諾頓 (NLOK) 2003 Q1 法說會逐字稿

Good day, and welcome to the VERITAS Software first quarter 2003 earnings release conference call. Today's conference is being recorded. At this time, for opening remarks, and introductions, I'd like to turn the conference over to Ms. Renee Budig (ph). Please go ahead ma'am.

Thank you. Good afternoon and thank you for joining us today for our report on VERITAS’ Q1 2003 financial results and future outlook. With me here today are Gary Bloom, our CEO and Ed Gillis, our CFO.

Before we begin, I would like to remind you that some of the matters we'll be discussing today include forward-looking statements that involve risks and uncertainties. For example, statements regarding the company's projections of revenue, earnings per share operating margins and cash flow for the quarter ending June 30, 2003, or for 2003 generally, and the company's ability to expand its platform support, integrate server automation technology into its products, execute its business model, maintain its competitive advantage, continue its international expansion and revenue growth and manage its operating expenses are forward-looking statements. Actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ can be found in our most recent current report on form 8-K and the periodic report on form 10-K, which are readily available on our Website as well as the SEC’s Website.

In addition, during this afternoon's call we will refer to non-GAAP financial measures of the company's operating and financial results. For complete information regarding our non-GAAP financial information, the most directly comparable GAAP measures and a quantitative reconciliation of those figures please return to the investor relations page on our Website, www.veritas.com. Today's press release concerning our first quarter results and certain non-GAAP information is also available at that page and has been furnished to the SEC as a part of a form 8-K. We will make this information and the web cast replay of this presentation available for a 12 month period. I will now turn the call over to Gary Bloom.

Thanks Renee. I will give a brief overview of our fiscal Q1 financial results and discuss the highlights of the quarter. I am pleased to report that our first quarter results have exceeded our expectation in first call consensus with revenue of $394m and non-GAAP EPS of $0.17. With this strong performance we have strengthened our balance sheet by generating approximately $203m in cash from operating activities and ending the quarter with a record $2.4b in cash and short term investments. Once again, the upside on revenue was highly leveraged to earnings and we effectively managed expenses driving non-GAAP operating margins to 26% for Q1.

VERITAS’ ability to continuously deliver exceptional results is directly tied to our proven business model, outstanding product quality and focused commitment to not only meet but also exceed our customers expectations. Furthermore the current market trend of business and IT consolidation has given us an opportunity to leverage our heterogeneous and [inaudible] technology. We have delivered solutions that enable our customers to manage the challenges of consolidation and the continued pressure to do more with less.

As a result of effectively executing on our business model, Gardner has identified VERITAS’ [inaudible] software market leader for non-array based software with almost twice the market share of our closest competitor. Based on the recently released Gardner report we also maintained our leadership position in the backup and recovery and volume management virtualization software markets with more than 48% of the worldwide market for UNIX and Windows backup and recovery and over 71% market share for the virtualization market. And in the very important replication software market in 2002 our revenues grew 52%, at a time when the overall replication segment shrank 9% representing the fastest growth among the top 10 vendors in the market.

The Gardner report confirms that our top competitors showed no significant market share gains and highlights the strength of our competitive position in the marketplace. The quality, reliability and heterogeneous nature of our products have contributed to our leadership in these key segments of the storage market. In addition, we continue to execute on our three pronged growth strategy of platform, product and geographic expansion. We are focusing our efforts on expanding our platform support to satisfy the requirements of market consolidation and an increase in multiplatform license transaction. Our latest version of VERITAS Global Cluster Manager now supports all major open systems platforms, including AIX, HP UNIX, Linux Solaris, and Windows 2000. We also extend the platform support of our VERITAS Sandpoint (ph) Control and VERITAS Database addition for DB 2 software for the IBM AIX operating environment.

On the product front of we announced a number of product enhancements to VERITAS Backup Exec 9 and VERITAS NetBackup 4.5. Backup Exec 9 introduced the fastest backup and recovery for Microsoft exchange servers and integrated support of Microsoft Windows server2003, also referred to as the dot net [inaudible]. This allows us to capitalize on the upgrade markets surrounding the release of Windows server 2003 and we are seeing a strong conversion rate through the channel for the many downloads of Backup Exec 9 at the time of the announcement.

For VERITAS NetBackup 4.5, we also introduced the release of our feature pack that helps company’s to dramatically reduce data center down time through enhanced technologies focused on streamlining backup and recovery performance and providing enterprise backup capability for exchange environments.

We also released a new version of VERITAS Global Data Manager, which allows customers to centralize the management of both data center and remote backup and recovery from a common dashboard. This single point of control increases administrator efficiency while maintaining and improving data protection and service levels.

Merger and acquisition activities also contributing to the product dimension of our three pronged growth strategy. In late January we announced that our acquisition of Jareva (ph) has closed. We have begun integrating the server automation technology into our product portfolio and expect to have this product available in the current quarter. This technology will enable our customers to allocate a managed server hardware similar to the way they use VERITAS today to manage storage hardware. The precise software acquisitions progressing according to schedule and we expect to close this deal by the end of Q2.

