諾頓 (NLOK) 2004 Q1 法說會逐字稿

Good day, everyone, and welcome to the VERITAS Software first quarter 2004 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 the Vice President of Investor Relations Renee Budig. Please go ahead, ma'am.

Great, thank you. Good afternoon, and thank you for joining us today for our report on VERITAS's Q1 2004 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, earnings per share, and operating margins in the second quarter, and revenue growth and operating margins in 2004, and the company's ability to continue its market leadership position, expand its addressable market, and maintain the positive momentum of its business are forward-looking statements. Actual results may differ materially from those projected in the forward-looking statements. A further description of such risks can be found in our periodic report on Forms 10-K and 10-Q on file on our website at the S.E.C.'s website.

In addition, during this 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 an inclusion of comparative numbers provides consistency in our financial reporting at this time. We have posted a quantitative reconciliation of the non-GAAP financial measures discussed during this call with the most directly comparable GAAP measures on the Investor's page of our website.

Finally, during this call, we will be making comparative statements with prior periods. As discussed in our conference call and press release of March 15, 2004, we are in the process of restating our financial statements for the years ended December 31, 2001 and 2002 and adjusting our financial results for the year ended December 31, 2003. All comparative statements will be made using previously disclosed results.

We have also previously disclosed our estimate of the expected effects of the pending restatement on our financial statements. At this time, we believe these comparisons to be current and meaningful, but you should note that there may be additional information that arises during the restatement process that may change these comparisons.

I'll now turn the call over to Gary Bloom.

Thank you, Renee.

Before reviewing results for the first quarter, I'd like to update you on the status of the restatement of prior period results that we announced on March 15th. As you are aware, we are currently trading on the NASDAQ with an E added to our ticker symbol, which indicates we are out of compliance with the NASDAQ listing requirements concerning the timely filing of our 10-K. As part of the NASDAQ carrying process regarding listing compliance, we will shortly be reviewing our plans with NASDAQ to file both our Form 10-K for 2003 and the Form 10-Q for the March quarter.

We continue to work through the reaudit procedures, balancing the natural sense of urgency to complete the process with our commitment to accuracy. The process continues to track to our internal plans, and we expect to file both our Forms 10-K and 10-Q in the June quarter. We expect to be in compliance with all NASDAQ listing requirements once these Forms 10-K and 10-Q have been filed with the S.E.C.

While both the restatement and completion of our S.E.C filings are important issues to the company, we are also very focused on our business fundamentals and driving our quarterly financial results. Our ability to balance our efforts is evidenced by the stronger than expected results we delivered in the March quarter, with revenues of $487 million. The strong Q1 financials are a result of solid execution on our strategy and then measured recovery in IT spending.

Earnings were also strong for the quarter, again demonstrating the leverage in our business model. Both GAAP and non-GAAP earnings per share were 23 cents diluted.

We also further strengthened our balance sheet, generating approximately $202 million in cash from operating activities during the quarter. We exited the quarter with $2.7 billion in cash, and in short-term investments.

Our continued market strength is reflected in the recently released 2003 market share report from the Gardner Group, once again showing our leadership in storage technologies at the heart of our utility computing strategy. VERITAS is once again #1 in the $3.6 billion non-array and non-switch based storage software market, with 26.1% market share in 2003. VERITAS is also #1 in the 2003 worldwide market for backup recovery on distributed platforms, with 45% of the market for all non-mainframe operating systems. And we are #1 in Gardner's core storage management software category with 31.4% share of a broad set of products that includes file systems, volume management, disk utilities, access and task management, and emerging technologies.

While we have a very strong lead in all of our key product areas, we are continuing our investment strategy by expanding the product VERITAS portfolio, delivering our products on a broad range of hardware and software platforms to further our heterogeneous advantage, and extending our reach worldwide by investing in sales and service capacity. In the course of Q1, we shipped Version 5.0 of our Data Lifecycle Management software, setting the industry benchmark for software that helps companies manage data from creation to archiving.

