Gen Digital Inc (GEN) 2011 Q1 法說會逐字稿

Good day and welcome to Symantec's first quarter 2011 earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to Ms. Helyn Corcos. Please go ahead.

Good afternoon, and thank you for joining our call to discuss fiscal first quarter 2011 financial results. With me today, are Enrique Salem, Symantec's President and CEO, and James Beer, Symantec's Executive Vice President and Chief Financial Officer. In a moment, I will turn the call over to Enrique. He will discuss 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/invest. A copy of today's press release and supplemental financial information are posted on our website, And a copy of today's prepared remarks will be available on our Investor Relations website, shortly after the call is completed.

Before we begin, I would like to remind you that we will review our financial results focusing on year-over-year constant currency growth rate, unless otherwise stated. Sequential growth rates are based on as-reported results. For June 2010 quarter, the actual weighted average exchange rate was $1.26 per Euro, and the end of period rate was also $1.26 per Euro, compared to our guided rate of $1.35 per Euro. For the June 2009 quarter, the actual weighted average rate was $1.37 per Euro, and the end of period rate was $1.40 per Euro We have included a summary of the year-over-year of constant currency and actual growth rates in our press release table, and in our supplemental information. As a reminder, we will provide a currency update following the end of each quarter. This will be posted on our website's quarterly results section. Given the rapidly fluctuating exchange environment, we encourage everyone to apply our rules of thumb, as a guide to estimating the impact of currency fluctuations on our financial metrics, once the quarter has ended.

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 statements. Additional information concerning these risks and uncertainties can be found in the Company's most recent periodic report 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 metrics. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP results, which can be found in the press release and on our website. Now I would like to introduce our CEO, Mr. Enrique Salem.

Thank you, Helyn, and good afternoon everyone. I'd like to start off by highlighting our key priorities for fiscal 2011. These priorities are, extending beyond the PC and Consumer security, growing license sales, expanding the adoption of our SaaS offerings, and simplifying the customer and partner experience. While we made progress in some of these areas during the June quarter, a number of Enterprise deals slipped, due to longer than expected customer procurement cycles driven by continued cautiousness among IP buyers. In particular, this affected our storage management results. With that said, we are confident that these deals have not been lost to competitors, as in fact we have closed many of them in July.

Having said that, highlights for the quarter included strong results in our public sector business, and continued strength in DLP and SaaS. In addition, we are beginning to reap the rewards of our new backup solutions, and are pleased with the steady growth in the Consumer business. The integration of PGP and GuardianEdge is off to a great start, with customers excited with the addition of new encryption offerings to our portfolio. We are pleased with the year-over-year growth in public sector deals for state, local, and federal governments. We signed a multi-year contract with the US Marine Corp who chose to use NetBackup with their Enterprise IT services program. In addition [SESCAM], a public health care department in Spain signed a multi-year contract spanning across our Endpoint security, backup, storage, and service offerings. Our recent acquisition of GuardianEdge is resonating well within the government sector, due to the adoption of standards based solutions, and increased regulatory encryption requirements. This positions us well for the federal government fiscal year-end in September.

In our Enterprise security segment, we continue to do well in the large and midsized Enterprise market segments. In particular, customers are adopting DLP, which generated another strong quarter of double-digit growth. Our DLP solution continues to shift the focus of security from simply locking down the infrastructure, to protecting the information itself. As a result, we are leveraging our relationships with FISOs to sell our data protection suite, along with our Endpoint security, management, and compliance suites. Customers are increasingly turning towards vendors that offer compete security solutions, versus point product tools. Our suite enables customers to protect completely, manage easily, and control automatically, the assets most crucial to their business.

We are seeing higher net promoter scores for our Enterprise security suites, driven by the recent improvement in customer experience and quality. We continue to address the SMB market by increasing our focus with our channel partners. For example, we have expanded our Small Business Specialization Partner program. More and more, small business customers are increasingly adopting managed services to reduce upfront licensing costs and operational expenses. As a result, we expanded our service prior program enabling our partners to offer customers a monthly subscription. This licensing model aligns with the way these partners due business with their customers. The Symantec Hosted Services business posted strong double digit growth. Our performance was driven by hosted e-mail security, and newer products such as Web Security. In the last 12 months, we grew our customer base by 50%, and we remain the clear leader in this fast growing market by gaining share from our competitors around the world.

In May, we launched our internally developed Symantec hosted Endpoint Protection solution. The early response from our customers have been very positive, due to it's ease of use and lighter footprint on the Endpoint. Our hosted Endpoint Protection solution was jointly developed, leveraging the combined expertise of our Enterprise, Consumer and Hosted Services teams. We will continue to expand our portfolio, by delivering additional Hosted Services such as Data Loss Prevention and archiving. I am pleased with the progress we are making in this part of the business.

