諾頓 (NLOK) 2003 Q4 法說會逐字稿

Good day, everyone, and welcome to the VERITAS Software fourth quarter 2003 earnings release conference call. Today's conference is being recorded. At this time for opening remarks and introductions I would like to turn the conference over to Ms. Renee Budig, Vice President of Investor Relations Please go ahead, ma'am.

Great. Thank you. Good afternoon, and thank you for joining us today for our report on VERITAS' Q4 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 expectations of revenue, operating margins and earnings per share for the first quarter and revenue targets for fiscal 2004, and its ability to extend its market leadership position and achieve growth in 2004, 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 periodic records on form 10Q and 10K, which are readily available on our website and the SEC's website.

During the call we will be referring to non-GAAP financial measures of the company's operating and financial results. We have reported similar measures to our investors in the past, and believe that inclusion of comparison numbers provides consistency in our financial reporting at this time. We have posted quantitative reconciliation of the non-GAAP financial measures discussed during this call with the most directly comparable GAAP measures on the invest relations page of our website. I'll turn the call over to Gary Bloom.

Thanks, Renee. I'm very pleased to report that in the fourth quarter, VERITAS again achieved record results.

With revenues of $513 million, we topped the record we set in the third quarter by 62 million in revenue. Total revenue for 2003 also set a record with $1.77 billion, an increase of 18 percent over 2002.

Earnings were also very strong for the quarter and the year. For the fourth quarter, non-GAAP EPS came in at 25 cents and GAAP EPS was 24 cents. For the year, non-GAAP earnings were 81 cents, up 33 percent from the prior year. GAAP earnings for the year were 63 cents, compared to 14 cents for the prior year.

We also continue to strengthen our balance sheet by generating approximately $174 million in cash from operating activities during the quarter. This allowed us to start 2004 with $2.5 billion in cash, and short-term investments.

Our outstanding fourth quarter performance is a culmination of a record-breaking year. We attribute the success once again to our focus execution and our growth strategy of expanding our product portfolio for both our core and emerging products, delivering these products on a broad range of hardware and software platforms, to further our heterogeneous advantage in extending our reach worldwide by investing in sales and service capacity around the globe.

The continued investment in our business, especially during the economic downturns, coupled with our focus on driving our product strategy through the eyes of the CIO, places VERITAS in a strong position for growth as the tech sector continues with steady, though measured recovery.

VERITAS's leadership is based on our proven ability to build long-term trusted relationships with the world's leading companies, and our no hardware agenda, software strategy.

Veritas's customers such as Air France, Deutsche Banc, Memorial [Sloan] Kettering, the city of New York, UBS, CSFB, British Telecom Retail, and Wachovia Corporation use our technology to help them more efficiently utilize our existing heterogeneous IT investments, while reducing the cost of managing and protecting their business critical data and systems.

And while our project strategy focuses on meeting the immediate needs of our customers, and extending our storage software leadership position, VERITAS is also at the forefront of innovation to support our customers' long-term requirements, providing the building blocks for utility computing

This approach helps our customers achieve optimal I.T. performance and availability on an automated shared infrastructure, while at the same time leveraging their existing I.T. investments.

In addition to the successful acquisitions of PRECISE and [Direva], which extended VERITAS's market reach beyond storage to application performance management and server automation, we completed our recent announced acquisition of Ejasent, adding important application virtualization technology to our growing utility computing portfolio.

Ejasent also provides us with software to help CIO's build internal departments for their application and resource usage. We also introduce command central service. A new utility product that enables I.T. managers to define service levels for backup and recovery, and track those metrics against changing business requirements.

Throughout 2003, we introduced several new major products and releases in our traditional storage software and enterprise data protection product areas, including a new version of VERITAS NetBackup 5, which introduced additional advanced data protection functionality, and faster disk space backup. Also in the backup area, we introduced a new desktop laptop option, extending VERITAS' leadership in backup recovery to corporate laptops and desktops.

Lastly we leveraged the strength and leadership of our existing data protection software to introduce the VERITAS Data Life Cycle Manager. This solution aligns well with the need for CIO's to better manage emerging regulatory compliance requirements.

For emerging products we continue to see solid growth in standpoint control, clustering, and replication, which are important building blocks in our utility computing strategy, and key solutions to extend our lead in storage software. Revenues from this category grew 16 percent for the fourth quarter, and 31 percent for the year.

I'm also very pleased with the progress we made during the quarter in our application performance management products acquired with PRECISE. Specifically in the growing interest from customers who recognize the value of optimizing application performance. Revenue from these products grew over 30 percent from Q3 to $17 million in the quarter.

What's clear in this business, is that we have tremendous customer interest and success, leading to a large pipeline for these products going into the first quarter of 2004, and in January, we delivered the largest APM deal ever with PRECISE, to a large financial institution for $2.9 million in license revenue. This obviously gives us a good start for Q1. And on the platform front, we saw growing demand on the LINUX, IBM and HP platforms all of which saw strong revenue growth.

I.T. spending continues to show signs of improvement. From a geographic perspective, VERITAS is continuing to gain momentum across all regions and industries as commerce continues to standardize on our backup, storage and utility computing solutions.

Domestically our U.S. revenues were strong with many successful transactions in the financial services and telecommunications sectors. Internationally, Amia showed strong results, especially in Italy and Spain and the emerging eastern European markets such as Russia.

And in the Asia Pacific region, we continued to see signs of growth, particularly in China. I will now turn the call over to Ed Gillis. When he completes this discussion I'll provide our outlook and open the call for questions. Ed.