We also launched NetBackup 5.0 Server, providing a new class of storage protection for mid-sized companies and work groups, and we delivered Storage Foundation 4.0, the most significant release of our core Foundation products since their introduction in 1992, further extending our technical leadership in storage management and virtualization.

And finally during the quarter, we announced broader support in the open source arena by expanding our offerings for Linux with new SUSE LINUX versions of VERITAS Storage Foundation, VERITAS Cluster Server, and VERITAS OpForce. The VERITAS commitment to ensuring our products support all major hardware and software platforms is a significant competitive advantage, especially when we look to open new market opportunities and deliver new solutions through strategic alliances.

As you know, in the fourth quarter we announced a significant partnership to deliver joint products with Network Appliance focused on data lifecycle management. We are seeing significant worldwide field and marketing engagement resulting in a growing pipeline of prospects and expect this to be an important long-term strategic relationship for both companies.

This month we also delivered a new technology and marketing agreement with BEA Systems to deliver an integrated utility computing platform for enterprise web applications. This agreement expands the market opportunity for our utility computing infrastructure products and aligns our application performance management products with the leading independent supplier of application server technology.

Our continued investment in products designed through the eyes of the CIO to meet the specific needs of enterprises in IT operations is paying off. Performance across all three sectors of our business was at or above expectations, with data protection growing 13%, storage management growing 31%, and our utility computing infrastructure products growing 21% year-over-year.

As always, the foundation of VERITAS leadership lies in our proven ability to build long-term, trusted relationships with the world's leading companies based on our no hardware agenda software strategy. In the first quarter, VERITAS completed new contracts with some of the world's leading corporations such as British Sky Broadcasting, Lufthansa Systems, Qualcomm, and Wachovia.

We continue to see a measured recovery in the IT spending environment. On a geographic basis, EMEA, Japan, Asia Pacific, and other international regions continued to demonstrate strong year-over-year growth, with our EMEA region up 49% and the rest of the world, which includes Asia Pacific and Japan, up 32%. Within Europe, we saw strength across many countries, particularly in the U.K., Germany, and Italy. In Asia Pacific we continued to gain momentum in greater China, Japan, and Asia South. And across all geographies, Financial Services was our strongest industry segment.

I will now turn the call over to Ed Gillis for the detailed Q and financial results. When Ed completes his discussion, I'll provide our outlook for Q2 and open the call up for questions. Ed?

Okay. Thanks, Gary.

I'm going to begin today by providing some comments on our income statement. Again, as Renee had indicated, I'll be providing historical comparisons based on previously reported results. These historical numbers are subject to revision based on the results of our pending restatement.

Revenue for Q1 was $487 million, up 24% year-over-year and down 5%, sequentially. This was our strongest Q1 ever and the second highest revenue quarter on record. Included in revenue is about $14 million benefit from favorable foreign currency rates when compared to the March quarter a year ago.

License revenue for the quarter was $303 million, up 19% year-over-year and down 2%, sequentially. License revenue from our data protection products, which includes NetBackup, Backup Exec, and options such as Bare Metal Restore and Data Lifecycle Manager and desktop and laptop options, was $162 million, up 13% year-over-year. License revenue from our storage management products, which include file systems, volume manager, replication, database editions, and our SRM products, SANPoint Control, StorageCentral, and Storage Reporter, was $84 million, up 31% year-over-year.

Finally, license revenue from our utility computing infrastructure products, which includes clustering, HA additions, application performance management, OpForce or server provisioning, was $57 million in the first quarter, which results in a year-over-year growth of 21%.

In addition, we were pleased with the revenue performance of the Precise products. Precise revenue was $19 million in Q1, up 12% sequentially. As we indicated last quarter, Precise revenue from application performance management products is reported as part of our utility computing infrastructure, and revenue from StorageCentral is reported as part of our storage management category. And we will not be separately reporting starting with our Q2 earnings announcement.