As we stated previously the acquisition of Precise (ph) will strategically increase the value [inaudible] of VERITAS software to the CIO by dramatically improving application service levels while [inaudible] and driving down the cost of infrastructure. Moreover the logical expansion into the adjacent market of application performance management will allow our customers to proactively detect and correct the root cause of performance problems before affecting response times. Also, Precise shares our heterogeneous strategy by supporting all major software vendors from SAP, PeopleSoft and Seibel applications to BEA and IBM application servers and across Oracle, Microsoft and IBM databases.

Geographically we are able to increase our international revenue from 33% Q1, 20002 to35% for Q1 2003, of total non-OEM revenue. This increase was a result of our continued investment and focus on expanding our geographic reach. We were particularly pleased with the growth in some of the merging markets within Europe such as Italy, the Nordic countries and Eastern Europe. In addition, Asia Pacific again shows solid growth on a year-over-year basis.

I'll now provide some perspective on the selling environment for Q1. We began the quarter with strong momentum exiting Q4 and we had a particularly good January and February across all geographies and channels. This was driven in part by million dollar plus deal performance in the first two months of the quarter, including the closing of a larger transaction in January. However, like many other technology companies, we saw forecast erode and buying decisions deferred as we closed out the quarter. This weakness was primarily in our U.S. enterprise license business. Our business in Asia Pacific and Europe remained relatively strong and we continue to see strength in professional services, support and maintenance, which were up 26% year-over-year.

On the product and platform front we saw increased activity in our merging products, SANPoint control, Cluster and Replication. Also our AIX business continued to gain traction and our indirect channel business was helped by the successful launch of Backup Exec 9.0.

While we did have end of quarter weakness from our U.S. direct business, once again our diversified channels, OEM, two tier distribution, resellers and the direct sales organization provided us with greater visibility and revenue predictability, allowing us to deliver very top line performance with total revenue of approximately 6% year over year. Our view on the reasons for the weakness parallels what you've heard from others, the uncertain geopolitical environment and the prolonged economic downturn. Overall VERITAS Software continues to be well positioned in the industry. Throughout this fiscal year we will remain focused on executing on our proven business model and strategy to meet the growing demands of our customers. I will now turn the call over to Ed Gillis for the detailed Q1 financial results. When Ed completes his discussion, I will provide our outlook open up the call for questions. Ed.

Okay, thanks Gary. Today I'll begin by providing some comments on our income statement. First, focusing on our non-GAAP results, followed by a brief discussion on the differences between our non-GAAP and our GAAP operating results. Finally, I'll provide a few comments on our balance sheet.

Let me begin with a comment regarding our use of non-GAAP financial measures. Our non-GAAP statements of operations are intended to present supplemental information regarding the company's operating results, excluding purchase accounting adjustments and other adjustments. We believe that these non-GAAP statements of operations are useful to investors in allowing for greater transparency to information used by management in providing better period to period comparability of our operating performance. These non-GAAP financial measures are not prepared in accordance with or an alternative to Generally Accepted Accounting Principles and may differ from non-GAAP measures used by other companies. As Renee indicated on the beginning of the call, comparisons and reconciliations of non-GAAP financial measures with the most directly comparable GAAP financial measures are included both in today's press release and are available on the IR page of the company's Website. Other financial and operating metrics are also available on the IR page of the company's Website.

Let me turn now to the numbers. Revenue for Q1 was $394m, down 3% sequentially and up 6% year over year. License revenue for the quarter was $255m, down 4% sequentially and down 2% year over year. License revenue from our core products which include Backup and our infrastructure products was $209m, down 8% sequentially and down 7% year over year. License revenue from emerging products which includes Clustering, Replication and Storage Resource Management products was $46m, up 25% sequentially and up 35% on a year-over-year basis. Service revenue for the March quarter was $140m, relatively flat sequentially and as Gary indicated, up 26% year over year. Service revenue again represents 35% of total revenue for the quarter. The strength in service revenue reflects both our ongoing commitment to providing best in class customer support and our continued investment in expanding our professional, consulting and training businesses.

The channel revenue mix for the quarter was 63% from end users and buyers, 27% from two-tier distribution and 10% from OEM partners. Our non-OEM international revenue in Q1 represented 35% compared to 33% in the same quarter a year ago. As we've said before, one of our key business initiatives is to drive growth to international expansion. We've been very successful over the past two years, increasing our non-OEM international revenue from 32% in 2001 to 36% for 2002. And in 2003, we'll continue to focus on increasing our international reach by at least two to three percentage points.