Thank you, Gary. Today I will begin by provide viding some comments on our income statement. Revenue for Q4 was $513 million, up 26 percent year-over-year and up 14 percent sequentially. Included in revenue is approximately a $16 million benefit from foreign currency rates when compared to the December quarter a year ago. Total revenue for 2003 was a record $1.70 billion, an increase of 18 percent over 2002. License revenue for the quarter was $309 million up 17 percent year-over-year.

License revenue from our core products which include our back up and infrastructure products was 254 million, up 12 percent year-over-year. License revenue from our emerging products, which includes clustering, replication, and enterprise storage resource management products, was 42 million, up 16 percent year-over-year. For the full year license revenue from our core and emerging products grew 5 percent and 31 percent respectively. License revenue by platform for the quarter was 48 percent Unix and LINUX, 41 percent Windows and 11 percent multi-platform.

Service revenue for the December quarter was $204 million, up 44 percent year-over-year, and represented 40 percent of total revenue . The service revenues were stronger than expected, primarily because of a maintenance component, which accounts for about 85% of our service revenue. Maintenance revenues reflect in part, our increasing install base, and our high levels of maintenance and support contract renewals.

And, in part, a greater than expected contribution from the retroactive portion of maintenance contracts. We expect to see maintenance, and therefore service revenues, return to more normal levels in Q1, and accordingly we're forecasting a sequential decline in service revenue of approximately $20 million for the first quarter.

The channel mix for the quarter was 57 percent from end users and buyers, 32 percent from two-tier distribution, and 11 percent from our OEM partners. Non-OEM international revenue in Q4 represented 41 percent of total revenue. For the total year, non-OEM international revenue was 38 percent, up two percentage points from last year.

In the quarter, we completed 12 end user transactions valued at over $1 million, and 286 transactions over $100,000. The median deal size for transactions over $100,000 was $172,000 reflecting a higher number of transactions valued at over 100 K than the prior quarter.

I want to take a few minutes here to talk about the seasonality in our business as it relates not only to Q4, but also to Q1. Like many software companies our business is seasonal. License orders are typically lowest in our first fiscal quarter, and highest in our fourth fiscal quarter.

In addition, in our enterprise license business, we have experienced a trend towards more license orders being received late in the last month of the quarter, and this year was no exception. With the strong concentration of orders at the end of the quarter and year, many of these orders are shipped and billed to customers in the next fiscal quarter. As a result, incoming orders in the fourth quarter typically exceed license revenues. In the first quarter the opposite is true, with incoming orders being less than licensed revenue.

Accordingly, although Q1 will benefit from the strong order performance in late December, we expect this to be offset by the typical seasonal weakness in Q1orders as we start the new year. Another consequence of this seasonality is to skew DSO upwards in Q4 and downwards in Q1. As such our DSO was 39 days, reflecting the seasonality of the quarter. With approximately 50 percent of billings occurring in December. For Q1, we expect DSO to be in the high teens to low 20s, as a result of what would be a more linear quarter.

Our total gross margin on a GAAP basis increased to 85 percent. The gross margin on license revenue was 96 percent, and the gross margin on service revenue was 72 percent.

Operating expenses on a GAAP basis were $287 million. The increase in operating expenses compared to Q3 is primarily attributable to Q4 specific spending, such as increased sales commissions and accelerators being paid out in Q4, due to our strong revenue performance, our year-end bonus program, and some one-time marketing expenses related to increased advertising, and our Enterprise data protection launch which we held in New York and London in November. Since we don't expect these Q4 specific expenses in Q1, we expect to see about a $15 million reduction in operating expenses in the first quarter.

GAAP operating income was $151 million or 29.5% of revenue, once again clearly demonstrating leverage in our business model. Interest and other income, net of interest expense was $4.7 million, compared to 2.7 million in Q3, and reflects the full benefit of the convertible debenture refinancing that was done in August. Assuming no significant change in interest rates, we expect interest and other income on a net basis to continue at this level going forward.

The tax rate for our GAAP and non-GAAP results were 33 percent. For 2004 we'll be lowering our effective tax rate to 32 percent for both GAAP and non-GAAP purposes, reflecting the increasing mix of our international business.

Our GAAP earnings were 24 cents per share based on fully diluted share count of 445 million. Historically we have excluded from our non-GAAP operating results, the amortization of intangibles and stock-based compensation totaling $4 million net-of-tax, for Q4.

For the full year we've excluded amortization of intangibles, stock-based compensation, in-process research and development write-offs, and charges related to the extinguishment of debt, aggregating in total $78 million net-of-taxes for the year. When adjusted for these items our non-GAAP earnings per share for Q4 is 25 cents and 81 cents for the full year.

Going forward, the difference between GAAP and non-GAAP earnings should be the quarterly recurring acquisition related expenses, of approximately $5 million net-of-tax. Related to the amortization of intangibles and stock based compensation, or approximately 1 cent per share. This includes an estimate of about a half a million dollars of amortization expense associated with our recent acquisition of Ejasent.

Non-GAAP operating margins for Q4 with 31 percent and 21.8% for the year. As we said last quarter, we're setting our spending targets for 2004, assuming an ongoing recovery in I.T, and our desire to stay invested for growth. As such, we are not planning for significant margin expansion for the year.

However, expectations for Q1 are for sequentially lower operating margins, again reflecting the seasonality of the business. Based on a revenue guidance that Gary will provide shortly and the reduction in operating expenses I discussed earlier, we expect Q1 non-GAAP operating margins to be in the range of 25 to 28 percent.