Now moving on to our backup and archiving business. Backup Exec posted double digit bookings for year-over-year across all geographies. Backup Exec 2010 has been one of our strongest backup releases to date. There's been more than 155,000 installations since it's February release. Small and medium sized organizations are excited about our ability to simplify data management, through integrated de-duplication and archiving, as well as virtual machine protection. We will continue to educate and engage our partners on the new features and benefits of the product. Since the launch of NetBackup 7, we have seen more than 2,350 installations, and over 12,000 customers are evaluating the product representing approximately 25% of the NetBackup install base. Customers value the improved storage efficiency with integrated de-duplication, greater infrastructure utilization, and faster recovery times which reduces the total cost of ownership. We expect this release to benefit us in the second half of this fiscal year.

In the September quarter, we expect to ship a new version of our archiving product, Enterprise Vault 9.0. With this release, we plan to include support for Exchange and SharePoint 2010, enhance de-duplication, and additional E-Discovery capabilities. These features will make it easier for our customers to adopt and standardize on our archiving solution. Our Consumer business generated another quarter of solid growth, driven by our award winning products, superior user experience, and multi-channel strategy. We continue to enter into agreements that are beneficial to both Symantec and our partners. As we announced in June, we are pleased to have extended our world-wide Consumer security relationship with HP for another three years.

This quarter, we expanded our security OEM relationship with Toshiba to include Norton PC checkup in the US, Australia and New Zealand. Norton PC Checkup helps customers become aware of PC performance problems and recommends possible solutions. This is an opportunity to up sell our Norton security backup and remote service offerings. Our PC Tools business achieved double-digit revenue growth this quarter. We are leveraging Symantec's extensive distribution network to distribute PC Tools world-wide.

For example, PC Tool is now being sold in retail stores in France, Spain, Portugal and Hong Kong, taking shelf space from competitors. We also introduced PC Tools into the Japanese market through a co-branded security solution with BBSS, a SoftBank Group company displacing our largest Japanese competitor. We completed the transition to our e-Commerce platform in June as planned. The performance from our online store is surpassing our expectations. We can tailor the user experience depending on where the customer acquired our product to maximize customer spend and improve close rates. I am very proud of the team's strong execution on this very strategic initiative.

I'm pleased with the progress we have made since the close of the acquisition of PGP and GuardianEdge in early June. Through the efforts of our integrated sales force, we exceeded our bookings expectations. The acquisitions generated revenues of $4 million, and diluted EPS by $0.005 in line with our plans. Encryption is being sold by the combined sales force, and the integrated product road map is already complete. Customers and partners are responding well, and I am pleased with how we have executed so far.

The acquisition of VeriSign security business is on track to close shortly. I am very excited about adding identity security to our portfolio, as it strengthens our core value proposition in securing and managing information. By bringing together our security portfolios, we will be the only Company capable to protect identities online, and create hassle-free experiences for our customers, our Consumer and Enterprise customers. I look forward to updating you on this acquisition in subsequent quarters.

In conclusion, we remain confident in our strategy and vision of securing and managing information and identities. We are focused on delivering industry leading products, integrated technologies, and cross-selling the portfolio. I am confident that we have laid the foundation for continued, improved execution in the September quarter. I'll now turn over the call to James to provide the financial details for the quarter.

Thank you, Enrique, and good afternoon, everyone. In the June quarter, we saw strength in our backup, Data Loss Prevention, and public sector sales. In addition, our Software-as-a-Service offerings posted double-digit growth. However, these positive developments were offset by the longer Enterprise procurement cycles that Enrique referred to. Given the relatively high volume of our business, that typically gets booked during the last week of the quarter, the additional time taken by some of our corporate customers impacted the June quarter's results. This buying dynamic was primarily a factor at some of our larger customers who typically buy products, such as our storage management offerings.

GAAP revenue was $1.43 billion, and increased 2% in constant currency terms versus the June 2009 period. The US dollar strengthened 8% 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 revenue growth by two percentage points year-over-year. Net income was $284 million, resulting in fully diluted non-GAAP earnings per share of $0.35. The reversal of accrued interest related to the successful outcome in our Veritas 2000 to 2001 tax case, added a one-time tax benefit of $0.01 to this quarter's non-GAAP earnings per share. Other one-time tax benefits recorded during the quarter generated another $0.005 of earnings per share benefit.

Looking at our geographic results, international revenue of $711 million increased 3% year-over-year, and accounted for 50% of total GAAP revenue. Revenue increased 2% year-over-year in each of our three geographies, the Americas, Europe Middle East Africa, and Asia Pacific Japan. Now I'd like to move onto our GAAP revenue by segment. The Consumer business had another strong quarter generating revenue of $473 million, up 7% versus the June 2009 quarter. With the launch of our e-Commerce solution, our renewal and upselling efforts continued to perform well. For example, our Norton 360 revenue grew 22% versus the reported results in the year-ago period, and accounted for approximately 40% of total Consumer revenue.