This quarter we completed 12 end user transactions valued over $1m and 200 transactions over $100,000. The transactions over $100,000 represent primarily enterprise transactions, and will be the measurement we will provide going forward along with transactions over $1m. In addition, the median deal size for transactions over $100,000 was $189,000. This compares to $156,000 in the December quarter where there were 252 transactions over $100,000.

The increase in the median deal size was driven by a greater than expected revenue contribution from large deals during the quarter. In addition, our linearity this quarter was skewed to the first two months of the quarter, with approximately 75% of billings occurring in the January and February time frame. As Gary said earlier, we did a healthy business in January, coming off a strong Q4 finish. And we subsequently saw weakness in the month of March particularly in the North American enterprise market which affected our linearity. As a result, accounts receivable were unusually low at $78m, and our DSO decreased to 17 days at March 31st. This compares to 36 days for the prior quarter.

The reduction in DSO is driven by two factors. First, the linearity of the March quarter, which was impacted by the larger transactions that were both build and paid for during the quarter, this resulted in a 14 day reduction of DSO. By comparison, the December quarter was more back-end loaded with 40% of billings occurring in the month of December. Second, our aged accounts receivable balance has continued to improve, which translates into a five-day reduction in DSO, when compared to last quarter. For Q2 we expect DSO to return to around 30 days, as we sustain our aging and return to a more linear pattern.

Non-GAAP gross margins for the quarter were 85%, compared to 86% for Q4. Non-GAAP gross margins exclude amortization of developed technology of $14.8m. Non-GAAP gross margins on license revenue were 96% and service margins were 66%. Non-GAAP operating expenses were $231m and exclude $18.2m in amortization of acquisition related intangibles and a $4.5m charge for the write off of in-process R&D and stock based compensation resulting from the Jareva acquisition.

Non-GAAP operating expenses were down $8m sequentially. This reduction in operating expenses was primarily related to lower sales and marketing expenses. Non-GAAP operating income was $104m or 26.4% of revenue. Clearly demonstrating the leverage in our business model. Going forward, we will continue to aggressively manage our operating expenses. Balancing funding requirements for ongoing research and development while controlling discretionary spending and maintaining solid profitability. As Gary indicated, we continue to maintain our near term non-GAAP operating margin target of 21% to 23%. Which reflects our ongoing plans to balance earnings with our plans to continue investing for the future.

Our tax rate for Q1 was 33%, consistent with our earlier guidance.

Before I turn to the balance sheet, I want to briefly comment on the difference between our non-GAAP and GAAP earnings. On a GAAP basis we reported net income of $43m or $0.10 per share diluted. Included in our GAAP income is $33m in purchase accounting adjustments before tax all of which are non-cash. The intangibles associated with our previous acquisitions should be fully amortized in Q2. Accordingly ongoing amortization should decline in the third quarter to approximately $10m per quarter, including the effect of the Precise and Jareva acquisitions. We closed our Jareva acquisition in January and as I indicated earlier included a $4m charge related to the write down of purchased R&D as well as stock based compensation charge related to Jareva stock plans. In addition included in other operating expenses is a $3.5m non-cash charge related to a write down of our strategic investment portfolio.

For Q2 we expect to record charges stemming from the close of the Precise transaction which could include $16m related to write-down of in-process R&D. In addition we'll record charges related to severance and relocation. However the amounts of these charges will not be known until closer to the close.

I'd also like to note that we intend to discontinue reporting our results using non-GAAP financial measures beginning with our earnings announcement for the third quarter of 2003. We expect that differences between our GAAP earnings and our non-GAAP earnings will become less significant starting in the third quarter as most of our purchase accounting adjustments will be fully amortized. We will continue to report non-GAAP financial measures for the second quarter of 2003 in order to provide supplemental information of our performance on a consistent basis for financial comparisons to prior periods and in order to provide continuity and clarity during the transition.

Our headcount exiting Q1 was 5,616, down slightly from 5,647 at December year end. Looking forward to the rest of 2003, we expect to see nominal growth in headcount. However, as we've said before, our business model is highly leveraged and we're prepared to take advantage of revenue upswings without significant increases in headcount.

I'll turn now briefly to the balance sheet. We exited the quarter with a record $2.394b in cash. During the quarter we generated approximately $203m in cash from operating activities. Our increase in cash was $153m. Primary uses of cash during the quarter were $54m related to our acquisition of Jareva and $16m for capital expenditures. For Q2 we expect cash from operating activities to be in the range of $70m to $90m reflecting the return to a more linear quarter and as a result, higher receivables.

Deferred revenue increased from $280m at the end of Q4 to $298m at the end of Q1. Roughly half of this increase is attributable to service revenues and half of the increase relates to growth and deferred license compared to Q4. For Q2 we expect deferred revenue to be relatively flat. With that I'll turn the call back over to Gary who will comment on our outlook before we open the call for questions.