Our head count exit in Q4 was 6518 people. And for Q1 we expect to see head count increase by about three percent.

I'll now comment briefly on our balance sheet. We exited the quarter with 2.5 billion in cash, and short term investments, and generated about $174 million in cash from operating activities for the quarter. And $629 million for the full year. Primary use of cash this quarter was for capital expenditures of 22 million.

Accounts receivable as of year-end was $256 million. Deferred revenue grew from 323 million at the end of Q3, to 399 million at the end of the year, reflecting an increase in both new support contracts, and very strong renewals, coupled with customers' preference for more [proterminate] support contracts. In addition we expect deferred revenue to decline in Q1, as maintenance contracts recorded in deferred revenue at year-end are earned.

Finally, before I turn the call over to Gary. I want to briefly go over some changes in how we'll be reporting our license revenue beginning with Q1. In order to better align our reporting with the changes we have made to our business, we will no longer break out our revenue between core and emerging, but will move to three categories that we believe align more closely to how our customers relate to our business, providing greater transparency to investors. The new categories will be as follows: First, data protection. This includes NetBackup, Backup Exec, and options such as Backup Restore, our data life cycle manager, and our desktop, laptop option. In Q4, data protection was $182 million, and grew 13 percent, year-over-year.

Second category is storage management, which will include file systems, volume manager, replication, database additions, and our SRM products, including SANPoint Control, StorageCentral and Storage Reporter. In Q4, storage management revenue was $71 million, and grew 12 percent year-over-year.

The third category is entitled Utility Computing Infrastructure, which will include clustering, high availability additions, application performance management, OpForce, or server provisioning, command central service, and our newly acquired Ejasent products. In Q4 utility computing infrastructure revenue was $56 million with 39 percent growth year-over-year.

We provided this revenue detailed by quarter for 2002 and for 2003 on our website for comparative purposes, and we'll begin using this categorization beginning with our next earnings call. I'm going to stop here and turn the call back to Gary.

Thanks, Ed. Before we turn the call over for questions, I'll provide some perspective on what we see ahead in 2004, and fiscal Q1. We view 2004 as a growth year for VERITAS, with growth that is more heavily weighted to the second half of the year. While it's early in the year, and our level of growth depends on a continued I.T. spending recovery, our business is strong, and we expect to drive the company from the 1.77 billion in annual revenues in 2003, to a target of $2 billion in revenue in 2004.

As Ed indicated our strategy for margins in 2004 is to invest for growth as we see continued improvement in the I.T. spending climate. As a result, for the full year, we don't expect to see margin expansion beyond last year's results. However, we will continue to carefully manage and monitor our spending, targeting minimum non-GAAP operating margins in the first half of the year, of 25 to 28% which allows upside in revenue to be leveraged to earnings.

As we indicated in our last call, our over-performance in Q4 combined with the normal seasonal patterns of the software industry, leads us to a conservative viewpoint relative to sequential performance as we move from Q4 of 2003 to Q1 of 2004. As a result, our revenue expectations for the March quarter are in the range of 455 million to $470 million, and based on GAAP operating margins in the range of 23 to 26 percent. GAAP EPS is expected to be in the range of 17 to 20 cents.

On a non-GAAP basis, the operating margin target for Q1 is expected to be in the range of 25 to 28 percent, resulting in non-GAAP earnings per share in the range of 18 to 21 cents per share. Although this revenue range represents a sequential decline of around 10 percent, I'd like to point out that it does represent year-over-year growth in Q1, of 12 to 16 percent, and is consistent with the 12 percent average sequential decline we have seen from other large software companies.

In summary, Q4 was a great finish to a great year, and a ton of our business was as strong as we've seen in the past two years. The climate for I.T. spending has clearly improved, and seems to be getting better. We have a great utility computing strategy for the future that allows our customers to leverage the industry leading back up in storage software solutions they have already purchased from VERITAS, while continuing to provide the CIO our no hardware agenda software.

Our competitive position and brand is solid in all of our key product areas, backup, storage, and utility computing, and we expect our position to get even stronger as we continue to invest heavily in all of these ares. End, the VERITAS team is motivated to drive the company to the $2 billion revenue target in 2004. I will now open up the call for questions.

Thank you, sir. The question answer answer session will be conducted electronically. To ask a question, please signal by pressing star key followed by the digit one on your touch tone telephone. If you are using a speaker phone please turn off your mute button to ensure your signal reaches our equipment. In the interest of time, we do ask everyone to please limit themselves to one question. Again, that is star one to ask a question. We'll pause for just a moment to assemble our roster. We'll take our first question from Neal Herman with Lehman Brothers.

Yeah. You talked a little bit about how you outperformed so much on the maintenance revenue line. Could you go into a little bit more detail on that, and perhaps how some of these contracts were structured, the retroactive issue? And as part of that, I think you had, I think, the biggest increase in the deferred revenue on the balance sheet that I've seen, could you talk a little bit about that, and was some that of that deferred license revenue or was that all deferred maintenance?

I guess starting with the last question first because they are obviously related. The big increase in the deferred revenue account is driven almost entirely by maintenance. So the lion's share of that account consists of maintenance contracts. And what we have done, I think we described to you in the past, we put really a full court press on building strong maintenance renewals groups, both in the Americas, as well as in Europe, and as we get into '04 that's certainly a focus for Asia. And they have had very good success at basically annuitizing strong customer relationships. And so I think when you take that effort, combine it with what I think is a general trend, at least in our company, and I think more generally in the industry to [co-terminus] maintenance payments, and the fact that I really think we did see some benefit from kind of, year-end budget cycles, where customers looked to get caught up on their maintenance, all of that ended up in really what got reflected as kind of an unexpectedly strong maintenance performance.