Our Enterprise business generated a total of 245 transactions, valued at more than $300,000 each, down 6% year-over-year. 37 of these transactions generated more than $1 million, down 30% year-over-year. The lengthening procurement cycles that I mentioned earlier, particularly affected the number of large deals closed this quarter. The Storage and Server Management group generated revenue of $524 million, and declined 3% as compared to the June 2009 quarter. We experienced fewer new license sales in our storage management business. However, our newly refreshed backup products performed well. Our mid-market products, Backup Exec, generated double-digit bookings growth as a result of the successful launch of the 2010 product.

New releases of our Enterprise scale NetBackup product tend to be gradually adopted by data center managers over 12 to 18 months, although we are pleased with our early deployment results, and with the positive customer reaction we have seen thus far. The Security and Compliance group generated revenue of $340 million, equivalent to an increase of 2% year-over-year, driven by strong growth in both Data Loss Prevention and Hosted Services. The percentage of Symantec Hosted Services bookings driven by referrals, from the on-premise sales force increased sharply year-over-year. Our Services business generated revenue of $96 million, an increase of 2%, as compared to the June 2009 quarter. We have received positive feedback on our recently launched partner-led consulting program. And we believe that our core software business will benefit from the resulting strengthening relationships with our partners.

Turning now to margins, non-GAAP gross margin was 84.9% for the June 2010 quarter, down 30 basis points from the year-ago period. Cost of goods sold increased, as this line item now includes credit card fees driven by our new e-Commerce store, and also reflects our increased investment in offshore technical support centers. Our non-GAAP operating margin of 26.5% in the June 2010 quarter was down 60 basis points year-over-year, driven by higher Consumer OEM fees. Cash flow from operating activities for the June quarter totaled $335 million. Cash flow was negatively affected year-over-year by higher OEM fees and cash taxes. We exited the June quarter with approximately $2.74 billion in cash, cash equivalents, and short-term investments.

During the quarter we spent $362 million to acquire PGP and GuardianEdge. In addition, we spent $200 million to repurchase nearly 14 million shares, at an average price of $14.49. We have $547 million remaining on our current Board authorized share repurchase plan. GAAP deferred revenue at the end of June 2010 was $3 billion, up 3% year-over-year.

Now I'd like to spend a few minutes discussing our guidance for the September 2010 quarter. We are assuming an exchange rate of $1.26 per Euro for the September 2010 quarter, versus the $1.44 per Euro that we experienced during the September 2009 quarter, equivalent to approximately a 13% currency headwind. Also, the end of period rate for the September 2009 quarter was $1.46 per Euro, versus our $1.26 per Euro assumption, equivalent to approximately a 14% currency headwind. Our guidance assumes a common stock equivalence total for the quarter of approximately 790 million shares. And an effective tax rate, before consideration of any loss from our joint venture, of 28%.

The acquisition of VeriSign's identity and authentification business is on track to close shortly. And therefore we have already included approximately two months of revenue and contribution from the VeriSign assets in our guidance. Thus, for the September 2010 quarter, we expect GAAP revenue to be in the range of $1.445 billion to $1.465 billion, as compared to revenue of $1.47 billion during the September 2009 quarter. We are expecting PGP and GuardianEdge to contribute $10 million, and VeriSign's security assets to contribute $16 million to our September quarter revenue. Once again, these acquisition-related assumptions are already included in our revenue guidance. We expect year-over-year revenue growth to be down 1% to 2% on an as-reported basis, and up 1% to 3% on a constant currency basis. GAAP earnings per share are estimated to be between $0.09 and $0.10, as compared to $0.19 in the year-ago period. Non-GAAP earnings per share are estimated to be between $0.27 and $0.28, as compared to $0.36 in the year-ago period.

Our September quarter EPS guidance already includes $0.04 of dilution, as a result of our three new acquisitions. Specifically, we are expecting VeriSign to dilute EPS by $0.03, and PGP and GuardianEdge together, to dilute EPS by $0.01 in the September quarter. We expect GAAP deferred revenue to be between $2.83 billion and $2.86 billion, compared to $2.9 billion at the end of September 2009. We expect deferred revenue to be down 2% to 3% on an as-reported basis, and up 2% to 3% on a constant currency basis.

We expect approximately 70%,or $1.03 billion of our September quarter revenue to come from the balance sheet. In closing, we are very focused on quickly and successfully integrating our recently announced acquisitions, while also executing on the growth opportunities inherent in our core business. We will continue to redirect our spending to those areas with the best growth opportunities, as we benefit from the various cost reduction initiatives that are driving additional efficiencies across the business. And now, I will turn it back to Helyn, so that we can take some of your questions.

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

(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 Citi Conference on September 8th, and we will be reporting our fiscal second quarter results on October 27. For a complete list of our investor-related events, please visit our events calendar on the IR website. Gwen, we are ready for our first question.

And we will first to John DiFucci with JPMorgan.

Thank you. Enrique, can you comment a little more on the storage business? It's not that there's a lot of expectation out of that business, and from at least from field checks, and from what you're saying, you're getting a lot of traction or at least interest in your new products, both Backup Exec and NetBackup. It's probably the most important product cycle you've seen in many years. At the same time, we haven't seen a positive growth number out of this business in quite some time.