Thanks, Ed. Before we turn the call over for questions I'll first comment on our outlook for fiscal Q2 as well as provide some perspective on what we see ahead for the rest of calendar 2003. While our results were strong in the first quarter, the weakness we saw as we closed the quarter combined with the recently introduced potential for SARS to impact our growing Asia Pacific business is causing us to remain cautious about our Q2 forecast. Therefore, we expect revenue for Q2 to be in the range of $370m to $380m. In addition, we expect non-GAAP earnings per share to be in the range of $0.13 to $0.14 based on our ongoing non-GAAP operating margin targets of 21% to 23%. Our GAAP earnings per share are expected to be in the range of $0.09 to $0.10

For the year we remain comfortable with current expectations and our optimism has not changed since the last earnings call. We continue to believe that the second half of 2003 could line up to generate some positive revenue and earnings momentum for the company. In the current quarter we are seeing some positive signs for the remainder of the year based on our pipeline coverage and upside deal opportunities for larger transactions. I'd also like to remind you that these expectations do not factor in any revenue contribution or expenses relating to the Precise acquisition. We will talk more about that at our analyst meeting at our upcoming VERITAS Vision User conference in Las Vegas on May 6th and when the transaction closes.

While the current is still challenging, we remain confident that we will merge from the economic downturn a stronger and more efficient company. Our position as a leader in the storage software market and our ability to deliver strong financial results has not changed. We have continuously demonstrated our ability to manage our business and leverage our revenue upside to drive better than expected earnings per share. Operator, I'd like to now open the call up for questions.

Yes, sir, thank you. Today's question and answer period will be conducted electronically. If you would like to ask a question please do so by pressing the star key followed by the digit 1 on your touch tone telephone. We will proceed in the order that you signal us, and we'll take as many questions as time permits. If you are on a speaker phone please be sure your mute function is turned off to allow your signal to reach our equipment. In the interest of time, and to allow every participant the opportunity to ask a question, we request that you limit yourself to one question. Please resignal for any follow-up questions that you may have. Once again, we do ask that you limit yourself to one question. Please press star one on your touch tone telephone, and we'll pause for just a moment to give everyone an opportunity to signal for questions. We'll take our first question from Drew Brosseau from SG Cowen. Please go ahead.

Thank you, hi gentlemen. My question is about the current outlook, could you share with us what might have happened in the last couple of weeks since the end of the quarter as to whether post Iraq there's any change in sentiment or tone, and what the current pipeline is, doesn't sound like you have the same kind of large deals kicking off the beginning of this quarter.

Yes, thanks Drew. It is kind of interesting to look at when you look at the causes of the weakness. They were around the macroeconomic climate issues and certainly having a war kind of starting right in the end time frame of a quarter doesn't help you any either. Clearly when we look out to April, and you know it's pretty early in the quarter still, obviously we're going to have better information as we see the first month's results in early May. When we look at it as of right now our pipeline is healthy, we have good coverage rates and our viewpoint on the quarter has been improving week by week during the month of April. In our view this is a really good sign but not necessarily a conclusive indicator that we may already be moving beyond the end of Q1 softness that led us to deliver a cautious outlook. We are clearly thrilled by the strong Q1 results but when we look at all the things going on right now, the March weakness, the tail end of the war in Iraq, potential impact of SARS on our Asia Pacific business, we think taking a little bit of conservative view is appropriate. Week by week it is looking better as we've gone through the month.

We'll take our next question from Laura Lederman from William Blair. Please go ahead.

Nice quarter. A few questions; one, can you give us a feel for the kind of license versus services kind of split in Q1, would you expect for the licenses to be down but services to grow kind of a little feel for that. And also lets talk about competition by segment, who are you seeing more, who are you seeing less of. Obviously, the Gardner numbers show you’re gaining share but who you do think you're gaining more share from and who you are kind of worried about as competition in the long run. Thank you.

Yeah, so on the revenue split, I'll take that. So the services business which consists of our maintenance contracts on the one hand and professional services on the other tends to be more predictable and recurring. And so as a result, I would not expect to see a decline in that business. So therefore, the difference between the $394m and the $370m to $380m guidance we’d come out of the license side of the equation, which is again pretty consistent with the caution that I think Gary described, that really relates to the March time frame. And we'll keep an eye on kind of business activity as we get through the month of April, as Gary indicated. And I think we'll be smarter at our technology conference in early May.

And I'll jump in on the competitive question here. It's a little interesting to look at it right now because when you think about it by segment which is as you ask the question, you know, nothing phenomenal has really changed. And what I mean by that is we've had competition on an ongoing basis in every segment of our business. But as the Gardner numbers indicate we have been very effectively dealing with that competition. The players we compete with hasn't shifted in any dramatic way in any of the segments either. As I look in the backup market the number 2 player is IBM with the Tivoli (ph) product, No. 3 player is Computer Associates and as has been the case quarter after quarter they continue to remain the primary competitors that we have to deal with in the marketplace. And that hasn't changed. Our market share in the statistic support held up really well in that market and we're really happy with that.