The retroactive piece is simply dates. So if you sign up for a contract that begins July 1st, but you don't give us the PO until November 1st, there's a retroactive piece back to July 1st So it's simply, you know the mathematics of to what period does the contract relate. So it's a very strong performance there, and one that I think should bode well for the future because, obviously, as I said earlier, this is a strong vote of confidence from a relationship and annuity perspective.

I would just point out that it's also a strong point of view that the customers are using the technology that they've purchased. One thing that has certainly changed over the last couple years if customers aren't using the software, they simply don't renew maintenance. And so the fact that we can go after this maintenance opportunity, customers are signing up for our maintenance, is a very strong indicator of usage.

Thank you. Could you also talk about what you're seeing in the very early stages of your pipeline in terms of RFPs and RFI's, and then secondarily, what you saw in terms of changes in your close rates in the fourth quarter, and your expectations regarding close rates going forward?

I'll talk about pipeline. I'll let Ed touch on the close rates. On the pipeline side of it, the pipeline going into Q1 is very strong. You know, we were, you know, very, very happy with kind of how the quarter went in the fourth quarter and seeing the, you know, the year-over-year another record quarter, so all of that was good news.

I think the best way to kind of talk about Q1 pipeline, is relative to how did we feel Q4 to Q1 a year ago. And what I tell you is we feel better going from Q4 to Q1 this year than we did a year ago. The business just feels stronger. The pipeline is supporting that it's stronger. And we see a lot of really nice opportunities out there as we go into the new quarter. So we feel pretty good going into Q1.

So on the close rate, I think that similar to last Q4, we had very good experience with close rates. And I think the sales organization did an outstanding job. One observation I would have was it was probably more skewed to the end of the quarter this year than last year. But, again I'd re-echo what Gary said about pipeline. Pipeline really consists of kind of several components. But certainly one component are the orders on hand. The second one are sales opportunities. You combine those two, and we're looking at a very good, strong pipeline going into Q1 that looks stronger than it has been in the last couple of years.

Great. Thank you very much.

Thanks, Neal.

We'll take our next question comes from Tom [Burnquist], with Salomon, Smith, Barney.

Thank you. Looking at the product revenues. Sequentially they weren't up as strong as I had hoped, in a couple of ares. I'm curious was there anything that changed in the marked place, Gary, with the EMC LEGATO transaction that might have impacted the backup in recovery product sales, or was it just you guys had had good performance in the quarters leading up to it so it was less pent-up demand in the fourth quarter?

Yeah. I think it was a very strong year for us the whole year. We didn't see any real effect of the EMC LEGATO acquisition. In fact if you look at our data protection revenues from Q3 to Q4, date of protection revenues, sequentially, were up $22 million. So clearly if there's a place that, you know, people were expecting them to have an effect it would have been with that acquisition. Our number is up 22 million. I don't know it's somewhere around 50 percent what they did in the entire quarter is what we did sequentially in improvement from Q3 to Q4.

So real strong. As we indicated previously, replacement business on LEGATO replacement has also continued to be very strong. You know, our early estimates here are that we ended the year with an excess of 200 replacements. So very strong replacement business. We continue to see that acquisition as positive for VERITAS.

The other perspective on that or the other color on that is the core business grew by five percent for the full year, but it grew by 9 percent in Q3, and 12 percent in Q4. So a very back half of the year weighted growth in our core business, which I don't think is accidental.

That's fair. On the APM business you mentioned that a big transaction already this quarter. I'm curious who are you seeing, do you think, in terms of primary competition there? Is it the BMCs of the world, the Mercury Interactives, or, if you could just walk through that a little bit.

Sure. We see a little bit of everybody. You see a little press, you see a little BMC, you see a little Mercury. The reality is, as far as the live application performance management, we're pretty unique in that asset. The major competition is whether the customer wants to continue doing it the way they do it today, which is predominantly tune applications manually. Kind of slog through system logs and other information to figure out what's going on, or whether they want to leap forward into a new era of technology where they can use automated technology to help them manage application performance.

It's not one of these super highly competitive markets as far as competition goes. You're more competing with, kind of, the processes they do today, and the question of whether they're going to buy into your strategy that you can be helpful with the technology. The thing we're real happy with is the customers that have this technology, they love it. And as PRECISE saw, and as we continue to see, reselling additional licenses into existing accounts continues to be a good business as well. And, as we mentioned on the $2.9 million license deal in Q1, that's essentially a new customer moving in in a big way and buying into a strategy for managing performance differently.

Great, thank you, guys.

As a reminder please limit yourself to one question. We'll go next to David [Reudeux] with Piper Jaffray.

How you doing guys, nice job on the quarter. In terms of the PRECISE business, can you go through what the sales force looks like? I know you made some changes in Q4. Can you remind us what those changes were?

If you remember, we actually made the changes predominantly in Q3. About halfway through Q3, we reintegrated the sales force and essentially the major change there is transferring the revenue and the quota assignment into the standard VERITAS sales organization around the globe. That was the model we switched to halfway through Q3. We continued that in Q4, and naturally we're continuing that into Q1 and beyond.