Well, John, you did talk about the NetBackup and Backup Exec. We do have great releases there, and they are continuing to get broad adoption. I mean, 25% of the base in NetBackup is looking at the product, and so we are optimistic about what we are seeing there. When you look at the core storage management business, what we are seeing is a move in our customer base to try to build out, what I'll call a more, distributed or scale out data center, where they are moving to use many commodity components, commodity storage. And that's where technologies like FileStore become more relevant. And so we are definitely seeing a move in the Enterprise data center from what we have traditionally seen as the, what I'll say the bigger focus on bigger systems, to a more distributed architecture and that's why the FileStore capability has become important. So you're right, we definitely have continued to see a softness in the sale of some of the traditional products.

But does that mean then, that your product portfolio is just sort of outdated? And if you could, if you could just -- you mentioned there were some deals that closed in July. If you could just -- can you give us any -- tell us how much they were worth?

Not in a position to really comment. We have closed a number of the deals at the beginning of this month, or through July. I think what's going on, John, is it's really a move that we are seeing, and while question continue to do very well in a number of segments, we think that the future lies more in what we are doing with some of the new products with our cluster file system and FileStore. The product portfolio, the largest companies in the world still depend on products like Storage Foundation and Storage Foundation HA. And my expectations are that that will continue and they will continue to use it in many of their business critical applications.

The other thing that we are seeing that we are encouraged by, is then some of the new deployment of virtualization technology, VMware and others, they are looking to us to help drive the improved SLA or availability. And so that's going to help us with some of the clustering technologies and some of the new capabilities that we will be shipping that will support that environment. So ultimately it's really a shift, I would say, from the architecture and the data center, to what I'll call a much more distributed scale out architecture. And that's why we have shipped some of the new products that we are expecting to see some benefits as we go forward.

Thanks, Enrique.

Okay.

We will go next to Phil Winslow with Credit Suisse.

Ohio, guys. Question on margins. Obviously, if you look at your guidance for Q2, a bit below where consensus was. How do you guys think about operating margins, especially on a go-forward basis? I guess from two perspectives, one, is just the writeback, or the recognition of the written deferred related over time, and then really kind of an an organic basis too? Thanks.

Well what we said in the last couple of months is that as we look through the next three-year period, we would be able to drive operating margins to 30%, driven by the core products. Now, in the interim, certainly on a GAAP revenue basis, that's going to impact the operating margins that we are reporting, because of this deferred revenue haircut. Now, I think once we get to FY 2013, we will have, in essence got through the effects on operating margin, of that deferred revenue haircut. And I would like for the three acquisitions that we have entered into recently to be additive to the profit margins at that time.

Got it. Thanks, guys.

We will go next to Brent Thill with UBS.

Thanks. Enrique, just in terms of the lengthening sale cycles and some of the deals that slipped, was there any common characteristics that you saw in terms of GOs? Was this more Enterprise related versus SMB? Can you give us more color in terms of what you actually saw?

I think it's the cautiousness we are seeing, is bigger deals, as those are going through more steps. And it's taking a little bit longer to get through that procurement cycle. I would say, we saw it both in the US and in Europe. So it's not necessarily one geography. We just see a little bit more cautiousness in the larger deals.

Okay. And I think you mentioned, that you don't believe there's new any competitive dynamic, it's just the timing issue.

Yes, I'm not seeing anything new on the competitive front. And as I mentioned, some of those bigger teams, a number of them have already closed.

Great. Thank you.

We will go next to Sarah Friar with Goldman Sachs.

Hi. Ventsi Stoichev for Sarah Friar. I had a quick question on geographies. I noticed that Europe was a little bit stronger than the US. And that's a little bit in contrast to what we are seeing from some other companies that have reported so far. What drove that, and do you expect that dynamic to remain the same during the next quarter, or do you expect that to change? Thanks.

Sure. If you look at the various geographies throughout Europe, one of the things that we saw was we definitely saw our central, what we call central, which is Germany, Switzerland, that market, and what we call west, the French part of Europe, actually doing -- performing well. And that's what we saw in the June quarter. I would tell you that we are going to keep monitoring what's happening in Europe, as there is -- there's definitely been a bit of a tone where people are a bit more cautious. And so we will monitor it. But what we saw that drove our results was good performance by Backup Exec, quite frankly, world-wide including Europe and then good performance in central Europe and in the western or French part of Europe.

Got it. And what was the issue in the US? Just overall the lengthening procurement cycle?

That's correct.

Thank you.

And we will go next to Todd Raker with Deutsche Bank.

Hi, Enrique. Can you guys talk about on the Consumer side, from an operating expense perspective, where you stand in terms of transition from Digital River onto your own platform? And how we should be thinking about kind of leverage and profitability in that business going forward? And kind of where you think growth will be in the back half of the year? Thanks.