License revenue by platform for the quarter was 53% UNIX and Linux, 40% Windows, and 7% multiplatform. Service revenue for the March quarter was $184 million, up 32% year-over-year, representing 38% of total revenue. The Services business continues to provide a solid revenue stream as a result of our increasing install base and our high levels of maintenance and support contract renewals.

The 10% decline from Q4 levels was in line with our expectations as we had described on the Q4 earnings call. The channel mix for the quarter was 60% from end users and VARs, 30% from our two-tiered distribution network, and 10% from OEM partners, again demonstrating both consistency with prior periods and the breadth of our go-to-market strategy.

As Gary indicated, Q1 saw renewed strength in our international business, particularly EMEA which showed solid year-over-year growth, even allowing for currency impacts. Revenue from EMEA was $131 million and represented 27% of our total revenue and grew at 49% year-over-year, or 35% on a currency adjusted basis. Revenue from the rest of the world, which primarily includes Asia Pacific and Japan, was $57 million and represented 12% of total revenue and grew at 32% year-over-year, or 27% on a currency adjusted basis. Our business in the U.S. was $299 million, or 61% of total revenue, and it grew by 14% year-over-year.

This quarter we shipped 25 end user transactions valued at over $1 million and 246 transactions over $100,000. The median deal size for transactions over $100,000 was $190,000.

As I said before, our license business is seasonal, with license orders being lowest in our first fiscal quarter and highest in our fourth fiscal quarter. This Q1 was no exception.

This quarter, license revenue benefited from the strong order performance in late December which offset the typical seasonal softness in early Q1. As we moved through the first quarter, we saw stronger than expected license orders, which resulted in a more linear quarter than we had originally anticipated and improvement over Q1 year ago when we saw weakness in our March orders.

With slightly more than 1/3 of our billings occurring in the 3rd month of the quarter, this compared to 1/2 in Q4, our DSO declined from 39 days in Q4 to 28 days in Q3. In Q1, sorry about that. For Q2, in other words our next quarter, we would expect DSO to be in the low 30-day range.

Our total gross margins on a GAAP basis were 84%. Gross margin on license revenue was 96%, and gross margin on service revenue was 67%. Operating expenses, also on a GAAP basis, were $274 million. The decrease in operating expenses compared to Q4 is in line with our expectations, primarily attributable to Q4-specific spending related in part to year-end sales commissions and in part to marketing expenses related to our NetBackup 5.0 launch in November. We did see an increase in G&A driven primarily by the cost of activities related to our restatement.

GAAP operating income was $137 million, or 28% of revenue. Once again, demonstrating the leverage of our business model given the overperformance on the revenue. Interest and other income, net of interest expense was $5.6 million compared to $4.7 million in Q4, primarily due to favorable investment returns on our growing cash balances. Assuming no significant change in interest rates, we expect interest and other income on a net basis to continue at this level or grow slightly going forward.

Tax rate for our GAAP and our non-GAAP results was 32%, again reflecting the increasing mix of our international business. Our GAAP earnings were 23 cents per share, based on a fully diluted share count of $445 million.

Historically, we've excluded from our non-GAAP operating results amortization of intangibles, in process research and development, stock-based compensation, and gains or losses on strategic investments. These totaled $1.5 million net of tax for Q1. When adjusted for these items, our non-GAAP earnings per share for Q1 is also 23 cents.

These figures include small amounts, or approximately $600,000, of amortization expense, as well as $400,000 related to write-off of in process R&D associated with our recent acquisition of Ejacent. Non-GAAP operating margin for Q1 is 30%.

As we said last quarter, we set our spending targets for 2004 assuming a measured recovery in IT spending and our desire to stay invested for growth. As such, we continue to expect margins in FY '04 to be consistent with FY '03 levels. Based on the revenue guidance that Gary will provide shortly and continued investment in our business, we expect Q2 non-GAAP operating margins to be in the range of 28% to 30%.

