about. How different is the growth rate between those two halves of the business? Because I feel like the storage foundation suite business has kind of in some ways depressed what may be fairly healthy on the other side?

Yes, I think when you look at the move that customers are making from tape based back up to disk based back up, there is a meaningful migration and that is absolutely helping the result in the NetBackup business. I think that you've got a modest to much flatter growth rate on the storage foundation side. Now some of the things that we are doing, Sarah, and you will hear us talk more about this in the coming months is some of the capabilities that we are going to be delivering on the storage foundation, Command Central storage platform, integrating some security capabilities, and I think the other thing that's important to note is that with the File Store technology I expect that will also help our results on the storage management side.

Okay. Great. Thank you for the color.

Okay.

We'll go next to Phil Winslow with Credit Suisse?

Hi, guys, good quarter. Just focusing back on the storage side I clearly have several new products coming out over the next multiple quarters here. Is there any one in particular or a couple that stand out that you are sort of looking forward to drive license growth? And then also just in terms of sales force productivity, Enrique, on the last call you mentioned some changes to the compensation structure, wondering if you are, you can comment on what results you are seeing from that and what future changes we might see? Thanks.

Sure. I think when you look at what's going on in the storage area our stop buying storage campaign continues to resonate with customers as we help them get much better utilization of their existing storage. That bodes well for things like Command Central Storage and some of the other products we have that help our customers understand storage utilization and thousand make improvements. When you look at the other products in the overall storage segment, the NetBackup product I think is one that we are continuing to see demand from customers based on the migration from tape to disk based back up and some of the new capabilities that we are going to be delivering. Now NetBackup, we are expecting that to be shipped in the March quarter and the real impact of that will be in fiscal year 2011.

I think when you talk about the sales force and some of the changes we've made and are continuing to look at, ultimately it really comes down to for me increasing what I would say specialization on areas where we see the biggest opportunities. And so we are continuing to do some of that work right now. We are seeing the first six months of results. We are analyzing it and you should expect us to continue through this fiscal year to look at what are the benefits of specialization or further specialization on key product areas that we see good growth opportunities.

Thanks.

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

Hey, Enrique. If we dig into the consumer for a minute you guys are starting to expand your dual brands strategy. You highlighted the retailer in Australia. What is the risk that you start cannibalize price points around the Norton brand? And then secondly, if we look at kind of the OEM relationships from a protection perspective, forget about back up, clearly you guys are -- can have a larger install base, but why would the economics of an incremental OEM relationship be different for you versus your largest competitor?

Let me just take the first question and then we will come back to the second one, Todd. If the first question, we definitely have a couple of dynamics, the Norton brand has historically gone after a couple of segments in the market that are more the premium security buyer and PC Tools I think is going after a more price sensitive buyer. The good news though in the Australian retailer that I mentioned is that we were able to push competitors off the shelves basically and so now what you've gone is you've gone PC Tools and Norton side by side and where before they may have considered alternative products from competitors. So I see that as a real positive for the dual brand strategy and what we are able to do by basically gaining shelf space in some key markets. The second part of your question, Todd, if you can repeat it for me?

So if I compare you guys to your largest competitor I would think when you analyze an OEM transaction most of the revenue and costs associated with that is applied to new units going out the door. So I struggle with the fact that you guys kind of, the sense I get is some of these OEM deals going on you guys just don't think are profitable yet your largest competitor considers them very profitable and I'm trying to understand what the different factors are that would influence that conclusion.

I speak to how we look at the deals and we look at the operating margin characteristics of our business, what the growth rate would be from any one transaction and we also spend time thinking about the customer life time value and what you can always do in a CLV calculation is you can extend the numbers of years that you expect a customer to stay with you. And so we are always looking at our assumptions but a lot of the analysis we do is based on that customer life time value. And I'm not, I don't like to look at these and extend out the life time that we expect a customer to stay on a particular, a consumer to stay on a particular platform given just some of the dynamics that we've understood in the years we've been in this business.

Thanks, guys.

You bet.

We'll go next to Rob Owens with Pacific Crest.

Great. Thank you very much. A couple questions for you. You mentioned some competitive wins in the Enterprise segment. If you look at some of the more significant wins what products are you selling? Who are you displacing?

So if you look at the some of the bigger wins, I highlighted a couple in my comments, one was a big US telecommunications company. That was a combination of our products -- the strength of the portfolio, it was products like control compliance suite, ends point security, managed security services. This was a very large deal where it absolutely was about the strength and breadth of our portfolio, where the CIO his team presented his with an alternative point security product and he said, we are not going to keep doing this, guys. We have to standardize on fewer vendors, standardize on a security partner and they selected Symantec and went across four or five of our security products in that deal. So it was actually the combination that really challenged that.