Yes. Let me take the first part, and I'm going to let James continue. So what we are really pleased about is that, we have successfully completed that transition. When we announced it in October, we said we would be done by the end of June and now we have done that. And what we are pleased about is that we now have complete control of the experience, and what does that mean? That means our ability to upsell to the suites, that means the ability to cross sell other capabilities. And so our ability to take over that whole experience is something that we are very pleased about. And with some of the details on the financials, I'll let James take that.

Yes, in terms of the expenses around the new e-Commerce platform our day-to-day operating expenses, if you will, are effectively in place. We have now fully transitioned, so the people running the platform are with us. Now, we also, of course, have started the depreciation process of what we invested in the platform. So that will play out over the next three years or so. Net-net, of all of that, is that in the past quarters, we have talked about the e-Commerce platform development being dilutive to margins. We are pretty much through that effect, and we'd look for a positive impact on margins overall, in the back half of this fiscal year.

Okay. And then just following up on the strength of Norton 360. If I look at that business, without -- if you back out upsell, are you growing your Consumer business from a units perspective? I mean, it seems to be that the key driver here, is upsell. Would that business be growing, without the trade-up to the suite side?

Would the -- would the -- the Consumer business is being driven by a couple of factors. I mean, the suite is a part of it. I think renewal rates, we have talked about with regards to the Norton 360 product, when people use Backup, we see improvements in the renewal rates. And then, of course, the other thing that we just talked about, was the work around the e-Commerce platform. And so, those things are driving the growth. So the combination of the move to suites, the better renewal rates, and the move to the e-Commerce platform are all benefits.

The only other thing I would add to that, of course, that we have got a wide variety of distribution parks for our Consumer business, both the range of OEM providers that we further added to in this past quarter, as well as retail. So I think we are unique in having this breathed of distribution.

And the other thing I would add on, one last thought is PC Tools. We are definitely getting that out there a little bit more.

I guess my issue, and I'm struggling with the fact that you guys got hit with a $0.02 impact in Q4, off of HP shipments, same thing in the March quarter. And yet it doesn't look like the Consumer business is really accelerating, and I would think that those units should be starting to transition into paid conversion.

Well, our expectation, our expectation continues to be, and we monitor those renewal rates very, very closely. And so there is that lag, we will keep monitoring it. Nut 6%, I guess on a constant currency basis I feel pretty good about a 6% year-over-year growth, and our expectations are what we achieved was in line with our expectations.

Okay. Thanks.

We will go next to Adam Holt with Morgan Stanley.

Great. Thank you. Maybe I'll ask a quick follow-up to that question on the Consumer business. Obviously, there's a lag effect with Consumer PC shipments and your business. As we have seen the Consumer PC market accelerate the last several quarters, now starting to weaken a little bit. When do you think that tail will start to peak for you all? And then, when do you think the recent weakness in the Consumer market might start to impact your business?

So when you say the tail, the tail on the growth rate?

Right. So if you were to look at the PC market, and the relative impact on your business, there's a little bit of a lag, obviously. Consumer market accelerated and basically peaked in the spring, and now it's starting to decelerate a little bit again. You have not all seen the peak impact of that acceleration. When do you think you would see that?

I think -- what you have to look at with the -- with the RPC business is, you end up getting deferred revenue, and it's recognized ratably. And so, we have gone through and you look at the seasonality. And it's pretty clear to me, December and March are the seasonally strongest quarters, tails off through going into the middle of summer, and then we start re-accelerating as we get back to the holiday season. So that's consistent what we have seen every year, and so my expectation is you'll see the same thing again through this fiscal year. So it kind of slows a little bit as people go on holiday, and it picks up into the holiday season.

Terrific if I could just ask a follow-up on the license revenue in the quarter, and I apologize if I missed this earlier. As you look at a number down 17% year on year in Q1, could you walk through some of the relative impacts there? Obviously the Sun business might have been a negative impact. But can you give us sort of what you thought were the different impacts on that, and how do you think about that turning around as you get a little bit deeper into an improved IT spending environment?

You did mention one of the components, which is we are still lapping the year-over-year impacts on the Sun business. And so, I think we are getting to the tail end of that effect. I think we will probably see that start leveling off. And then it's a matter of us, through our own sales force driving those products into the breadth of platforms whether it be Oracle Sun, HP, IBM. And so our expectations is that we are starting to hit the bottom of that effect. I think the other side of it is, we continue to simplify. As you heard at our Analyst Day, what Francis deSouza, and his team are doing is creating a much simpler approach to our security solutions, where you've got four suites. By simplifying the message, which lines up to what customers are expecting, which is how do they get away from lots and lots point products, that should also benefit us. So when I look across bottoming out on the storage side, improvements in security, also the strength of the new NetBackup and Backup Exec releases, and then lastly we did see double-digit growth in the SaaS business. So that combination of things should start seeing an improvement in new license growth.

Great. Thank you.

We will go next to Rob Breza with RBC Capital Markets.

