Gen Digital Inc (GEN) 2012 Q2 法說會逐字稿

Good day, and welcome to Symantec's second quarter 2012 earnings conference call. Today's call is being recorded.

At this time, I would like to turn the conference over to Ms. Helyn Corcos, Vice President of Investor Relations. Please go ahead.

Thank you. Good afternoon and thank you for joining our call to discuss fiscal second quarter 2012 financial results. With me today are Enrique Salem, Symantec's President and CEO, and James Beer, Symantec's Executive Vice President and CFO. In a moment, I will turn the call over to Enrique. He will discuss Symantec's execution during the quarter, then James will highlight 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. 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 the website shortly after the call is completed.

Before we begin, I'd like to remind you that we will review our financial results focusing on year-over-year constant currency growth rates, unless otherwise stated. Net income, EPS and sequential growth rates are based on as reported results. For the September 2011 quarter, the actual weighted average exchange rate was $1.41 per euro, and the end of period rate was $1.34 per euro, compared to our guided rate of $1.43 per euro. For the September 2010 quarter, the actual weighted average rate was $1.30 per euro, and the end of period rate was $1.38 per euro. We've included a summary of the year-over-year constant currency and actual growth rates in our press release tables and in our supplemental information which can be accessed on the investor relations website.

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 and 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 to update any forward-looking statements.

In addition to reporting financial results in accordance with Generally Accepted Accounting Principles, or GAAP, Symantec reports non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP results, which can be found in the press release and on our website. And now I'd like to introduce our CEO, Mr. Enrique Salem.

Thank you, Helyn, and good afternoon, everyone. For the fifth quarter in a row, the team executed very well delivering solid September quarter results. We generated record September quarter revenue and deferred revenue. Performance was balanced across our business segments and geographies. Results were largely driven by strength in enterprise Security, backup and Consumer. The VeriSign authentication business generated strong growth for the fifth consecutive quarter. In addition, the Clearwell acquisition completed its first full quarter posting its largest bookings quarter ever and exceeding expectations.

Now let's take a closer look at some of the highlights from the quarter. Focused sales execution coupled with industry-leading products drove solid results in each region, both the Americas and APJ regions grew double digits and the growth in EMEA met expectations. Our public sector business generated record bookings this quarter as we closed several competitive wins. We are successfully cross-selling the product portfolio with 43% of our September quarter deals over $1 million including sales from both enterprise product segments. Sales of data loss prevention and backup solutions drove license revenue growth for the third consecutive quarter. Our enterprise Security business generated another quarter of growth reflecting improvement in the Endpoint security business and strong performance from our managed security services authentication and data loss prevention businesses.

Since the July launch of Symantec Endpoint Protection 12, the product has been successfully deployed on more than 1.3 million end points. I'm pleased with both the level of quality and effectiveness the solution provides for both virtual and physical environments. Early customer and partner feedback for both the enterprise and small business editions has been very positive. Recently, at our annual partner conference, several partners commented that the product is easy to deploy and their customers have had 0 infections since installing the product due to step 12's new innovative reputation-based security technology. Partners serving the SMB segment in the US and Canada are also excited about the ability to sell [SaaS.cloud] providing customers choice in deploying our Security solutions.

The managed securities services business had another quarter of strong double-digit revenue and bookings growth. Customers are increasingly relying on our security expertise to protect their environments and information as many struggle to meet the IT staffing needs they require to confidently respond to new and emerging threats. Our data loss prevention business posted strong double-digit growth as information production continues to be top of mind for corporations and governments around the world. We've been a leader in the Gartner Magic Quadrant for 6 years, making us the clear choice when CSOs evaluate DLP solutions. Further extending our leadership, we'll be delivering the industry's first content aware DLP solution for tablets in early 2012.

Our authentication business had another strong quarter as we continue to reap the benefits of leveraging Symantec's distribution channel for SSL and user authentication solutions. The SSL install base grew double digits for the fifth consecutive quarter as we increased our lead in both the premium and value segments. In addition, our cloud-based user authentication solution, known as VIP, had its best quarter ever. VIP is cost effective for customers and delivers strong authentication service that is allowing us to win competitive deals.

Our enterprise mobility strategy is focused on unifying identity, information and device independent protection. We continue to make progress in helping our customers manage the increased adoption of smartphones, tablets and other mobile devices in the enterprise. We launched Symantec Mobile Management 7.1 which now extends native controls to activate, secure and manage Apple IOS devices. Symantec Mobile Management 7.1 is a natural extension to Symantec's client management suite.