Head count exit in Q1 was just over 6700 people, reflecting approximately 200 net additions. For Q2, we expect to see a similar number of additions.

Now briefly on the balance sheet, we exited the quarter with a record $2.7 billion in cash and short-term investments. We generated approximately $202 million in cash from operating activities for the quarter, while noncash -- or rather nonoperating cash contributions is approximately $43 million, related to stock activity from options and our employed stock purchase plan.

Primary uses of cash in the quarter included $61 million for the acquisition of Ejacent and $28 million for capital expenditures. Accounts receivable as of the end of the quarter was $158 million, and deferred revenue grew from $399 million at the end of Q4 to $421million at the end of Q1.

With that, I'll turn the call back over to Gary.

Thanks, Ed.

Before we turn the call over for questions, I'll provide some perspective on what we see for Q2. Building on the strength of a solid Q1, we continue to view 2004 as an important growth year for VERITAS, and we continue to forecast our business based on the assumption of a measured, but ongoing, recovery in IT spending. We expect revenue in Q2 to be in the range of $490 million to $505 million.

As Ed indicated, our strategy for margins in 2004 is to invest for growth as we see continued improvement in IT spending climate. As a result, we will continue to carefully manage and monitor our spending, targeting minimum GAAP operating margins in the range of 26% to 28% for Q2, and GAAP EPS to be in the range of 21 cents to 23 cents per share.

On a non-GAAP basis, operating margin target for Q2 is expected to be in the range of 28% to 30%, resulting in non-GAAP earnings per share in the range of 22 to 24 cents. Q2 should benefit from the excitement surrounding our Annual User Conference in early May, where we are expecting record attendance.

As a reminder, the Analysts' Day that is part of the conference is scheduled for May 5th in Las Vegas. We will provide the latest updates for our corporate product strategy for customers, media, partners, and the financial community. Additional information can be found on our website.

In summary, Q1 continued more than a year of record growth and success for VERITAS. Q1 was our best Q1 ever and the second best quarter in the company's history. Our ability to deliver record results quarter after quarter is a great indicator of the value our customers see in our vision for utility computing. The combination of a great vision, industry-leading technology, and the strength of both our direct and channel partners to deliver and service our solutions provides us the key business fundamentals to support our drive past the $2 billion revenue target in 2004.

We look forward to seeing you at our Vision User Conference on the 5th of May, and I will now open up the call up for questions.

Thank you, sir.

[OPERATOR INSTRUCTIONS]

And we'll take our first question from Tom Berquist with Smith Barney.

Thank you. Well, I've just got one question, Gary. Could you just run through the competitive landscape a little bit? Particularly interested in your thoughts on EMC LEGATO, from what you saw in their results recently.

Also on the grid utility computing side, there's been a lot of announcements from a lot of players, both server players and storage players alike. Can you chat a little bit about what you're finding when you're out talking to customers about utility computing, in terms of competition versus the server guys particularly? Thanks.

Okay. So, thanks, Tom. You know, competitive landscape, I would say, you know, first off, just on a general basis, not a lot of material change in the competitive landscape. You know, we haven't seen this -- as I think you know for several quarters now, we haven't seen any kind of real significant swings in the landscape. And generally in technology, you know, landscape swings don't happen that quickly anyhow, or certainly don't happen as quickly as some people sometimes forecast them or would like them to occur.

On this more specific question that you asked about EMC and LEGATO, yeah, all we have to go on is their published results, and what they've put up on their website on their results. And we pretty much like our position on this particular area, and we certainly aren't seeing a lot of traction out of the LEGATO products, especially on a license basis, against our VERITAS backup solutions.

In particular, if you look at a more detailed basis, we're growing almost as twice as fast as they are, with a number that's about 4 1/2 times as big. So if you look at it, we did $162 million in that category, they did $36 million in Q1. We grew 13%, they grew 7%. And we have the added benefit of NetBackup 5.0 which launched in the November timeframe, as well. So, kind of the whole combination is just good momentum, a big number that's growing faster than theirs. All a pretty strong indicator that we're doing really well in that particular segment and backup for us continues to be a very good business.