I think I highlighted deals with city of Stockholm and others where it's your usual suspects. It's the companies that are in second place and down that we are getting these displacements from right now and that's really driven by the focus that we have put on the security business since the beginning of this fiscal year and we are starting to get some traction with displacements, quite frankly, against all of our competitors.

Just one thing to add to that to build on the cross-selling point that Enrique was making. Obviously we track our big deals in great detail and it was interesting to see in this past quarter for our $1 million above deals which we noted were up very nicely sequentially. We had 20% of those deals now involving three of our business units on the enterprise side. So a nice illustration that we are really selling across the portfolio.

Great. Then focusing on the cost side of the equation, there's been a lot of focus around sales and marketing, especially for the last six months, but if I look at that as a function of revenue it actually ticked up sequentially 60 basis points. Is this new initiatives around sales specialist or why was there inefficiency in the quarter especially given some of the revenue strength and the flat license performance?

No, on the cost side of the equation, quarter over quarter, the two things that drove the numbers there were foreign exchange and then OEM fees. So those were the drivers. In terms of Enterprise, sales force we continue to see improvements in efficiency there.

Okay. Great. Thank you.

We'll go next to Adam Holt with Morgan Stanley.

Good afternoon. Thanks for taking my question. My first question I guess is about the upcoming Backup Exec release. In the prepared comments you talked about some of the incremental functions in particular Deduplication and archiving as being able to accelerate the cross-selling opportunity. Does that mean that you think you'll be able charge for those separately? So if you are a customer on maintenance and you want those new features, you will actually have to buy them separately and how do you think about that cross-selling opportunity?

So we definitely believe that there is an opportunity to charge for the new functionality separately. As you know many of the things we do on the NetBackup platform are integrating new options and various agents. We do think that there's an opportunity. I think if you look at our message commoditizing the hardware or the infrastructure I think the NetBackup 7.0 is going to help us do that because what you are going to get is the ability for us to much more efficiently utilize the existing hardware that you have plus also give you a lot of choice on what storage devices you use in conjunction with NetBackup. I think this is going to be a release that will not only add the new functionality but accelerate our ability to drive cost out for our customers.

If I could ask a follow up on the margin side. James, I believe you said that you are going to incur $0.02 of cost related to the move to your internal e-commerce platform and $0.02 from OEM shipments ramping up, would you expect to see the same kind of dilution in the fourth quarter?

Well, on the OEM shipments it's hard to say because very much we are driven by the production volume forecasts of our various OEM partners. So that's the tough one to predict. And then in terms of the e-commerce platform I would expect that there would be a couple of cents of dilution in the March quarter for that.

So I guess as we think out a little bit more medium term a lot of folks including Morgan Stanley are expecting to see a relatively significant ramp in the PC market next year. How should we think about the impact of a material acceleration in the PC market with respect to, you may be bearing some up front costs around those shipments before you actually get activation on the back ends?

That's exactly right. We take the operating expenditure up front when our OEM partners are shipping the units out of their factories. And, of course, the benefit to us on the topline comes ratably overtime and that's after the customer has physically received the unit and then had the 60 or 90-day trial period. So there is quite a difference between when we recognize the revenue when we incur the cost up front.

Great. Thank you.

We'll go next to Heather Bellini with ISI Group.

I was wondering, Enrique, if you could share with us if we've seen the anniversary now of the pressure of contract duration on the Enterprise side that you referred to in your June quarter results?

I think we've got probably at least one more quarter. We have to get through December and it could be all the way through March to really anniversary it. It could be as much as six months, Heather.

Now I was just going to say, going forward, would you expect that behavior then of the shortened contract durations, do you think that's here for good, that that's what we should expect when we are modeling going forward or do you think that there's a chance that you could start to see those lengthen again next year.

I think when you look at the balance of fiscal '10 and then looking at fiscal '11 I would expect it to be very, very similar to what we are seeing right now. You may towards the end of fiscal year 2011 or fiscal year 2012 start to see an increase but it's more dependent on the overall IT spending environment. I would from a modeling perspective I would say same for the balance of this year and fiscal year 2011.

Could I ask a follow up to James if you don't mind?

Please.

On the expense front, James, you mentioned about the uptick in OEM shipments and that you are going to have the up front costs associated with that. How much of a benefit did you get from that when PC shipments were coming in? And does that mean that you might not have as much room on the efficiency side going forward from a cost perspective as we've just scene over the last three or four quarters?