Moving onto our information management business, our backup solutions once again realized strong revenue growth as we continue to take share. Growth in this business is being driven by the ongoing adoption of our Deduplication and virtualization capabilities. In addition, the V-Ray technology embedded in our backup products continues to differentiate us from the competition allowing the IT administrators increased visibility into backup images across physical and virtual environments.

Customer adoption of our NetBackup appliances is growing as we have integrated backup, Deduplication and the media server into a single offering, making it easier to deploy our solution and reduce total cost of ownership. Over the past 6 months, we've sold more than twice as many appliances as compared to all of last year.

In August, we expanded our appliances into the SMB segment. Our Backup Exec appliance is the first SMB backup appliance which integrated client and target data Deduplication for protecting virtual and physical machines. And for those customers who prefer a backup solution in the cloud, we launched Backup Exec.cloud. This SaaS based solution is ideal for small businesses or remote offices with easy-to-use online backup and recovery, allowing customers to automatic protect their information on desktops and servers.

The Clearwell E-Discovery team, working with Symantec's federal team, signed the largest deal in its history, driving the results above our original expectations in the September quarter. The team has done an outstanding job of integrating sales, operations and product development. As expected, Clearwell's E-Discovery solution complements our archiving capabilities. Customers value our ability to get relevant to information to the right people while reducing the need for high-cost manual discovery.

Our storage and availability management business met our expectations this quarter, driven by customer demand for centralized management across Linux, Windows and UNIX platforms. Customers transitioning to non-UNIX-based environments are realizing that managing multiple point tools is costly, inefficient and ineffective. Our solutions help customers deal with this challenge allowing them to adopt new platform's while maintaining their service levels and reducing storage costs and operational complexity. Customers are increasingly adopting our application AJ solution for managing critical applications in virtualized environments.

Earlier this month, customers got a glimpse of how the Symantec can help transform their IT infrastructure with the upcoming 6.0 release of storage foundation and cluster server. With this upcoming release, we expect to enable IT organizations to use their existing infrastructure to build and manage resilient private clouds that span multiple virtualization technologies, operating systems and storage platforms. We expect this release to help us further stabilize this business and attract new customers who are grappling with the challenge of having to do more with less.

Our Consumer business generated a solid quarter of high single-digit revenue growth, driven by our strong multi-channel relationships, improvements in renewal rates via our Estore, and the quality of our products and services. The Consumer team has delivered consistent growth for the past 3 years. We signed more than 20 new deals worldwide across OEMs, service providers and alternative channels. We had a competitive win at Samsung to provide Norton Internet Security and Norton Online backup on their laptops and notebooks. We expanded our partnership with AOL, to offer Norton online backup to a majority of their paid subscribers starting this fall.

During the quarter, we continued to extend our security leadership with the release of the Norton 2012 products, which have once again set the industry bar for the best protection and performance. Our new products received PC Magazine Editors Choice, and CNET's top award. In total, Norton has won more than twice as many awards as our closest competitors combined. As part of the 2012 release, it is now possible for consumers to remotely manage their Norton products and subscriptions on multiple computers all from a central location.

In addition, we announced Norton One, which will be the industry's first personalized service that will protect consumers across multiple devices and platforms including Windows, Mac and Android. This offering is expected to be available in the first half of 2012.

As part of our Norton Everywhere initiative, we extended our mobile offerings with Norton Mobile Security Lite, Norton Tablet Security and Norton Anti-Theft. Since the launch of Norton Mobile Security Lite, the premium version of our Mobile Security solution, we averaged 170,000 downloads per month. These new products seamlessly combine anti-theft features with powerful anti-malware capabilities given units improved protection in the event their phone is lost, stolen or compromised. In addition to these new mobile offerings, we have several products already in the market including Norton Mobile Security, Norton DNS and Norton Online Family for Android and IOS.

In conclusion, we have executed well against our FY 2012 plan delivering strong results in the first half of the year. We've been able to effectively integrate and grow our acquisitions consistently and customers are embracing the value propositions we offer across our portfolio. And with that, I'll turn the call over to James for a detailed review of our financial results.

Thank you, Enrique, and good afternoon. In the second quarter, we once again achieved solid results driven by growth in bookings across all geographies and business segments. Our consistent execution drove record September quarter revenue and deferred revenue as well as double-digit earnings per share growth. GAAP revenue totaled $1.68 billion, an increase of 9% versus the September 2010 quarter. The US dollar weakened 8% against the euro as compared to the year ago period. Overall, foreign currency movements positively impacted revenue growth by 5 percentage points. License revenue grew 1% year over year driven by strong performance in backup and data loss prevention. Content subscription and maintenance revenue continued to grow, up 11% year over year. Increasing subscription sales from our Consumer, software as a service and authentication businesses, accounted for 39% of total revenue, up from 35% in the year-ago period.