So it's an integrated sales force. What we have is we have a good chunk of the original PRECISE team that is really providing specialist services, and kind of for lack of a better term, an overlay organization that is really coming in and helping with the specialty knowledge around application performance, and helping move the larger transactions providing sales engineering support and so forth.

But it's an integrated effort, and there was really no change in Q4, no change going into Q1, and really none necessary, given what we're seeing in the pipeline and the opportunities the way they're building.

Then what do you expect to see from PRECISE in Q1? I think you were looking for 18 million in Q4, came in at 17. Any projections for Q1 here?

So as Ed indicated, the license revenue on PRECISE is now going to blend into the new utility computing infrastructure category. We continue to be real optimistic. I think sequentially it's going to be strong. So we're very optimistic about where this business is going. But as far as specific, PRECISE only guidance, we are kind of moving that into that utility computing structure.

Okay. Thank you.

We'll take our next question from Drew Brosseau with SG Cowen.

Thanks. Mine's regarding the license outlet. I guess I'm wondering a little bit about what your thinking is behind the, -- I guess it's implied about 275 to 290 in licenses compared to last year at 255. If I adjust for currency, adjust for PRECISE, we're not looking at much growth at all. Are you being conservative, or do you have a problem?

Well, let me -- let me take a pass at it. You can draw your own conclusions. We certainly don't think we have a problem. I'm not sure I would characterize it as conservative. We are going into a Q1 in which from our perspective I think we described this to you last call, if you look at the kind of top 20 software companies and you take Microsoft out of the mix, fiscal Q4 going into Q1, declines on average 12 percent. We're looking at a decline on average of about 10 percent here.

The results that you just described, if you kind of take the mid points of those I think you are looking at revenue growth in Q4 -- in Q1, rather, that's somewhere in the kind of 18 percent range, and you're looking at license growth, that is, above 10 percent. And those don't look like bad numbers to us, you know, given what we believe is a pretty wide spread seasonal decline in the industry. If we can do better, dynamite, we will, and we'll get some margin leverage. But that's what we're planning, and we think it's a reasonable place to be.

Okay. Thank you.

One thing to keep in mind just to add to that. When we think about, you know, kind of the forecasting and guidance that we're giving, remember, too, that we use guidance, maybe a little more so than others to help set the expense lines as well. And, you know, to set the margin attainment and the EPS attainment we're after. So is there potential for upside? There's always a potential for upside in these numbers, but what we're focused on is setting the expense line, giving guidance as we see it. I'm right there with Ed. I think kind of, you know, kind of year-over-year growth that we're talking about is really solid and we're very optimistic going into the next year.

So you would be pleased with 290 in license?

You know I'm not going to get into what I'm pleased with and not pleased with. We are comfortable with the guidance. We think it's an indicator of a good strong performance. We've talked about in Q3 we had -- if we had a strong overperformance in Q4, that you know sequentially that goes on into Q1.

Put another way, at 290, I think we all feel, internally, that we are on a strong glide path to $2 billion. That's totally consistent with $2 billion.

Right. Okay. Thank you.

We'll go next to Shebly Seyrafi, with Merrill Lynch.

Yes, thank you very much. Can you provide us with the contribution of NetBackup 5.0 to Q4 license revenue, and secondly how much deferred revenue do you expect to be used up in Q1? Thank you.

The question on NetBackup 5, we, as you know don't break it out by specific products. Again what I did indicate a second ago in the data protection line is Q3 was 159 million in license revenue, and it went up in Q4 to almost 182 million in license revenue. Clearly the NetBackup launch in the November time frame is a huge launch for us. It introduced major new functionality, gave us a real technical advantage around disk based backup protection, and we introduced a number of new features surrounding that product to move us beyond just the strong disaster recovery area on into the regulatory compliance area, not to mention the desktop and laptop option as well.

So that was a major release. All indicators from our sales organization is that that is helping create immense momentum in our customer base, and all the indicators that I've seen and all the reps I've talked to looking back on Q4, all saw strength in the back-up business. That was a launch that we did in both New York and London. So from a kind of an effect perspective, very positive effect on the business that I think will carry on, and support the business very well going into 2004.

And on the deferred revenue account, Shebly, given the fact that by far and away the majority of that account is maintenance related. I think we're going to see a decline in Q1 as those maintenance contracts start to get recognized. I'm estimating the decline is probably in the area of $15 million. But I will tell you that's an estimate only, because obviously it's offset by continued success we have with renewals which, again we continue to chase with the catch-up piece and the component of new business coming into the quarter.

Okay. Thank you.

Thanks.

We'll go next to Laura Lederman with William Blair.

Yes. Thank you. I'm on a cell phone, so sorry if it's a little choppy. Can you talk a little bit more about EMC Legato, obviously we all have questions on it. I know you mentioned that there are several hundred competitor replacements. Did you see them any more, in other words, one, are you seeing them more in the field, two, changes in win rates versus LEGATO, in terms of new customers?

Laura, I don't know any other way to talk about it than to tell you this has been a strong business it's continued to strengthen. We haven't seen any negative effect of them entering the marketplace. I was personally involved in a financial services opportunity. It was a very large replacement and we won it. And we won it hands down. So there's a number of stories like that. Where we just continue to go in. We're winning the consolidations. Our partnership opportunities continue to be favorable, because of our independence. The fact that we don't have a hardware agenda is an enormous asset. It's no no way a liability. It's simply an asset. The revenue supports it. 22 million sequential growth going from Q3 to Q4. To me that's a big sequential improvement.