If I move over and take a look at the clustering market again the competitive landscape has not changed at all. It's the same competitors we've always had. We are the number one supplier in that market as of an IDC study back in April of 2002. Number 2 player is Microsoft, No. 3 player is Sun. No. 4 is either HP or IBM, and No.5 is either HP or IBM, depending which order that goes in. It is all the same players. It’s the operating system and the hardware vendors that we’re competing with there and we haven't seen the introduction of any new products, any new competitors, landscape hasn't changed. We continue to be the only supplier providing the same solution on multiple different platforms and that continues to be a dramatic advantage for us.

In the replication market again, not a real dramatic shift in the competitive landscape at all. Same players again. As we pointed out we were one of the strongest growth players in the replication market. We like the traction we are starting to see in that product category and we remain real confident about what that project can do.

If I switch over to the SAN area, the storage area network market. Again as a segment kind of a interesting segment, it still is a really new market, customers are starting to adopt it, we are moving away from SAN islands to global, to kind of company wide SAN deployments, we are seeing some of that. We are seeing good traction of our SAN technology. We are on a third or fourth generation product. We think we're meeting the customer requirements and we see nice opportunities teeing up in that market. The competitive market there changed a little bit over the course of the last 90 to 120 days in the BMC software who was historically up in the leaders quadrant along with VERITAS and EMC actually stepped aside out of that marketplace. So that competitive landscape will shake out differently in the next couple of years than some players might have thought.

And in the storage components, operating system components, Volume Management, File System and other technologies, we continue to do very well. On a relative basis, knowing that there's an alignment to box shipments to that piece of our business, I think Ed said the OEM revenue was 10% of revenue. That's the part really associated with those components. The part across all these technologies that's going really well and that I'm very happy to see is growth through the AIX platform and some early traction we're getting there continues to build, the numbers continue to get more impressive. We are coming off of a small base in many of those product areas, seeing strength on AIX is real good for business and we’re happy to see it. So, I’ll take the next question.

We’ll take our next question from John Roy of Merrill Lynch. Please go ahead.

Good quarter guys. I was wondering how much business you have been doing with the government recently, if you could give us any kind of color on where that's headed.

You know, government continues to be a very good sector of the business for us. We've highlighted on kind of a continual basis, kind of an interesting spectrum of markets that have been good to VERITAS. One of them has been telecom, one of them has been government. And that continues to be a pretty consistent trend, both currently and also looking forward. And so on the government side of it we've continued to move more sales capacity into our government sales organization. We see it as a great investment. And you know hopefully as we look forward on the government sector, as the issues with Iraq and the war in Iraq you know kind of start resolving themselves on a continual basis here, some of the distraction around business with government agencies starts dissipating a little bit. It is not to say we are really impacted by it but clearly we can have a better government business and stronger government business if the funds and money and distraction aren't going to a major war effort. We continue to see government as a real strong business. Ed, if you want to add anything to that?

No, I think that's pretty complete. Stronger in Q4 than Q1 but good pipeline.

We'll take our next question from Jim Mendelson from SoundView Technology. Please go ahead.

Thank you. Could you elaborate a little bit? It sounds like you had--what was the largest deal during the quarter, out of curiosity, and can you give us a little bit more color about the large deal contribution?

Jim, we had 12 deals over $1m. Beyond that we don't comment specifically on kind of customer names or specific sizes, although I would add that one of the 12 deals was over $10m.

And that's kind of what I wanted to get at.

And we'll take our next question from Sabrina Ricci of Deutsche Bank. Please go ahead.

Quick housekeeping then a question. Housekeeping if you could give us the breakouts revenue by platform, UNIX, NT, multiplatform. And my question pertains to the guidance for Q2 versus your comments about the second half, it sounds like in the short term the visibility is still up in the air but you feel pretty comfortable longer term. Could you reconcile that for us, given if the visibility right now isn’t that clear, what kind of signs are you seeing for the second half that are giving you more confidence, maybe budgets look better, something about the pipeline. Thank you.

Thanks, Sabrina. The platform mix for the quarter was on the housekeeping front 53% UNIX, 37% Windows and 10% multiplatform. Within the UNIX category, just added commentary there, as I mentioned AIX was very strong. We also saw again off of a relatively small base but we saw god increase in Linux as well.

If I look at the forecast sentiment on the April quarter, the real concern we have is all around kind of the economic weakness, the recently introduced potential of having SARS impact Asia Pacific which for us is a good growth business and obviously we want it to keep growing. And so having a SARS like condition that could slow down growth there is of some concern.

Otherwise when we look at the numbers and we look at the data and we look at how the pipeline's doing week by week, how the forecast is doing week by week and we look at the quantity of larger transactions that are starting to build in that pipeline, we feel pretty good and we think everything looks pretty strong and we think we’re executing really well. At the end of the day here it's just with a weak March, with SARS coming into play and these other conditions, we are applying a reasonable amount of caution to the near term outlook. We think that's appropriate. Next question please.