Non-GAAP net income of $295 million grew 11% and resulted in fully diluted non-GAAP earnings per share of $0.39, up 15% from the September 2010 period. The Consumer business delivered its twelfth consecutive quarter of year-over-year growth, generating revenue of $531 million, up 9% year-over-year. If we exclude the impact of a 2010 one-time charge of $10 million, year-over-year revenue growth was 7%. Our new product and service offerings grew 52% and contributed 2 percentage points of revenue growth to the Consumer business. In the September quarter, OEM placement fees were higher than we originally forecast, as our OEM partners increased their PC shipment volumes ahead of our expectations. In addition, it's important to note that OEM PC shipments are historically higher during the second half of our fiscal year with shipments, and therefore OEM fees, peaking in the December quarter.

Turning now to the enterprise business, solid sales execution continued again this quarter. We generated a total of 373 transactions valued at more than $300,000 each, up 17% year over year, and 56 transactions valued at more than $1 million in line with our seasonal expectations. Of our deals valued at more than $300,000, 72% included multiple products.

The Security and Compliance segment generated revenue of $483 million, up 22% year over year. This performance was driven by growth in our endpoint security business, with the successful release of SEP 12, as well as the continued strength of data loss prevention and managed security services. The VeriSign authentication business continued to perform well, generating revenue of $89 million in the September quarter.

The Storage and Server Management segment generated revenue of $605 million, an increase of 4% as compared to the September 2010 quarter. Revenue from the information management business, which includes our backup and archiving offerings, increased 11% year over year driven by our differentiated Deduplication and virtual machine protection features. In addition, we realized $20 million in revenue from our Clearwell acquisition, well above our expectations, due in part to a large federal deal that was not in our original forecast. Revenue from the storage and availability management business was down 7% for the quarter, and down 2% for the first half of fiscal year 2012, in line with our expectations. Our services business generated revenue of $62 million as we continued to transition our consulting practice to specialized partners.

Turning now to total Company margins, non-GAAP gross margin was 85.8% for the September 2011 quarter, up 10 basis points from the year-ago period. Non-GAAP operating margin was 25.5%, down 40 basis points compared to the September 2010 quarter, in line with our expectations. Cash flow from operating activities for the September quarter totaled $308 million. We generated operating cash flow of $811 million for the first half of fiscal 2012, an increase of 26% year over year. We exited the September quarter with $2.25 billion in cash, cash equivalents and short-term investments. During the quarter, we utilized $275 million to repurchase 16 million of our shares at an average price of $17.30. 32% of our cash balance was onshore in the US as we exited the September quarter. GAAP deferred revenue at the end of September 2011 was $3.45 billion, up 11% year over year. In the month of September, the dollar appreciated 7% against the euro, negatively impacting our reported end of quarter deferred revenue balance. At our guided rate of $1.43 per euro, deferred revenue would have totaled approximately $3.5 billion at the high end of our guided range.

Now I'd like to spend a few minutes discussing our guidance for the December 2011 quarter. We're assuming an exchange rate of $1.37 per euro versus the weighted average rate of $1.35 and the end of period rate of $1.33 per euro in the December 2010 quarter. Our $1.37 per euro assumption reflects a 3% decrease from our weighted average rate of $1.41 for the September 2011 quarter. As a result, foreign currency movements would decrease estimates sequentially but provide a modest tailwind during the December quarter year over year.

Our guidance assumes an effective tax rate of 28%, and a common stock equivalents total for the quarter for approximately 745 million shares. Thus for the December 2011 quarter, we expect GAAP revenue to be in the range of $1.7 billion to $1.715 billion as compared to revenue of $1.604 billion during the December 2010 quarter. We expect year-over-year revenue to be up 6% to 7% on an as reported basis. 71%, or $1.2 billion, of our December quarter revenue is estimated to come from the balance sheet.

The Clearwell business is expected to contribute between $13 million and $17 million to our December quarter revenue. GAAP earnings per share are estimated to be between $0.25 and $0.26 as compared to $0.17 in the year-ago period. Non-GAAP earnings per share are estimated to be between $0.40 and $0.41 as compared to $0.35 in the year-ago period, up 14% to 17% on an as reported basis. As previously mentioned, we expect $0.005 of dilution as a result of our Clearwell acquisition during the quarter.

In addition, US GAAP accounting dictates that we no longer recognize quarterly losses from our joint venture, now that the JVs cumulative losses exceed our original investment. The impact of this accounting requirement is reflected in our earnings per share guidance for the December quarter. GAAP deferred revenue is estimated to be between $3.685 billion and $3.705 billion, compared to $3.408 billion at the end of December 2010. We are expecting deferred revenue to be up 8% to 9% on an as reported basis.