Oh, no, no. I think you're misinterpreting my question was more are you seeing more of the win rates now very good? In other words is there any change at all, after EMC bought them that you can see win rates going down, them trying to sell the product more aggressively, just more contextual view of any change that you've seen.

No. I mean the answer is -- the short answer to the question is maybe where I should have started is no.

Okay.

We're simply not seeing more of them. It's not having an effect on our business. We are very strong. They have continued some of the practices that we saw, you know, two years ago, and a year ago and three years ago as an independent company of trying to win on price alone.

Okay.

And they aren't winning those either in most cases. There's always the customer here or there that takes the free software approach, but by and large, the total cost of ownership, feature functionality, market leadership, all favor VERITAS.

Right. And quickly on the APM side, you mentioned who you're seeing competitively, but how often is there a competitor in the deal versus them going directly to you? I'm just getting a sense of what the deals look like, in general, from a competitive standpoint?

Laura I don't have specific statistics, but I would say 70 -- roughly 70, 80 percent of the time we're kind of more or less competing with ourselves, and competing with the notion that says we have to sell the customer on the fact that it really is as good as we say it is. And, you know strong references and success stories are helping that, but it's almost one of these -- the customers hear the story and they ask you, is it too good to be true. The customers that have tried it find out it's not too good to be true, that these products are really phenomenal and that's what we're competing against.

The big asset here, Laura, for us, obviously, is our installed base.

Right.

The reason why we're so enthused about this and why we think that we're going to see growing momentum through our core, is the leverage that we can get out of our relationships in the installed base.

Thank you.

Thanks, Laura.

We'll take our next question from Kevin Buttigieg, with Kaufman Brothers.

Thank you. Just back to the retroactive portion of maintenance. Did that come all off of the balance sheet then onto the income statement?

No. Because again the way that -- the retroactive piece is really as simple as if you have fallen behind on maintenance, and you want to go renew your contract, you've got -- we, by policy we'll only renew you if you go back to when your last policy expired.

Okay.

So it's really that simple. It's a case of we had added something in the nature of probably 25 people in Europe last January to start more aggressively pursuing that business. We were a little more mature in the U.S. on it, and it ultimately gets reflected in renewal rates. Our renewal rates are obviously improving. And I think our -- reflective of the fact that this is mission critical infrastructure software that's being used.

Right.

So, ergo, you're going to end up with very high renewal opportunities.

Okay, I thought that was signed, but not billed.

No.

But it's not signed or billed.

No. No.

Second of all. Obviously you saw a little bit of a decline in large deals quarter-over-quarter, and it looks like it impacted the emerging products license revenues. I guess that's a little bit at odds with your comments about seeing an I.T. spending environment improving. What would you attribute that to, or how would you reconcile that?

A couple of observations there. I guess the first is that we did 12 deals over a million, but the deals over 100 K, I think grew by something like 20 percent. The average deal size grew nicely, up to 172, I think from what ways it 166 or 156. The average deal size grew. We're seeing some uplift in that context. I also think that as we look at the pipeline, again defined as kind of orders that haven't yet been delivered and forecast opportunities, we're going to see a good start to -- to the first quarter, relative to larger deals, and while I can't tell you with confidence that their biased to emerging, I can say that our emerging business has traditionally been driven both by growth in I.T. budgets, as well as the bigger deals. The more sophisticated customers. So I think it's a reasonable expectation, but I don't have that information.

Did you have big deals in early January then, other than the PRECISE deal you talked about?

Sure.

Million dollar plus deals?

Yeah. Yeah.

Okay. And what is your forecast for operating cash flows for the first quarter, and for the year, if you want to give that as well?

I won't give it for the year, but we would expect very strong operating cash flows in the first quarter. Certainly over 200. 200 to 250 million. You know, and part is a result of the fact that as I indicated earlier in the call you see a spike in receivables in the fourth quarter as a result of 50 percent of the billings being in the third month. Those will get collected in the first quarter.

Mmmm-hmmm. Okay. Thank you.

We'll go next to Sanjiv Hingorani, with Oppenheimer and Company.

Several questions. The first is from Q2 to Q3 your license revenues grew almost 30 million, and in a seasonably strong Q4, your license revenues grew only 29 million, which is not the normal seasonal pattern that you would expect to see. Can you explain what happened to license revenue growth in the quarter? Then I have a couple of follow-up questions.

Yeah. So, again if your -- it sounds like you're describing it so correct me if I miss understood. That you're describing sequential, and I don't think it was 29, I think it was 19 in the Q3 to Q4, but your point, I think is the same. At least if I understand it. So I dial you back a year ago. A year ago, Q2 to Q3 we grew at zero percent, Q3 to Q4 we grew at 10 percent. These are sequential. This year Q2 to Q3 we grew at 11 percent. Q3 to Q4 we grew at seven percent, from a sequential performance I think they are both very strong.

I'd also harken back to the fact that, and I'm looking at licensed revenue here. I'd also harken back to the fact that license revenue year-over-year is up 17 percent, which I think is a good number, and as we're looking into Q1, we're expecting that to remain at double digit levels. So that's -- you know that's kind of our perspective on it. I think we've had a good strong second half of the year, and we've got a lot of momentum as we go into '04.

Actually my numbers were correct, they were 29 million for 261 million in licensed revenue from Q2, and 290 million in Q3, these are your reported numbers.

So maybe you're correct.