What I think that certainly if PC unit shipments continue to grow then it will be quite a headwind for us and terms of our various other cost reduction activities. Now of course they will continue. We are very much focused on building efficiency. And so as to have we seen some benefit from the slowing of PC shipments in the last year or so, yes, there have been quarters where that has been the case. I wouldn't say though that that has been terribly dramatic in any one quarter. And that's why we haven't been particularly calling it out.

Okay. Great. Thank you.

We'll go next to Brad Zelnick with Macquarie.

Hi, thanks for taking my question. James, not to beat a dead horse, but on the OEM placement fees and your execution to Q3 just to clarify, what are the assumptions for increased units versus any change to the placement fees themselves? And --

No, no change to the placement fees themselves. It's just unit volumes.

Great. Thank you. And reconciling the dilution with cash flow, what are the typical terms from the shipment to when the impact is actually paid to the OEM?

Well, in terms of cash flow, you've got the period of time that it takes HP to get it out of the factory. That's when we pay them and others to the store itself and so that could take a month, six weeks, perhaps. And then there's a certain amount of time in the store. That's the order of maybe of a few weeks. And then there's the 60 or 90-day, depending upon the deal, trial period and then it's at that point that the customer purchases the product and we receive the cash.

Thanks, James. If I could ask a quick follow up of Enrique. Asia-Pac seemed to be a strong performance in the quarter. Can you comment on what drove that and any additional color, thank you.

Sure. If you think about our business, what we are definitely continuing to see is the growth in the Chinese market. I mean I just remember a couple short year ago China was smaller than our business in Pacific in Australia and New Zealand and now China is rapidly approaching the size of Japan for us. And on the Enterprise side. And so I think it's really been a lot of the health of the Asia Pacific region has been China.

Thanks, guys.

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

Hi, thanks for taking my questions. Enrique, I wonder if you can talk about what growth you've seen in the pipeline. Obviously large deals seem to be returning. As you're looking at those large deals and then taking into account the deal term, can you talk to us qualitatively or what you are seeing relative to your pipeline? Thanks.

We think about the business right now, the thing that I'm encouraged by is that we are continuing to have an opportunity to cross-sell our products into the customer base and we are seeing more and more, what customers are saying we are going to do business with less vendors and I think that bodes well for Symantec because ultimately the richness of our product portfolio and integration work that we are doing, I've got a sense right now that the deal DOP product is strengthening our security business because that's having the effect of opening the conversations around what are the risks, what are the threats. And how do we not only sell DOP but then control compliance suite and some of the other products in security portfolio. And also pulling in potentially products from the storage side like Enterprise Vault. So I think that's going to bode well for the numbers of deals and the size of the deals and my expectation is, given that this is a fairly large renewal quarter specifically on the traditional storage side of the business I think that will have a positive for us as we go through the December quarter.

And maybe just a follow up, Enrique, you talked about you've been through the sales specialization for six months now. And you've obviously seen some success with you. Can you talk how long do you think it becomes meaningful where you see meaningful share gains or I should say maybe we on the outside start to see meaningful share gains with this sales strategy? Thanks.

You have to, when you are working with the sales force of roughly 4,000 people, you do look at how do you get the changes made, get everybody focused on the right product lines and my sense is that you won't see the effect of the sales force change probably until fiscal year 2011. I think it's something that right now we've been looking at districts in various parts of the US and outs the US and so it's going to be a bit more of we'll continue to analyze the benefits of it and the impact of it will probably be felt in fiscal year 2011.

We'll go next to Kathryn Egbert with Jefferies.

Good afternoon, hi, back to the large deals, what's your run rate on those large deals and do you feel like it's increasing or decreasing. On the large deals, the deals over 1 million in particular, what do you think your win rate is and has that win rate improved or decreased would you say?

It's actually improved. I think the notion here is that many of the deals when we get into the much larger deals that have many products, it really ends up being more, we've been selected to be more of a strategic partner slash vendor and then it's a matter of what is the sum total of what the customer is going to be using in the one, two, three-year period. And it's less about a point product competition and that's what I think is the real strength of our portfolio at this point is we are able to bring a range of products together in some of the larger deals.

Okay. And then I think it was last quarter, Enrique, that you talked about when you guided down the margin, you talked about doing more in-house and then we saw your relationship in the e-commerce side change. Are there any other opportunities you can share with us where you are making any sort of strategic changes like that?

Kathryn, I'm thinking through. There are absolutely opportunities to continue to drive and manage our cost structure. I don't know of another item that we are currently contemplating of that scale. But on that particular item that's obviously going well. Our tests are going well. And we continue to see some improvements as we can now have direct control of the customer online experience and how we can test various options, but it's early. We've been doing this for less than a month, just a few weeks. But so far so good.