And that's also related to the whole landscape around kind of who our partner base is. And if you really look broadly out there, there's a number of players from, yeah, Network Appliance to HP to Sun to a couple others that really kind of got left without a dance partner as EMC picked up LEGATO. And we've talked about that a number of times that we think that's working out favorably for us. And I think that's contributing to a growth rate that's almost twice what they saw in the first quarter.

On the grid computing and utility computing side, we're mostly competing at this stage with vision versus products. And that's not unique for us. The reality is this is a very emerging area. The real competition for VERITAS in this utility computing phase is the arguments between the fully integrated vertical stack that typically, and as you asked your question around the server providers, typically has a hardware agenda associated, versus VERITAS's approach to saying, it's really not a fully integrated vertical stack, in fact what it is is building blocks to enable utility computing.

And we continue to see great traction in our messaging, and our products, I think, are -- product sales are benefiting from the fact that our customers understand that everything they're buying from us is yet another building block toward utility computing. So again. We're doing real well there. The lack of a hardware agenda is very helpful. While we sell some services to help customers architect and implement our solutions, in many respects we really don't have a services agenda either. In the sense that we're not trying to be a systems integration company. And so overall, that just continues to be great.

And then we saw very good growth in our utility computing infrastructure category. Again, those are the building blocks that customers are buying into. So all in all, I think we're in a real positive position on all these fronts, and I think the vision that we have out there is really contributing to customers aligning to us for the future.

Great. Thank you very much, Gary.

Alright. Thanks.

And we'll take our next question from Heather Bellini with UBS.

Hi. Thank you. I was wondering if, Gary, you could talk a little bit about trends in disk-based backup and talk a little bit about how they impact VERITAS. And if you think this is a -- if it's a complete refresh cycle for customers?

And then just following up a little bit on what Tom just asked. In the backup and recovery market, it seems like your business has been accelerating there. How much of that do you think is due to the NetBackup release, and how much of it is due to kind of data points? We've been getting that there just seems to be the whole market for backup and recovery just seems to be a little bit stronger than it was, say, 6 to 9 months ago. Thank you.

Okay. Thanks, Heather. You know, the trends are always interesting when you look at it. Especially from a perspective of backup software, you look at the trend toward disk-based backup. And it really goes back to kind of the history of the trend here, which is, there's been kind of an ongoing forecast, you know, for as long as I can remember now, the death of the tape unit. And that's going away.

And the reality is, the tape unit continues to be a valuable device that is really the ultimate form of protection for many customers. So disk-based backup is really a trend that's complimenting this ultimate form of data protection with a new trend that's very helpful around some of the new archiving and recovery issues that are out there, regulatory compliance. And so disk-based backup's becoming a very important thing.

From a VERITAS software perspective, we don't have a huge differentiation in our products between doing data protection to tape versus doing data protection to a disk. It really doesn't materially change our approach to the marketplace or our value to the customer, because what we're providing is the software to manage that backup process, and we're really -- you know, again, it's back to that no hardware agenda. We're really kind of indifferent to what hardware device it goes to.

Clearly, our relationship with Network Appliance is going to be beneficial to us. They're doing well in the kind of backup and recovery space around disk-based backup. That's a popular reason. The overall trends in the business accelerating, I'm not quite sure how to respond to that.

If you look at our market share, we're roughly 45% of the market. So if we're doing well, given we represent almost half of the market now, the market's going to do well. And so to some extent we're a little bit of a proxy for the market. And we continue to do very, very well.

I think we're gaining some share as evidenced by the answer around EMC LEGATO. If we're growing faster on a number that's 4 or 5 times bigger, we're going to be gaining share on the license basis. So that's good news for us.