The second follow-up question, I guess I have, is if your renewals are increasing, what was the sort of historical attach rate off renewals, off maintenance, and where are you in that process now? I mean clearly there were a lot of existing customers who had not signed up for maintenance contracts for a while, which is why when they play catch up you're seeing a big bump up in revenue. What was the attach rate of renewal contracts or maintenance contracts? And where do you think that can go?

Yeah. So the attach rate is, without giving you kind of explicit numbers the attach rate is approaching what I would -- what I think is probably steady state in the U.S. We've still got improvements to make in Europe, although we made big improvement in fiscal '03. And we are well behind in Asia. And so that's on the kind of the initial license. And then the renewal rates really follow a similar pattern. You know we're starting to approach in the Americas renewal rate level that, you know, I think is going to be hard to increase. Europe made big improvement in '03 but still has some opportunity. In Asia they're well behind.

Once again in the interest of time, please limit yourselves to one question per person. We'll go next to Katherine Eggbert, with C.E. Unterberg, Towbin.

Hi, good afternoon. I was wondering, you alluded to the bookings were strong in Q4 and they'll go down in Q1. Can you tell us qualitatively how strong they were? Can you give us any indication of book-to-bill?

I think probably the best way to look at it from a macro perspective is our growth in orders year-over-year and our growth in revenue year-over-year were pretty comparable. I think the growth rates in both are pretty comparable.

Okay. And then second question, any comments you can share with the audience on EMC buying VMware? Do you have any response to that?

Yeah. VMware is kind of an interesting acquisition. Clearly, you know pretty far out of their traditional storage domain for them to head off into that direction. And it's an Intel only solution, relative to competitive overlap with VERITAS, really not terribly competitive with VERITAS We did an acquisition that we announced and have since closed this last quarter called Ejasent Technology that really focuses much more heavily at the application level of kind of virtualizing and managing movement of applications than managing operating systems. It's a different kind of technology, in that one works at the operating system level versus ours that works at the application level. Ours also works above the operating system and has, you know, very, very solid performance, or put differently, little performance overhead as you move applications around. And it also is a technology that extends just beyond just the Intel world. So from our strategy perspective, you know, we have a lot of technology that touches in that area, all different than what they do, including our JERIVA technology that we acquired, called OpForce, which is shipped with Intel blade servers to help manage the blade environments. And also the Ejasent technology more recently acquired. But as far as direct competitive overlap, essentially very little.

Maybe asking the question a different way, do you feel like you need a response to EMC buying VMware?

No, we don't believe that we need to have an immediate response to that. There's other efforts under way besides VMware, there's also technology being developed by Microsoft through an acquisition they did, and is an environment that we would probably end up supporting if our customers use it, quite possibly. We do do some support of the platform, today. Microsoft is in that market, EMC is now in that market. You know I suspect it's more of another platform that we may end up ultimately supporting than the space we actually need to be in.

Good. Thank you.

Thank you.

We'll take our next question from Adam Holt with J.P. Morgan. Mr. Holt your phone line is open. Please go ahead with your question

Yes. I actually also had a question about the bookings number. Was it greater than you had expected? And was the fourth quarter more back-end loaded than you expected, and how much visibility does this bookings number give you heading into Q1 on the license side?

Well, again, Adam, at the risk of repeating myself, the -- the, greater than expected. We had strong -- um -- performance in the fourth quarter at both the revenue level and the order level. I think it was probably more back-end loaded than we had expected. But again, I think we ended up with very strong revenue results. As we go into Q1, we have stronger outlook in Q1 in terms of momentum and confidence this year than we have over the last couple of years. That's in part driven by the fact that our pipeline's strong. Of which a component is, those are those orders. So, again that's -- that's kind of the nuts and bolts of how we're approaching '04 and what we're thinking about '04 and really don't have an awful lot to add to that.

Okay. Just one follow-up question, also on the maintenance uptick. At what point during the quarter did you recognize that maintenance was going to be stronger than you originally thought?

Um -- again I would say towards -- you know really towards the end. Again an awful lot -- the maintenance business is a pretty predictable business with the exception of the retro's, the retroactive stuff. And that, you know, those were, I think largely end of quarter kinds of issues, and it's back to the issue of some of it is us doing a good job at pursuing it, and I think some of it is a function of customers having budget availability to fund it.

I'd say there's one other piece that kind of drives it a little bit, too. As we continue to expand the customer relationship and broaden out, you know, based on budgets, based on next year's projects and their optimism, or not, towards 2004, that as we establish a bigger relationship with the customer, part of that process is very often looking at what licenses have been deployed, what are they paying maintenance on, what aren't they paying maintenance on. A lot of this retroactive maintenance is coming from an aspect of our business which is building stronger customer relationships.

The fact that Ed has talked a number of times about, through the call about all these different people that we've added to go after this, is trying to simply make it easier on our customers because the maintenance renewals can become complicated, relative to when you bought your licenses, how much you're using and so forth. These people available simply a service function to make it easier to get the retroactive, easier to get the renewal, easier for the customer to figure out what they are and aren't paying for. All these investments really do payoff to create a strong maintenance renewal business. Which is good. It's a good thing to have because it keeps us engaged with the customer, it creates opportunities to sell more of our expanding portfolio.

There's no question it was driven in part by the big launch of NetBackup 5.0. Whenever you have a new product launch, that is going to increase your original opportunity.

Great. Thank you.

Next question, please.

We'll go next to Daniel Cummins with UBS.

Thank you. Ed, I thought you said that we'll see a step down of about 20 million in the first quarter for the service revenue, is that right?

That's right.