In conclusion, we are pleased with our execution and the solid performance across all of these geographies, segments and financial metrics. We will continue to focus on carefully managing our expenses while driving long-term growth and free cash flow generation. And now, I'll turn it back over to Helyn, so that we can start taking 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 UBS Conference on November 15 in New York, the Credit Suisse Conference on November 29 in Phoenix and the NASDAQ Investor Program on December 7 in London. Lastly, we'll be reporting our fiscal third-quarter results on January 25. For a complete list of our investor related events, please visit the Events section of the investor relations website. Gwen, we're ready for our first question.

Brad Zelnick with Macquarie.

Thank you. Nice quarter, guys. Enrique, specifically on the Consumer business, it's great to see this kind of acceleration. I was hoping maybe you could give us a little bit more visibility to what it looks like on a bookings perspective just especially in light of what we're seeing with PC growth, the results are much stronger than we had expected? And also if you can comment on the contribution from nontraditional products?

Yes, Brad, thanks for the comments on the quarter. We're obviously pleased with our ability to consistently deliver against our guidance. What I was going to comment on was as you look at the PC business, the Consumer team just continues to deliver the best products on the market. I mean, it's evident from their ability to consistently win awards that people love what we're doing as far as the overall solution and so what that's doing is it's allowing us to do a much better job of not only bringing in new customers over a range of channels, but it's also allowing us to get improving renewal rates. A lot that's being driven by the work we've done around the Estore, where we can be much more effective at targeting the renewal with the appropriate offers, the appropriate price points and so forth.

The other thing that's going on and you heard in James' comments, that we did see a good set of shipments of OEM units into the-- back into a back-to-school holiday season, or the beginnings of the holiday season, and so my expectation is that while we'll continue to see pressure on the overall PC business, given people diversifying to other nontraditional devices, we expect that this will be fairly common or as expected given the work that we've done.

The other thing that I did say in my comments was Janice's team has done a really good job of extending the number of new products that we're shipping on non-PC platforms, our Norton One initiative, some of the work we've done with Norton Everywhere, and then some of the new mobile solutions. And so we're getting a nice distribution beyond our traditional PC products. You specifically asked how much of our revenue came from the non-PC products, and that is approximately 2% at this point of the total business that we're generating in Consumer.

Well, 2 points of the growth.

2 points of the growth, that's right.

Came from the traditional businesses.

Nontraditional.

Yes, over the nontraditional businesses. That equates to about 4% or so of the overall Consumer revenue.

Thank you very much, that's helpful color. If I could just ask a follow up for James, James just on margins, if I recall back to financial analyst day, your guidance on margins at the time was for where the street was at pre-Clearwell, so I think that was 26.3%. Looking at first half I think we're a little bit behind, and I haven't been able to run through all of your details on guidance, but I'm not sure that Q3 is much better than what we saw this quarter. I just want to know if your guidance from financial analyst day still holds and if I've got that right?

Well, you're right, that at analyst day we talked about 26.3%, and then the 0.2 point adjustment for Clearwell bring us down to 26.1%, so that's the discussion that we've had on operating margins and we're continuing to go quarter by quarter to meet that goal.

Great, thanks again. Nice job.

Thank you.

Walter Pritchard with Citi.

Hi, guys, it's [Donyell] for Walter. Enrique, you mentioned that Europe met expectations, could you give any more granular detail on country level?

Yes, I'll give you a couple thoughts. So we grew 11% as reported, 2% on a constant currency basis. And what we saw was Central Europe continued to perform well, and we did see a little bit of weakness in the Mediterranean countries in the September quarter.

Anything on Europe? I'm sorry, anything on UK, sorry?

Yes. So as far as the UK, we performed as expected. It was probably a little better than it's been, we had seen about a year ago a little bit of weakness in the public sector in the UK, but definitely seemed a little more stable with a bit of improvement.

Got it, okay. And then just 1 more, how much are you benefiting from bringing eCommerce in-house? Is there a way you could kind of quantify it and, or tell me-- or tell us how much of a financial benefit you've had this quarter for Consumer?

At this point, we're -- because the eCommerce platform has been in our business now for several years, we're not breaking out any other delta's per year over year or quarter over quarter, but clearly it is making a difference because more of our business is coming from the Estore. I mean, we're over 80% of our business now comes through electronically and so a big driver of the improvements and a lot of the work that we do is in that much better targeting. So ultimately, it is an absolute benefit to the business.

Yes, I think the investment has helped build our cash flow on margins over time.

All right. Great. Thank you.