Rob, are you there? Go ahead.

If you're on speakerphone, please pick up your handset or press your mute button at this time. And we'll go ahead, and go next to Daniel Ives with FBR.

Yes, with the September quarter, are there any one-time OEM payments baked into the number?

I'm unaware. I don't know of any one-time payments that we are expecting.

No. It would be a run rate type OEM activity.

Okay. So you're saying the $0.04 from the acquisitions is the only let's say like, one time type things, that we weren't seeing three months ago?

Yes, I would say that I would expect OEM cash fees, as well as OEM OpEx to be up year-over-year. And so that's certainly a pressure point for us in the short run.

And then just going forward in -- I know you're not giving guidance, but how should you think about operating margins the rest of the year?

Well, in terms of the operating margin, I'm just getting to really focus on, what I was saying earlier about the three-year look. Clearly, this year we have got $0.11 of dilution that is going to be driven from the three acquisitions. And that's very much a function of this deferred revenue haircut that we have been talking about. We will get through that process in the next couple of years. We will have fully lapped that effect, if you will. And so, I think the acquisitions will be improving operating margins at FY 2013, and the core will be driving a 30% operating margin at that time.

Okay. Thanks.

And we will go next to Philip Rueppel with Wells Fargo.

Yes, thank you very much. You talked about the slowdown, or the deal slippage in the Enterprise level. Implicit in your 2Q guidance, are you sort of lowering your expected deal close rates on those big deals, or on big deals in general? I guess, another way to ask it is, do you expect sort of a similar selling environment to continue through Q2?

That is my expectation. And that's what's figured into our guidance, is that, what we saw, like I'm pleased with having closed some of the deals that we were targeting in June. But as we go through this quarter, I expect that the procurement cycles will remain about the same. We come through the summer, and so that's planned into our guidance for the September quarter.

Okay. And then so shifting to the SMB area, you had sort of showed -- or talked qualitatively about progress you made there, especially on the security side. Could you give us a little color on that segment of the business in Q1?

So when you look at the products in that segment, Backup Exec and Symantec EndPoint protection, Symantec protection suites are the key products. We continue to make good progress with the launch of Backup Exec and the adoption of the suites is continuing in the SMB segment, the security suites. Obviously, we continue to look at opportunities to reach more of that segment, as you know, it's very diverse. But we definitely have continued plans. And I've made comments. One of the things that we are doing is specializing our partners, because what we have found is the more specialized they are, the more effective they are, especially in that SMB segment. And so, we are going to continue to do that. And my sense is that will continue to drive better performance for the security products, and better performance for the storage and backup products. Last comment, we shipped the new products, Symantec Hosted Endpoint Protection. That is a hosted version of our Endpoint security technology, and the initial feedback on that has been very good, and that serves that SMB segment very well. So this is another addition to the segment that I think will help improve -- continue to improve performance.

Great. Thanks.

We will go next to Heather Bellini with ISI Group.

Hi, this is [Ryan Leaf] in for Heather. I just had a quick question about Enterprise on markets. Last quarter you guys mentioned that you didn't see any pricing or pricing pressures, or any changes in the deal size. Is there -- are you seeing -- are you guys seeing any changes there? Are you seeing more pricing pressures?

Well, one of the things we monitor very carefully is discounting and what our results are showing is that we do not see any increased pressure to further discount our products. And so comparable to previous quarters, no increased pricing pressure. And my expectation is that we have now reached a stable state from our pricing perspective.

And in terms of average deal size, are people still opting for a one-year deal as opposed to --

Correct, yes, they are.

Okay. Thank you.

And we will go next to Shaul Eyal with Oppenheimer.

Thank you. Hi. Good afternoon, thank you for taking my question. First question, with respect to the weakness, any specific verticals you guys have seen it in, or it was broad based?

We saw -- I made comments about strength in the public sector, and in governments around the world. When you look at the verticals, there continue to be a number of verticals that continue to perform well. We definitely have seen a more cautious tone, that that's fairly global, meaning US, Europe, and across verticals, with the best performance really coming from the public sector.

Got it. And kind of maybe just more of a -- I don't know how you guys are going to want to address kind of the answer to this question, but what's kind of the strategic thinking? How is the Board thinking about strategic direction? Are you -- is the Board happy about how the business has been progressing over the past couple of quarters? Apparently the storage business is kind of lagging, maybe one step forward, two steps backwards. What's kind of the internal thinking?

Well, what we did our Analyst Day is we spent some time sharing what we see the future of IT, what it looks like, and our expectations for that future. And so we have shared that with our Board, with all of you. We will continue to iterate on what are the capabilities, what are the opportunities for monetizing that vision. And so our expectations are that, we have sat a direction for our company that takes advantage of where we are very strong. And then outlines what our expectations are, because things like consumerization, that is a big trend that Symantec is uniquely positioned to take advantage of, given the size and scale of our Consumer business.