Next question comes from Bob Simpson (ph) of Bank of America securities. Please go ahead.

Hi, Gary, Bob Simpson. Hi Ed, how are you today. Couple of quick ones. Can you give us a little bit more sense of what was in the emerging technology, 32% growth number was pretty strong, was that more Replication or SANPoint control?

I think both categories showed very good strong growth. Now, these are off of small bases, but Clustering Replication and SANPoint all showed strong growth. And I think that the clustering and replication businesses are a bigger piece of the overall mix.

And we'll take the next question from John DiFucci of CIBC World Markets. Please go ahead.

When you look at your pipeline and when you are engaging with customers, even what looks to be a flat IT spending environment, are customers thinking more strategic in nature this year as opposed to previous years, in other words, I guess trying to get a feel, you guys are showing some good growth here in your emerging products. Could this finally be the year of the SAN?

I don't know if it's the year of the SAN. You know, SANs are still fighting I think a complexity problem out in the marketplace in that you know we are taking a lot of the complexities of storage and we are putting them together with lot of complexity of networks. And when you do that things go a little slower than you expect. Although people are starting to see the business benefit relative to implementing SANs and the ability to do more efficient backup and have better storage architectures because of it. All those things are favorable to us.

When I look out at kind of a quality question, quality of conversation question, with the CIOs that I meet with and you know from my experiences and I've been out you know on a number of sales calls, in front of a number of customers. They seem to be taking a much, you know, kind of more profound, longer-term viewpoint of their company, of their market, of what they're trying to accomplish in technology than where they were say 6 or 12 months ago. So what that means is, the quality of the conversations I do have with them has gone up dramatically. They're talking about very detailed architectures, they are talking about their vendor relationships with a long term viewpoint not just short term viewpoint, and we see that kind of ongoing evolution of better relationships with senior executives. I think it is showing up a little bit in some strengths that we are seeing that others aren’t around the bigger deal flow. We do a little bit better there. I do like in the pipelines that we have a number of opportunities that are larger that are starting to build. We can see those you know kind of showing up in the pipeline, showing up in the optimism in our sales force and the nature of the relationships and discussions I have with customers, supports that they're willing to make some long term bets on key vendors. And certainly we have moved into a key vendor world.

I'll also tell you that the Precise acquisition and what that means for what we do for a CIO has really kind of further raised our visibility within those accounts. It is a good subject discussion that they want to hear about, why we did it, what value it's going to bring to them and it keeps evolving. Net-net on all that, we had discussions that are much more strategic, much longer term viewpoint and I think all of that kind of discussion does favor in a relatively dramatic way potentially over time does favor emerging products.

Next question from Jason Ader from Thomas Weisel. Please go ahead.

Could you give us an update on the partnership with Cisco (ph)? Cisco is about to start selling their product in the market. And I'm just wondering, because they are focused so much on the OEM channel, how are you going to manage that just because I can imagine that EMC and HP are not going to necessarily want to sell a Cisco switch with VERITAS software on it.

The Cisco scenario, it's a pretty interesting relationship. As we said a couple different times before, we kind of expect the market adoption of the storage switches. And that move in general of the intelligence of storage which is what we call virtualization. We expect that to be a pretty gradual move from server based virtualization to switch based virtualization. One of our primary strengths in the market that the others have difficulty doing is we virtualize a lot of storage out there with 71% market share we are a very prevalent player out there. And my belief is that most people are going to be doing both for a considerable period of time. They are going to be virtualizing from the server and virtualizing from the switch. Ultimately when you go full circle and bring that back to Cisco specifically. We like the way our technology is positioned in the Cisco environment. We think we're on track to have a market opportunity there. As we've said over and over again though, our ultimate market opportunity with Cisco will simply be highly dependent on how well they do in the marketplace. Clearly them orienting their model a little more to an OEM model than a direct model that changes things a little bit but it doesn't change things very much if you believe the customer is going to be doing both forms of virtualization. Because ultimately people are starting to think about storage from an architecture view, and we’re the company that can do both switch based and server based virtualization and storage management. We are in an ideal position knowing it is going to be a gradual adoption rate of that type of technology.

We’ll take our next question from Shebly Seyrafi from AG Edwards. Please go ahead.

Would you say that your guidance in Q2 which in my math implies a 7% sequential decline in license revenue is worse than normal seasonality. The last two years in Q2 your license revenue fell 7% and 5% in the last two years respectively. And if you can go into the causes of that. Would you say it's more due to weakness at one of your big OEM customers namely Sun, if you can also talk about 53% revenues from UNIX, did Solaris decline meaningfully as a percentage of revenue, and do you see that persisting into Q2?