Thank you.

John DiFucci with JPMorgan.

Hi, thank you. I got a question on the Storage business, Enrique. This continues to put up, I'll call it, respectable results after a couple of years of sort of tough sledding. But after next quarter, the comps at least year over year get tougher. And I was just wondering, if you think you can continue to put up mid-single digits sometimes in the high single-digit growth, if you can continue to do this with the Storage business, or is it something we should just expect to be sort of a lower growth business?

You're right that, that business has continued to improve, I think our team there is doing an outstanding job. And what's happening, John, is that we've been able to diversify away from the UNIX platform, where as you remember, a lot of the business was on UNIX, now we're seeing a lot more business coming through on Linux, Windows and HPUX. As far as the other things that we're doing in that business that I think are meaningful are the work that we've done to help optimize VMware environments with technologies like Application HA, or ApHA, and so I do see good momentum and improvements there.

As far as the growth rate, I'm going to stick with what we said at Analyst Day which is this is a business that will be relatively flat for us. Obviously, we're going to work hard to outperform that, and there's a lot of good signs in the business because as I commented on the last several calls, we're seeing people want to simplify their environments, and that means not having lots of point products and lots of point tools spread out across multiple data centers, and that's where we're really seeing some kind of return back to using the product from our SAMG business. So far, I'm pleased with the performance. It's-- teams doing an outstanding job and I expect that to continue.

If I might just a quick follow up on the Security Compliance business, it's-- if you exclude acquisitions, and by the way your acquisitions appear to be performing very well here, but if you exclude that, you're sort of growing that sort of in the low single digits it looks to us anyway. Is this in this business, and realize that most of that is sort of desktop or endpoint protection for corporate, is that sort of what we should be expecting for that part of that business any way?

Well, for the Security and Compliance business, if you adjust for acquisitions and also in a constant currency basis, that business unit grew at 5% year over year. And so I think that's reflecting the progress that we're making in endpoint security, we're very pleased with how the SEP 12 release has come out of the gates, continued growth around data loss prevention and software as a service.

I'm sorry, James, did you say 5%?

Yes 5%. So that's adjusted for currency and acquisitions.

The other quick comment I'd give you is we're very pleased with the launch of SEP 12. I mean, the feedback has been outstanding, I mean 1.3 million endpoints have already been upgraded. The efficacy of the solution is proving to be just incredibly strong, and many of our customers are saying it was easy to deploy, and they absolutely are seeing improvements in detection rates, because as you know 75% of attacks now are hitting less than 50 machines. And so this new technology is really allowing customers to better protect their environments. And the feedback from both customers and partners has been better than I expected. And I think that also showed some improvements in the Security and Compliance center.

And we hear--actually, well, I hear similar things in the field, but thanks a lot.

Sure. Thank you, John.

Adam Holt with Morgan Stanley.

Thank you. Maybe just a follow up on the question about organic growth, James, what do you think your organic constant currency growth was in the quarter? And then maybe a longer term question as you think about the 3-year targets, and this maybe for Enrique or James, that you gave at the Analyst Day, how do you bridge from where we are now to those 3-year targets? Is it about the environment getting a little bit better, some of these acquisitions anniversarying, maybe give us the bridge from here to there?

Well in terms of the organic constant currency growth rates, revenue would have been growing in the 3% to 4% type range. So that's a little bit faster than we have seen in the last 3 or 4 quarters. So a bit of a sequential improvement.

I think as we look forward, we're comfortable with where we set kind of 3-year growth rates at the 7% to 8% levels, and what's really driving that and will drive that is kind of 2 big thrusts. 1 is continuing to improve our core businesses. How do we continue to drive improvement in security with the great launches of products like SEP 12? But then also the work we're doing with appliances, around the backup business. So it's really about strengthening the core business, and then it is executing against our vision and taking advantage of the opportunities around cloud computing, virtualization and mobility.

I mean some of the new technologies that we're showing both at our Vision Conference in Europe that we just held at the beginning of the quarter, the beginning of this quarter, where we showed people you can take a lot of that current infrastructure you have and retool it using our products to be more efficient, better utilized and create your own internal private cloud, without having to procure lots of new equipment and software. And so we're seeing people, especially in this what I'll say is folks trying to do a lot more with less, some of the solutions we're shipping or will be shipping with the 6.0 release will really help people do that. So at this point the combination of strengthening our core and taking advantage of some these big trends that we've been talking about over the last several calls, I think will enable us to achieve the growth rates. Now, obviously, we do expect that, that requires IT spending to continue at what I would say normal levels, and that's what will make it possible, Adam.