So on a base of 470 million total, that would still be about, you know, 39 percent coming total revenue coming from the services line. What are you thinking about for the full year and that 2 billion, in terms of the services contribution?

Well, we haven't broken it out explicitly, other than to observe that over time, and certainly not going to happen in one year, I would expect to see the services license mix approach a 40/60. So we -- if we're at kind of the 35/65 level, it's going to over time march to something that's closer to a 40 percent service/60 percent license. Now we were at that level in this quarter. That's an anomaly. And I do not expect to see that as we go forward, at least in terms of the full year. More explicit guidance for the full year, we really don't have out there. But I think if you look at first quarter, a services number that's somewhere in that kind of 180 range is consistent with, you know, with being down roughly $20 million. So 180, 185.

So you think it could still be a gradual climb, it won't just kind of jump up and stay there?

Right.

And to be clear we're not not doing anything in our businesses to cause the services to spike. We deliver the maintenance services and then the services beyond that professional services, is primarily to help customers with adoption of our technology, make them successful so they ultimately buy more and are successful using what they've purchased. The goal is not to become a services business. It's a license business supported by maintenance and implementation services, along with the consulting necessary for customer success.

I may have missed this before. Did you give any kind of sense of where you expect the gross margin to be on full year '04?

The gross margin, no. Total operating margin we said would be roughly flat which is in round numbers 29 percent.

Thank you.

I think we have time for one more question.

We'll take our final question from Tom Curlin with RBC Capital Markets.

Good afternoon. Could you just walk through the selling cycle for the new products and how you see those arriving at a full contribution to the revenue flow from a timing perspective over the course of a year. And I heard a comment about those products help stimulate maintenance contract renewals. Maybe I didn't hear that right. But, do you see that primarily as a license catalyst, or is it also a contract renewal cap?

I'm not sure I completely followed the question, but, you know, the way -- the comment I made about the maintenance renewals is simply says, as we're establishing bigger relationships with our customer, and typically bigger relationships with our customers involve customers standardizing on either a portion of our technology offering or a very -- you know a narrow portion of it or very broad portion of our offering in the product stack, meaning that they really, you know, go out to solve disaster recovery or they go out to solve availability. We're seeing more of that over time as customers move towards utility computing and buying the building blocks to enable utility computing

So what happens is, as they do these standardizations and they're kind of for lack of a better term doubling down on VERITAS for the future, then they tend to look at their maintenance and they bring all their licenses up to compliance up to the current level of usage and they spend time in the form much building an ongoing relationship with us, figuring out what all they've deployed, and that is the positive motivator coming back kind of relationship between new relationships and expanding relationships back to maintenance renewals.

As far as the selling cycle for the new products, I don't know that our selling cycle has changed dramatically over time here, other than, as I said before, we do see more and more customers, you know making kind of standards decisions. We're seeing a continual trend in the industry with our customers towards customers narrowing the quantity of vendors they use, and picking those vendors that have a broader portfolio of offerings than a narrow portfolio of offerings.

We're extremely well-positioned for that with our broad offerings, all the different things we do in back up, in storage, in application performance management, and utility computing in general. So we align well to virtually every trend that's out there in the industry right now.

If you take NetBackup 5 just as an example. As you look into 2004, is there an acceleration point for that with respect to license revenue, or do you really feel like you're already running those programs, obviously, there's a penetration rate, but is there an acceleration point of penetration that comes at some particular point in the year?

In the back up market certainly for the maintenance renewal the comment that Ed made is that on maintenance renewals, NetBackup 5 does drive maintenance renewals, because those people that haven't renewed their maintenance want to get the maintenance upgrade. They don't want to rebuy the product. They have a choice they can rebuy the product or they can come current on maintenance and get the product shipped to them as a maintenance upgrade. Obviously, they would have to then license the additional add-on options that we continue to offer in the products that are priced separately. That's the motivation of get current on maintenance is to get the new version.

As far as an acceleration of the business, you know, this is a market that is viewed as growing, you know somewhere around four or five percent by the industry analysts estimates and we've obviously been growing stronger than that throughout the year. So my belief is we're gaining market share, we're continuing to offer more technology and broadening our offering there. We haven't kind of slowed down or anything else, in fact the way we define our strategy is through the eyes of the CIO.

We talk to our customers about what kind of things they need. We put those in the products to satisfy their requirements. We do a good job at that. I don't think there's any kind of one-time big event that causes a spike. More so than what we've seen in the past. We're the industry leader.

As customers decide to consolidate, they consolidate on the leader, and we don't have a hardware agenda. So there's all the hardware independence that's favorable towards us, a real asset to the business. We're really kind of the 800 pound gorilla in this particular product category. And it's a good position to be in. It's a real strong business that will continue to do well, I believe, throughout the year. Again our independence is very helpful there.

The only other thought there is the timing of the -- of NetBackup 5.0 is fabulous, because we're getting marketing focus, we're getting increased competitiveness, just at a time when it looks like there's more money to be spent. So the juxtaposition of those things, from our perspective is outstanding as we go into '04.

On that note I'm going to go ahead and wrap up the call. Thank you all for attending. We are obviously extremely happy with the results this year. We are extremely happy with the quarter. We saw a 26 percent growth in the quarter, 17 percent license growth. We saw margins at 31 percent. We are thrilled with the results, incredibly optimistic about 2004 and we'll talk to you again during Q1as we are on our way to $2 billion in revenue for 2004. Thank you very much.

That does conclude today's conference. Thank you for your participation You may disconnect at this time.