I'll led Ed jump in on this one too. There's been no real significant kind of trending change in the mix of who we do business with, how we do business, who it comes in through in so forth. AIX is doing well, we like the way the IBM relationship is building, that's a good thing for us. Given its off a relatively small base, it hasn't been at the expense of Sun or Solaris business. Everything continues to run pretty well. You're right in that we have had kind of a decline Q1 to Q2 the last couple of years. And the seasonality doesn't feel you know at a real high level dramatically different this year than in the prior years. It was a little bit odd you know to see the magnitude of the March weakness there. But not a total surprise given what was going on in the world, and given what you heard from every other technology company as to why they had weakness. And so -- but you know again as I look at April it's just starting to feel like week by week we're getting past this thing. And I like the idea that over the long run for the year that these big deals are starting to build back into the pipeline and you know we still feel pretty optimistic out there.

The only thing I'd add to that is that the one thing that is probably different and we don't know how to gauge it is what Gary had described earlier around Asia and the SARS activity. And we put kind of a you pick it, $2m, $3m, $5m risk factor around that. You know, it's very hard to measure. But people aren't traveling. And you know, you can only do so much business over the phone and you know kind of from your home. And so the duration of that is a bit of a wild card. So if there was you know one kind of aberrant event that we just need to keep our eye on it's probably that.

We'll take our next question from Dan Renouard from Robert Baird. Please go ahead.

I wonder if you could talk a little bit about the impact currency had on your top line and I know your hedge to the bottom line, I was curious could you talk about when you hedge, such that was there any sort of leakage and did you see any earnings impact at all and then related to that if you could talk about the expectation for the current quarter we're in what are you anticipating for currency looking forward? And then what kind of impact would that have on a year-over-year basis on Q2's numbers? Thanks.

So on the currency side of the equation, the impact of currency on net income was pretty small, in part because our international business is still kind of a third of the overall business and is kind of an investment area. Having said that you know, the impact when you compare it to the fourth quarter on the top line was probably in the $2m to $3m range. With a commensurate increase in spending. So net impact on the bottom line under $1m but on a gross basis probably somewhere around $2m to $3m at the top line with a roughly commensurate increase in spending. If you go back a year ago, the impact is larger obviously because the currency's moved substantially more, and we're probably talking on a gross basis somewhere around $8m. But on a net basis, again, diminimus to the bottom line.

We'll take our next question from Steve Denegri from RBC capital markets. Please go ahead.

My question's been answered. Thank you.

We’ll go next to David Rudau (ph) of Piper Jaffrey. Please go ahead.

Can you talk about the integration of the Precise products? What's the timing of that and have you had any initial comments from customers yet?

You know, the only part that we really talked about so far relative to the Precise technology is the fact that there's an acquisition out there that's on schedule and our kind of continual guidance here is we are going to talk about integration at the time the transaction closes. We'll give a little more insight into that at our analyst day but all in all we are really deferring integration discussion until the time of the close of the transaction. And that's the prudent thing to do for a number of reasons. The main one being they need to continue to operate as an independent company as do we until which time the merger's done. I'm going to stick with that viewpoint and we look forward to talking to you on detail on it as we close.

And we’ll take our next question from Chris Russ of Wachovia Securities. Please go ahead.

You had a very strong quarter in the emerging category, driven by clustering, replication and to a lesser extent SANPoint control. In the core business which is backup recovery and the File System Volume management looks like that business was down sequentially and year over year. Was the weakness concentrated in one category over the other versus backup recovery versus File System Volume Management or were both sort of equally weak in the quarter?

Yeah, I mean, that's just kind of glancing at data here pretty quick, I hadn't looked at it that carefully previously. They're kind of pretty much in line with each other. They're both in the same ballpark. You know, they're both down a little bit in line with the total decline in that segment of the business.

And we'll take our next question from Glenn Hanus from Needham and Company. Please go ahead.

Thanks. Question answered.

Next question from Amy Feng from JMP Securities. Please go ahead.

Can you tell me how your search is going for the new Head of Worldwide Sales and did your sales quota change going into `03 versus the quotas set in `02.

The leadership of the sales organization we have indicated a number of times we have a search under way. We are continuing to look at good qualified candidates for the job. I'm generally I'd say satisfied with the progress of the search though I will tell you it is probably a little too early to predict whether we'll reach the six month target we put out. This is not a scenario under which we have a gun to our head that we have to get this search done immediately. Our current leadership team in sales is operating very effectively and in general the executive team in its entirety is having good interaction with the field and there's a lot of executive selling going on which is something that is very valuable to sales organizations, something they appreciate. So we're doing real well on that front.

On the sales quota numbers, we don't actually disclose kind of what we do year by year in our comp plans for our sales organizations or in particular where we set their quota plans going. What I would tell you though is if you kind of roll it all up together on a capacity basis and everything else is, you know, we're comfortable with the guidance that's out there and the average street estimates for the year and I think that's the best indicator of the business, not how we've assigned the quotas within the company.