One quick follow up. How about the reverse side of that question, which is, is there anything internally that you would consider selling off or outsourcing to improve the margins?

Well, on the outsourcing side we actually have done quite a lot of work over the last year or two on both the IT side of the house and then the back office finance operations type areas of the business. And we are pleased with the financial returns that are coming out of that. But also in terms of the effectiveness of our ability to do our job. So that's really been the primary development going in the other direction.

Okay. Very nice quarter. Thank you.

Thanks, Kathryn.

We'll take our next question from Aaron Schwartz with Ladenburg Thalmann .

Had a follow-up question on the Consumer business. Understanding that PC Tools expands your addressable market, can you talk at all about the consumer margin as that gains a larger mixed shift. Is that going to put pressure on the consumer margin or would you expect 360 and some higher ASP products to continue to rise to offset that.

I think it's a relatively smaller part of the overall business but it does have a lower margin than the premium priced Norton products. One of the benefits and I just touched on it was the e-commerce side where we will get some margin improvement in everything that we do online. And then the other opportunities clearly to move folks from PC Tools through the range of the Norton products and try to get them up to Norton 360 and that's where we would really get the big pay off where we can create a great experience for the customer and upsell them all the way up through the product line to 360.

Just a second question for ming looking at the revenue guidance into the second quarter what are your assumptions for year end spending on the enterprise side? And given the deferred revenue of out performance is there any reason that the quench actual revenue shouldn't be greater? Is there something that pulled off hear a little bit that you didn't expect?

Well, we are expect to go see some level of budget flush at the end of December. But we are cognizant of course that IT budgets are down this year at our customers versus last year. So we wouldn't expect it to be as great a budget flush as we saw last December.

Okay. And on the deferred revenue?

Sorry, what was the question?

Just given the deferred revenue out performance, is there any reason the sequential move in revenue should be a little greater in the December quarter? Did something not stabilize further than what you expected maybe 90 days ago?

No, we were pleased by how the deferred revenue came through very much reflective of the strength of the maintenance revenues that we were recording and the December quarter is obviously a big maintenance renewals quarter. So I would expect to see, to see continued strength on the deferred side of it. Our, as our Security business continues to develop and we believe take share over time then of course that tends to be more ratable in its nature than it does the Storage side of our business. So I think you can expect to see some sort of a shift in the mix if you will as a result.

Okay. Great. Thanks for taking my questions.

We'll go next to Brian Freed with Morgan Keegan.

Good afternoon, thanks for taking my questions. Real quick, as we look at the Server and Storage management segment over the last couple of years there's been some shift in your pricing methodology. As we try and correlate the growth in that to various trends such as storage capacity, the number of virtual machines, number of physical servers, number of processors, where do you see the highest correlation in terms what have drives positive or negative trends in that business.

I think when you look at the model, right now what we are trying to do is look at capacity based pricing for some of our products given the rapid increase in storage and the rapid growth in storage and so what you're seeing is us absolutely being able move some customers there. We had a couple of very large deals we did this quarter that moved back up customers to a capacity based model. Ultimately, though, you definitely are seeing customers look for cost savings. How they drive more efficiency and basically reduce their cost of infrastructure. I think anything that allows us to help them do that, that is absolutely a positive from a quick benefit or ROI for the customer.

As you look at your deal how far along are you from moving to a capacity based pricing.

It's early. I think it's very early. I think that we've introduced it. We are definitely seeing big deals happen on a capacity model but we are just at the beginning of that.

Okay. Thank you.

You bet.

We have time for one more question. We'll take our last question from Daniel Ives with FBR Capital Markets.

Thanks. Can you just talk about the Federal business? I mean, there's a lot of talk about cyber security spending, it's a big issue with the government. Obviously came in strong. Just talk about that in the quarter but more importantly just going forward how you guys are viewing that and just are you able to get that opportunity.

I think this quarter was, we saw double-digit growth in the Federal business as it's their fiscal year end. We definitely see opportunity with some of the new initiatives. We've had a number of discussions with the leadership teams across the various agencies both civilian and noncivilian. And there's a range of things that they are trying to do specifically in the security category where we see a lot of opportunity and I expect that to be something that will develop over the balance of this fiscal year and into fiscal year 2011.

And that's the end of our question and answer session. I would like to turn the conference back over to Mr Enrique Salem for closing remarks.

In conclusion we are pleased with our execution during the September quarter. In particular we are pleased with the strength in the consumer segment and with the initial progress we are seeing in the SMB security market. That concludes today's call. I'd like to say thank you for everybody for joining us and look forward to speaking with all of you again soon. Thank you.

Thank you everyone. That does conclude today's conference. We thank you for your participation.