If I could just sneak in 1 follow up, it looks like the buyback accelerated in the quarter. Is that something you think we should expect to see continue or are you thinking about doing other things with your capital position, which is obviously strong? Thank you.

Yes, the buyback did accelerate during the September quarter and that very much reflected our approach of trying to buy a little more back when we see particular dislocations in the marketplace as we did in August.

Great. Thank you.

Brent Thill with UBS.

Thanks. Just on Europe, can you just walk through what you think is happening? Obviously I know it's been lagging the US, but the US has been recovering, Europe really hasn't recovered and I'm just curious if there's something else going on in terms of the competitive landscape or something that you're seeing in terms of the deal structures that perhaps is holding Europe back still? Would have thought that, that would have recovered a little bit better than it has.

What I would look at it Europe is I think we've been in an interesting kind of macro environment in Europe over the last 12 months that's a little bit different than what we're seeing here in the US. And what I mean by that, Brent, is a year ago, we were dealing with some weakness in the UK specifically in the public sector, now as we look at it given what's been happening in the Mediterranean countries from Greece to Spain and Portugal, I think that, that's continuing to put some level of pressure on the overall results coming out of Europe. Now the shining spot in all of this for us has consistently been the Central European area of Germany, Austria, Switzerland, that have continued to perform well for us, but we've seen different parts of Europe be weaker at different points. Operator?

Aaron Schwartz with Jefferies.

Hi, this is [Sonja] on for Aaron. Just a quick question on the Storage Management business. So now that we've gotten through kind of the bulk of some related declines, I guess can you comment a little bit on your expectations for the growth trajectory going forward?

I think you're right, that we are at the tail end of the integration or the Sun/Oracle OEM contract. We're continuing to see that business stabilize. As we showed last quarter and this quarter, some of the other platforms beyond Sun, Solaris, are doing well for us. And I think the important point is that's stabilizing the overall segment. But then we're also seeing improvements in the backup business. We launched a new set of appliances that are doing very well for us. We're seeing a lot of demand for our approach of taking what used to be multiple point products, potentially some from us and some from others, and integrating it into 1 device, where you now you've got the backup software, the Deduplication software and the media server all integrated into 1 appliance. And so that's also helping that business. We're coming up on a new product cycle with the backup products at the first half of next year, and so my expectation is that our backup business will continue to be the driver of growth in the overall segment.

Okay, that's helpful. And then just quickly circling back on your points around SEP 12, or just Symantec Endpoint Protection 12, I guess can you speak a little bit to how meaningful you think the revenue opportunity is there? Is this more of a maintenance release, where it seems like it'll be more related to seat expansion or is there a price increase associated with it will as well?

It's definitely -- as we look at it, that's-- it's a major release and it integrates a number of new capabilities. Most specifically the reputation based technology that really is doing an outstanding job of detecting a lot of these very targeted threats. It also -- because we work very hard on the ease of deployment and some of the early results are showing that where we have had previously a little bit of weakness in the SMB segment, I think this will be part of the improvement plan of tailoring products to serve that market segment well. So my expectation is that we'll continue to see improvements in the Security and Compliance segment where previously the endpoint security business had been a bit of a drag on the overall business. The other thing that's important is we continue to see, post the Intel acquisition of McAfee, some disruption in their business and go to market, and that's helping us across the various segments now and we expect that to continue.

That's helpful, thank you.

Kash Rangan with Merrill Lynch.

Hi, thank you very much. I was wondering if you could give us a little bit more color on public sector. I think you talked about some good business performance towards the end of the quarter, with given all the controversy and the scrutiny on IT budgets in that sector, what's your view as to how spending trends hold up for your businesses based on your conversations and what salespeople are telling you about how your products are being budgeted for the public sector? That's it for me, thank you.

Kash, it was a record quarter for us in the public sector, I think the team executed very well. And the Clearwell acquisition performed well against our expectations, and some of the larger deals came out of the public sector. Obviously, people are trying to figure out what happens with the federal budget. As you know, in this kind of wait and see what budget gets allocated in the new fiscal year, but as I kind of look and talk to a lot of folks, senior folks in government, I mean the federal budget will be anywhere from $76 billion to $80 billion. And cyber security has become a big priority for governments around the world. And so my expectation is that we'll continue to see demand for a number of our security products, but I still expect it to be a very significant budget. I haven't seen dramatic changes in that area. And we'll wait and see what happens with the budget, but at this point, I do believe that we'll continue to do well. And the question is, now what ultimately happens with the focus on cyber security in some of the other priority areas?

I don't know if you have time for 1 quick follow up, but on the Consumer Security business, I was wondering if you could talk to conversion rates directionally?