And keep in mind, our backup revenues are split between NetBackup and Backup Exec. So we address, really, all segments of the market. And this is again where somebody like LEGATO's at somewhat of a disadvantage. They're much more focused to the units market, where we have a very strong lead, and then where IBM plays as the number two player.

So, backup continues to be a good market. And I think disaster recovery, still an important topic, and regulatory compliance a very important topic, as well, as we're all kind of well aware of.

Great. Thank you very much.

Sure.

And we'll take our next question from Neil Herman with Lehman Brothers.

Hey, guys. It looks like you had a big increase in the number of transactions over a million bucks, 25 deals, which seems to be a huge increase. Maybe your best ever by a longshot. This is IT's data here. Could you just talk about what you see as the drivers and -- of that, and is that something that's sustainable, and how does your pipeline of large deals look going into Q2?

Yeah, Neil, there's kind of a couple components to it. The first component is driven in part by the fact that our business at year-end was heavily skewed to the end of the quarter. So some of those deals were really carryover or things that spilled over from year end. So that clearly contributes to the front half of Q1. We also saw a good strong large deal flow in the quarter itself, which is what I think really kind of contributed also to the number of deals over $1 million.

Now, this is something that I think is highly subject to fluctuation. I think, frankly, a better indicator is probably the deals over $100K, because the number's simply bigger. I think we had 246 of those deals over $100K that contrast with 200 a year ago. Although it is down from Q4, which again I think you'd expect, given just the seasonality of the business.

From a pipeline perspective, from a leading indicator perspective, I think that the number of big deals is improving. And frankly, I think the geographic dispersion of them is also improving. We're seeing some particular uptake in Europe, as an example.

Do you think it's reflective of customer's buying a broader array of your products? And -- or just the deeper commitment to what they've been historically using with respect to your products?

Well, I think there's two aspects to that. I think that, clearly, the fact that we have a refreshed product cycle with NetBackup 5.0 and with Foundation 4.0, so that we're in a very strong position product-wise, I think deepens customer commitment.

But we have said, I think for a long time now, that it's our biggest and our best customers that are going to be deploying the widest range of our products, and that's typically most likely to occur through the larger transactions. So I think that -- I think we're seeing both. I think that we are deepening our penetration inside of our existing accounts, but I also think these accounts are broadening the portfolio products that they're deploying.

You know, I think the other thing you're seeing there is a little bit of just what's playing out in the customer base, which is the whole vendor consolidation. You know, customers, they used to have 100 vendors supplying them, looking to try to get to 20, 25. And with a good solid vision around utility computing, in a broad range of products that support that, we're in a favorable position to become one of those key suppliers. And so it just leads to kind of a better volume of business.

But again, I think, you know, that this is something that fluctuates from time to time, and on an overall trend basis, as IT recovery continues and as people start -- continue to spend more money and as that climate improves, I suspect on a trend basis, we'll see continual improvement. But I would look at it more on a trend basis than just the quarter-to-quarter fluctuations.

And we'll take our next question from Brenden Smith with Goldman Sachs.

Hi. Thanks very much. It's a question on the, kind of, bottom up components in growth, so to speak. Obviously, data protection has been accelerating yet again. I'm curious, in terms of Asia Pacific expansion, Precise for the full year, and then this growth in storage management. You know, what kind of growth rates you're expecting in terms of a bottom up view rather than the top down?

Well, Brenden, I think you're -- as you're aware, our expectations for the year are somewhere around 13% in terms of total revenue growth. We obviously exceeded that, at least from a run rate perspective in Q1. But at this point, I think we continue to think that we don't want to get ahead of ourselves. We've been trying to manage at least the revenue line pretty conservatively, because our spending is geared to what we have great confidence we can do with the revenue line. And in the back half of the year the compares get tougher.

I think I indicated that we had about $14 million benefit year-over-year from currency. That becomes harder to count on. So, from a context perspective, we're kind of staying where we are in terms of our outlook.