And so when we talk to our Board, what we do is paint a complete picture that says, here is the strengths of our portfolio. Here is the potential weaknesses, and where there is some level of risk. And then here, is where we are going with the Company. And the reception that I've gotten externally, and I was with CIOs around the world. I was in Europe two weeks ago, met with a number of CIOs here in the US over the last month. And they understand our vision, they see that this notion of protecting information, protecting people, securing identities, they are very encouraged by where we are going with the Company. And I think that's what's important right now, is to execute against the current product offering, and sell what we have got. But also start moving towards the direction that this new vision has outlined for Symantec.

Okay. Thank you.

We will go next to Michael Turits with Raymond James.

This is Jon Doros, for Michael. You mentioned strength in the public sector this quarter. Some other IT vendors out there are expecting some weakness in the federal vertical in the September quarter. Are you baking any softness from the public sector into your guidance for September

We just finished our business reviews for the September quarter last week. We had presentations that covered all segments. We looked plans and forecasts, we looked at pipelines, and so at this point we have taken into account more the pipeline view, and our expectations and our expectations for the public sector, and we think that that's all baked into our guidance. The other part that's important, is with the acquisition of GuardianEdge, that is a product that's done very well in the public sector, and that's now added to our portfolio. And what that does, is when you take a small company and you add it to Symantec, where buyers, especially the federal government where we have a lot of great relationships, there's going to be more confidence in working with us, than working with a small company. And given the certifications they have and the capabilities, that is a plus for us in the public sector. And so we feel good about our ability to achieve our forecast in the public sector.

And then one more on the go-to-market strategy. I know previously you tested out, separating storage and security, but the weakness in storage this quarter, is there any -- looking at maybe going back to that?

What we have done is our sales force continues to have a flying formation or alignment that matches up to the products in the portfolio. That's when we deal with the largest Enterprises or the Enterprise segment. When we go down to smaller customers, I've been talking about the specialization in the partner community, and so we are going to continue to do that. So now we have got partners, who are very good on our storage management partnership. Partners who are very good on our backup products, very good on our DLP products. And so what we are trying to do, is drive much more specialization that will allow better results, we think, across the product portfolio. And as far as our sales force, I'm comfortable with how we go-to-market with our own people.

Thanks.

Yes.

And we will go next to Ed Maguire with CLSA.

Yes. Good afternoon. Back to the Enterprise storage management business. You commented that you're seeing cycles lengthening, but I'd appreciate if you could provide just some color on your overall pipelines. Have the pipelines change, have close rates changed or have we seen this -- are we seeing what had been more of a just-in-time approach to purchasing, focusing on larger deals that take longer to get through the pipeline?

When you look at the overall picture, the pipelines are as robust as they have been. I haven't seen a change in the ratios. Given the procurement component, and the extra approvals and some of the discussions have gone on, we did see a slight change in the close rate for some of the bigger deals. When you look at the other segments, SMB, we didn't see that for example in products like Backup Exec, and some of our suites. So it would be more, pipeline ratios seem to be appropriate. We do see a little bit close rates in the larger deals decreasing a little bit. And then we also our expectation is that that will continue in this quarter.

Okay. Great. And on the Consumer, how are you -- well, you tracked the conversion of trial to paid. What are the dynamics in that market for your OEM relationships? Are you seeing a fairly consistent conversion rates?

When you look across the board, we tracked that very, very closely. And at this point, nothing that is unexpected, especially as we go into the summer period. Obviously, we are always looking forward to the holiday season, and then the beginning of the New Year, but so far we track it carefully and we haven't seen any big changes there.

Great. Thank you.

We will go next to Rob Owens with Pacific crest.

Great. Thanks for taking my questions. Question on the Consumer front again. I think you said you were happy with roughly the 6%, 7% constant currency. Do you expect any acceleration there, just from the standpoint that you talked I think at your Analyst Day, about a high single digit three year CAGR. So, is that coming down more to the mid single digit range here? And also on the Consumer fronts, what are you seeing out of the freemium vendors in the market right now? Thanks.

Yes, so, Rob, just to be clear, it is 7% at constant currency, and 6% as reported, sorry if I -- I just want to be clear on that number. When you look at the marketplace, this level of growth, plus or minus, any one quarter, it's going to move around. So I think we are in the right range, that 7% plus or minus, is probably about right. Could be a little higher, could be a little lower.

When we look at the freemium market, we haven't seen any dramatic changes in that marketplace. And quite frankly we are pleased because you take the PC tools offerings, and what we have done, which was our initial strategy is we are better positioning PC tools to go after the more price-sensitive buyers, to go offer the freemium or lower cost solutions or offerings. And so, we got that combination. And we think we have the mix about right with our high end premium Norton product, and then PC Tools at the low end. And we think that's going to combat the freemium vendors. The other thing I commented on, is that we now have PC Tools available in many of the markets where the freemium vendors have historically done well, not just emerging markets, but parts of Europe. And so I think that will also help.