Yes, if you look at what we've done with the Estore, it's pretty clear that our ability to really have a good understanding of what products they're using, what browsers, what price points they paid previously, is really enabling us to be much more effective at converting and getting more value per transaction of people coming to our online store. So I would say that ultimately, we're getting benefits in 2 areas, better pricing or increases in pricing, and also better conversion rates.

Thank you very much.

Sure.

Phil Winslow with Credit Suisse.

Hi, this is Dennis Simson for Phil Winslow. Can you describe the trends you saw in sales force productivity in the quarter and how much room you think you have for improvement there? Thank you.

Well, thanks for asking the question because it's pretty clear that our sales force execution has continued to improve consistently over the last 18 months. And I think it's a credit to Bill Robbins and his team and the work they've done at to institute a much more disciplined sales process. What I would comment is I think there's continued room for improvement. I think we can continue to drive efficiency, I think we can continue to be even better at cross-selling the whole portfolio. We're giving you a metric right now that talks about our ability to cross-sell and what's happening with the larger deals, 43% of the deals about $1 million contained products from both segments, and I think that's just our sales team is much more focused and disciplined in how they look at the Symantec portfolio and how that matches to the things our customers are trying to do. So I expect there will be continued improvements in sales force effectiveness and productivity.

Thanks. And can you describe maybe the trends that you saw, you commented on your traction with your backup products, if you can maybe expand there a little bit more, specifically in the SMB space?

With the backup product in particular?

Yes in the SMB space.

Yes, so a number of things that we're doing is we're looking at what are all the capabilities that we need to deliver into the SMB space? Specifically, we've added 2 things, which are the new Backup Exec appliance. It's early, but this was the first quarter at our partner event a couple weeks ago, we showcased it and there's genuine enthusiasm about our ability to deliver the Backup Exec appliance, which will be targeted at the, I'll call mid market/smaller-sized companies. I think the other thing that we're doing is clearly the Backup Exec.cloud, or our cloud-based backup capabilities that will also allow us to better serve the SMB segment with the cloud-based offerings. So my sense is the combination of Backup Exec.cloud and the new appliance are definitely going to help us there. And clearly, we're going to continue to work towards bundling both the security products with the backup products because IT buyers or the smaller businesses, they want simpler, they want it easier, they don't want a lot point products. And so ultimately our ability to bring together the products from both our security and backup business will fit well with that segment.

Okay. Thank you.

Steve Ashley with Robert W. Baird.

Great. I actually would like to just swing back to the SEP products and specifically the mid-market or small business SPS SEP product that was also released recently. Do you have any kind of early feedback on how that's being received? I don't know if it's too early to get net promoter scores or also if you might be doing anything different in the channel to try driving adoption at that level? Thanks.

Well the net promoter scores for the new version of SEP have done very well both in the enterprise and SMB markets. The initial data showing multiple points of improvement, and that really is a tribute to the great work the team has done. I am very encouraged by the partner feedback, and I'm sure you're starting to the same thing, that people believe this is just an outstanding product. And my expectations is that it'll bring partners back in because what partners are trying to do is they're trying to optimize their time. And if they can -- if it's easier to deploy and they don't have to go back and potentially have to clean up when somebody's machine gets infected, that really is something that allows them to be more productive, more efficient and then generate more profit for the partner.

As far as from a go to market perspective in the partner segment, we've done a number of different things. We've continued to be very focused on specialization, where we're trying to make sure that partners have the necessary certifications to make each implementation successful and that's why you are seeing the improvement in the net promoter score because our partners are becoming that much more effective at implementing the new products. And so we're very confident that the new products combined with some of the work we've done with the channel will drive improvements in the small business segment.

And just quickly on the VeriSign authentication business, have you done anything there with respect to the go to market strategy to broaden out either the breadth of distribution or things that are -- anything new and different on the go to market there that's helping the success there? Thanks.

Well absolutely. The big difference is you've now got a much larger sales force around the world that is able to take the user authentication products to market. But the other more important thing is that we're able to combine it with a much richer portfolio because we're able to bring in the extensions around encryption, the extensions around malware and improved management platform, and so ultimately, the combination of product breadth and a larger go to market or sales force capability is definitely driving improvements. Also there's been some attention as a result of some of the issues that 1 of our major competitors faced with an attack, and so my sense is that, that combination is definitely having a positive impact on our user authentication business.

Great, thanks.

Ed Maguire with CLSA.

Hi, good afternoon. Enrique or-- and James, you had mentioned that your OEM agreements had I guess higher costs up front. Could you discuss what the competitive dynamics have been around some of those OEM agreements and what you expect going forward with any major renewals that might be coming up?