We'll take our next question from Nitsan Hargil from Friedman Billings Ramsey. Please go ahead. Mr. Hargil your line is open. We'll go next to Clay Sumner of Legg Mason. Please go ahead.

Thank you. You guys said in the past that service revenues should stay at about 33% to 35% of the total mix so it's been growing in the mix for years presumably because of your high maintenance contract renewal rate. Do you still expect service revenue mix to plateau at about 35% of total sales and if so why shouldn't it keep growing or is there something that starts reducing the rate of net additions in maintenance contracts? Thanks.

So it's a good question because clearly, the thing that is going to have the biggest impact on service mix is license growth. So from a business model perspective we'd like to see the services business in that kind of 33% to 40% range, and that is going to be highly dependent on getting the license business growing. We're confident we can do that. But it's going to require some up tick in IT spending. In the meantime the services business both on the maintenance side and on the professional services side is a good business. It's something that gives us greater account control, it's something that as Gary had indicated earlier is getting us kind of higher and higher into the accounts and should position us very well for when IT budgets do start to improve. But the direct answer is, it's going to take license growth to keep that in the kind of 33% to 40% range.

We'll go next to Dan Renouard of Robert Baird. Please go ahead.

Hi, thanks. I wonder if you could just talk a bit about pricing in both domestic and abroad and then particularly as currency moved fairly meaningfully through the quarter, did you do anything on the pricings side to sort of help you versus the competition and then just what you're seeing just in general on that respect? Thanks.

So kind of on a general basis on pricing the bottom line answer is we have not changed pricing. And you know so usually when you say you haven't changed pricing then it becomes well have you changed discounting so I'll go ahead and answer that one which is probably the heart of the matter is are we discounting dramatically difference than we have in the past. If I look over the last couple of years I'd say there is really no dramatic change in their discounting practices or policies as is the case almost every quarter we always have a couple deals where there is a competitive situation, it's kind of a must-win account for us, it's one we don't want to go to the competitors, and we do some form of discounting to make sure we win it. But you know by and large across our business, our discounting practices, our pricing hasn't changed and in general our discounting practices haven't changed. And we certainly haven't changed our approval processes relative to the discount levels under which individuals at various levels are allowed to allocate and distribute discounts. So very consistent treatment on the discounting front.

The other thing I'd add there is that deals have gotten smaller, right? So one alternative to discounting is just to take smaller deals. And I think that has helped us. It's helped us in the context of it has resulted in less discounting and it has helped us in more repeat buys. And so I think a big asset in the business model right now is the fact that the business is a lot of small deals.

And we'll take our final question from Kevin Buttigieg from Kaufman Brothers. Please go ahead.

Could you talk a little bit about the international business? What t he mix of sales are by product as well as what the mix of sales is there by channels. And looking at the first quarter it was a good performance internationally on a year over year basis. This was the first quarter I guess that the mix ticked down quarter over quarter and given the weakness you were talking about in the U.S. license business that was a little bit surprising. If you could just talk about some of those issues I would appreciate it.

Yes. So from I guess starting at the beginning in terms of mix by product and mix by channel, the international businesses, and these are generalizations which are dangerous. I'm going to have ten countries call me up tomorrow and bark at me. But from a generalization perspective it's a more core products oriented business which makes sense obviously, because it is what we first did in the U.S. and what obviously from a model perspective you'd expect to then roll out internationally.

From a channel perspective it's more heavily weighted to distribution than it is to direct. Having said that, we've got a very good direct business in some of the larger accounts, and in some of the global accounts. But again, as a generalization it's more heavily weighted to distribution than to direct.

In terms of the quarter over quarter comparisons, the international business had a pretty good quarter in the fourth quarter. It was strong business performance. So I think the comparison was a higher one or a tougher one. And we are very, you know, enthused as we look at Europe's prospects and at Asia's prospects. And you know, back to this whole notion of how do we grow around platform, product and geography, you know, the geography piece of it is a big, big element in our optimism as we go forward.

It's also been actually a good contributor over time with just continual year by year growth in our international mix. To jump in a little bit on the channel question, the answer to the channel question is it's different by country. You can't look at it as international and say here is the channel strategy. Where it skews to the most part is by the maturity of the country or the maturity of our business in a given country. When we are in a very emerging new business or new market that we don't have a strong presence in clearly more of the business is done through partners. In the more mature countries, you get into U.K., Germany France and Nordic countries now, there we have a much more direct presence with the larger accounts in those regions. And it has to do with maturity of business, maturity of our organization, revenue opportunity, the whole works. So a lot of different things play into the channel.

Before I hand off the call to the operator to close out the call, I just want to remind you again that we do have our VERITAS Vision User conference in Las Vegas on May 6th of that week. During on conference we will have an analyst meeting there and I look forward to seeing you all there and I appreciate you joining us today for our call. Thanks.

That does conclude today's conference. We thank you for your participation and you may disconnect at this time.