Great, and then I apologize if I missed it. What is the tax rate guidance for Q2, and for the year?

For Q2, the tax rate guidance is 28%, and that's before any consideration of losses around the JV.

Okay. Thank you.

And we will go next to Neil Herman with Soleil Securities.

Hi, could you talk a little about the competition in the storage and server space vis a vis the EMC, if you're seeing any significant changes there? You had also mentioned that one of your goals is obviously license growth. Could you kind of give us a sense as to your hopes, expectations in terms of getting back to year-over-year license revenue growth?

When we look at the competitive marketplace, we are doing very well. We are gaining share in the backup market as you can -- you can see. Backup Exec has done well, and Backup has done well. And so from our point of view, obviously looking at the deals that we are closing there, across all competitors, we are gaining share in the backup space. What we are doing, though, is we have got to make sure that we take advantage of this move to data de-duplication. And our new offerings are NetBackup appliances are now shipping and so that will continue to help us in that more appliance de-duplication marketplace, but we are gaining share in the Backup space.

When you talk about the new license growth, it really is a matter of executing across the portfolio, driving more DLP, driving solutions from Backup, driving the Software-as-a-Service opportunity. And so to get that back in place, those things I just outlined have to become a larger total percentage of the overall business. And that's what we are seeing, as we see double-digit growth, in both DLP and Software-as-a-Service. Now they are coming off a smaller base, but if that continues, that should be a positive towards new license growth.

Is the transition to SaaS, do you think having an impact on license revenue growth? Are you finding customers are choosing to buy -- to move in that direction as opposed to historic license purchases?

We definitely are seeing a move towards more subscription oriented buying. And when you look at that number, and some of my comments I talked about the offerings we are making to our partners where they can sell more of a subscription model. So we definitely see a shift towards more subscription oriented businesses, than what I call the traditional just pure license maintenance business.

Thank you.

Yes.

We will take our next question from Katherine Egbert with Jefferies.

Hi. Good afternoon. Can you hear me?

Yes, we can.

Okay, great. Same question that Neil just asked, but on the security side. Can you talk about competition in this quarter, win rate, how often did you see McAfee or Sophos or some other vendors? Thanks.

We are doing great. In the bigger deals where we are competing on the security front, we are doing very, very well. And it's really a matter of looking at the whole portfolio because we have got a set of products that match up to a number of competitors, McAfee, Trend, and others and then they have got some products that are not consistent with us. As we go into the new products lines, the encryption and now the identity security that comes from the VeriSign acquisition, we will again have some other capabilities that are different and differentiating from a number of our traditional competitors. We are seeing Symantec Protection Center, SPC, not only get reviewed well, but customers are very pleased with it's capabilities, it's user interface, it's reporting versus, versus EPO. And that's been another big positive for us, as that was one of the concerns customers had several years ago.

Sure. One quick follow-up. I am sorry if I missed it. Did you talk about Altiris? How did that product do, I think, with Windows 7 upon us, that you would be seeing good uptick there? Thanks

I didn't make any specific comments on the Altiris suite. The full suite is available. We shipped the last components just recently. We have got an update coming out. And you're right, a number of our customers are using it for the roll-out of Win 7, and Win 7 in the Enterprise is -- that process is starting. And we expect that to continue quite frankly for the next 24 months or so. Operator?

We will go next to Richard Williams with Cross Research.

Hi. Can you hear me okay?

We can.

Okay. Could you give us a little bit more color in terms of the geographies for the deal slippage? Was that specific to any one geography?

What we saw was specifically, around the US and Europe, where -- is where we saw some of the deal slippage.

Anything in the SMB space?

The volumes of deals in the SMB space are very, very high, so from a close rate perspective, we didn't see any changes there. And Backup Exec ,quite frankly, did very well so nothing really that I can report or comment on in SMB.

And then weakness we heard from other software vendors reporting recently, that the last few days of June they saw large deals just disappear. Is that, I guess, similar to what you saw?

Well, we saw the longer procurement cycle. I don't know if they disappeared for us. It's just a matter of they pushed into the new quarter, and a good percentage of them have closed. So I can't say that they have disappeared. We had a very detailed conference call and planning sessions, that we have done over the last -- or the first three weeks of July to make sure we were tracking those deals. And I don't know any of the larger deals that we are tracking that completely disappeared. They are all there.

Any grouping by industry, and that will do it for me? Thanks.

Across the verticals, we are in so many verticals that it's hard to say one vertical saw the bigger change than the other. The positiveness came from the public sector, state and local continued to do well.

Okay. Thank you very much.

And there are no other questions at this time. I'd like to turn the conference back over to Enrique Salem for closing remarks.

Thank you, everyone for joining our call today. While we saw some challenges in the June quarter, we remain focused on our key priorities for this fiscal year. The Consumer and Enterprise products we offer are more capable and valuable to our customers than ever before, and our recent acquisitions strengthen our product portfolio, enabling us to better serve our customers. I look forward to speaking with you again soon. Thank you very much.

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