Well what I was referring to in my text was that our OEM fees actually came in higher during the September quarter than we were expecting would be the case 90 days prior. Very much driven by the fact that the OEM partners shipped more PCs than I think everyone was expecting. So that effect added about $0.005 worth of costs to the operating expense space.

And the other point I was making in the text was that we would expect to see sequential increases between the September quarter and the December quarter in the total amount of OEM fees that we pay. So that would likely add something in the $0.01, $0.015 type realm. We'll see how we go with the OEM PC shipment volumes this quarter.

Great and just a follow up, if I may, on the Huawei/Symantec progress, I saw that you are making some moves in North America, would love an update on that. Thanks.

Well we're continuing to work on improving the overall product portfolio in that business across both the Storage and Security areas and from a go to market perspective, kind of the next frontier for the joint venture is really getting traction in the US. The other part of that, as you know Ed, is we're in discussions around what's the best outcome for the joint venture. And so we're continuing down that path working with Huawei to determine is it something that we continue to manage jointly and drive towards an IPO or is there a potential different outcome? And so we're probably in the late innings of really having a determination, and I would hope that by the next call, the next earnings call, we'll have an opportunity to give you a more detailed update on where we are with that.

Thank you.

Rob Owens with Pacific Crest Securities.

Great, thank you very much. Enrique, given that over half of your organic constant currency growth is still coming out of Consumer and you've got potentially Windows 8 on the horizon at some point, what's some of the industry thinking right now, what's the feedback been from the OEM channels, they actually make a decent amount of their money off AV being on-boarded by folks like yourselves?

Well look I think everybody is looking at Windows 8, and what are the things Microsoft is trying to do. Obviously their priority is really around figuring out how they stay relevant in a what I'll call the move to next-generation or other non-PC devices and that's really the priority. Everything we've seen, that's the focus. Now clearly, Microsoft like all the vendors is always trying to think about how do they make sure that their platform is secure. And the OEMs as you say, part of the profits that they make is the after market products that they sell, security being 1 of them, and so they're working closely with us and with Microsoft to make sure that we still can deliver, sell security products on their traditional PC platforms. Obviously, it's still early, Rob. There's-- they're showing some of the things that they're going to do but we expect to see some continuing changes in the approach and what they're going to do with Defender and other things. So we're all working together. We've got folks in Redmond as we speak talking about how security continues to add a lot of value beyond anything that's being done in the operating system.

Great. And then for James, what was the inorganic deferred revenue contribution from Clearwell?

Clearwell, gosh that would have driven of the order of about $10 million to $15 million worth of additional deferred revenue. Something of that nature.

Great. Thank you.

Yes.

[James Westman] with Raymond James.

Hello, guys, it's James sitting in for Michael Turits. First question, what is the VeriSign business growing pro forma X the remaining write-down?

Well, the VeriSign business we've seen growing in this past quarter, it's mid-to high single digits, so we're pleased with how the value added items that Enrique was talking about on an earlier question, things like the additional malware scanning capabilities, the much enhanced management platform that we have integrated into the VeriSign SSL certificate sales are getting traction in the marketplace.

All right and then 1 other question on the Consumer side. As you start selling into more emerging markets though, what type of impact are you expecting on ASPs?

Well clearly the ASPs, there's more price sensitivity and we've always used a number of approaches to emerging markets from some of the things we've done with our PC Tools brand to the work we're doing around some of the premium offerings where we can deliver a capability and then do some up selling. But clearly there's more price sensitivity in the emerging markets, and we take that into account with the mix of products and price points.

All right, thank you.

Operator, we have time for 1 last question.

Brian Freed with Wunderlich Securities.

Good afternoon, thanks for slipping me in. Can you guys give us a little bit more color around the scale and number of customers for your Norton online backup business? And maybe just some-- to the extent you can give some clarification as to what percentage of your Consumer business you would attribute to that business?

So I'll give you the headline number is approximately 15 million people using our online backup capabilities. And what we continue to see is that business is driving good growth rates but it's off of a small base. We haven't broken out the specific online backup numbers, but when we talked about the 4% of the business coming from the nontraditional products, 1 of the biggest drivers there, Brian, is the online backup business. But clearly services and other things are also contributing there. But ultimately we are encouraged by the capabilities and the adoption of the online backup feature.

Great. Thanks.

Absolutely.

And that concludes our question-and-answer session. I'd like to turn the conference back over to Enrique Salem for closing remarks.

Thanks, Operator. I'm pleased with the team's execution and solid results for the fifth consecutive quarter. We'll be focused on executing our key priorities for the remainder of the year. Thank you very much for joining us this afternoon and I look forward to speaking with you again soon.

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