We are absolutely encouraged by the performance that we saw in China, in Japan, in Germany, in the U.K. and in Italy. We had a really strong quarter in those areas. That's a nice start to the year. So that's a positive.

We were encouraged by the Precise revenue. And I think we all believe that as IT spending improves, it should help new products disproportionately, because I think our expectation is, customers have a bigger appetite for trying. So we are upbeat about the year. We do not want to get ahead of ourselves, and we continue to believe that the position that we have is a good place to be, particularly from a spending perspective.

Obviously, we'll be smarter over the next couple months, and we'll revisit the topic as we get some more visibility.

And then, just one follow-up on the storage management side. Was most of the upside there tied to the number of large deals, in your opinion, or do you think it's a combination of large deals and the secular uptick in the growth rate?

Well, we had a couple of things going on there. We had strong replication quarter, 4.0 was released in the quarter. I don't think there's any question that helped. And then as Gary said in his opening remarks, you know, we continue to believe that these are great proof points for the importance of heterogeneity.

Alright. Thanks very much.

Okay. Thanks.

And we'll go next to Shebly Seyrafi with Merrill lynch.

Yeah. Thank you very much. Nice quarter.

Thank you.

There are two parts of the results of which I'm concerned about. One is the United States, and I'm calculating that your revenues were down maybe on the order of 10% or so, sequentially. And your utility computing segment hasn't really grown for the past three quarters, and I'm wondering whether those trends will break going forward? And if so, when? Thanks.

Okay. Well, I'll try to jump in on the U.S. business. Our business in the U.S. was strong. We were very happy with the results in the U.S. operation. And for, as Q1s go, I have, obviously, about a three-year window of looking at Q1's now. By far the best and most predictable Q1 we've had in a long time. So, we're pretty comfortable. I'll let Ed address the actual, you know, what it did sequentially, more specifically.

But as far as a business perspective, real solid business, I think we're in really good shape in the U.S., and it was a good result. Again, as Ed pointed out, coming off of a lot of record results quarter after quarter. You're remembering that the U.S. was a real strong part of our business for the last year or so.

On the utility computing products, we continue to like our position there. It's a -- while we call the utility computing infrastructure category a separate category, as you know, some of the emerging products that are growing well and doing well, didn't land in that category. So it wasn't as though we took everything that was high growth and said that's utility computing. Something like replication that did very well is now in the storage management sector, and that's been a high growth product, as well.

So, I think what's happening in utility computing is, we have a lot of new products and new technologies, we have the technology from the OpForce acquisition from Ariba that's now VERITAS OpForce product. Those are new products in the marketplace. We have the Ejacent technology that we acquired. We have the Precise products that are starting to see some traction. So when you say, you know, is there going to be a breakaway quarter on it? My anticipation is there will be a very strong quarter somewhere down the road. Predicting where that hits exactly is a little difficult.

That category is playing a big role in what you're seeing out of a strong storage number, a strong backup, a data protection number. It's a very leveraged area, it helps us sell everything we have. And these categories are for reporting purposes and trying to give you some insight into how the product splits come. But as far as what people are buying, they're tending to buy into VERITAS, and that's what's really important to us.

And Shebly, on the U.S. numbers, in terms of the data, it's $299 million in U.S. in Q1, $315 million in Q4, and $263 million in Q1 a year ago. So down sequentially, but as Gary indicated, I think that at least internally, we feel like we've got the best start in the U.S. that we've had for several Q1s. And are pretty upbeat about the balance of the year.

And then again, I think as Gary indicated on the utility computing front and the emerging products front in general, you know, that's an area where we're, you know, we continue to be focused from both an acquisition perspective and a development perspective, and are absolutely interested in seeing that do better and grow.

Yeah, the only other thing I'd point out is that, you know, certainly, some of the decline in the U.S. has to do with something that Ed talked about during the fourth quarter results, which had to do with our anticipated decline in the services, in particular the retroactive maintenance piece. And that tends to hit the U.S. number a little bit more strongly than the European number. And so that was that decline going from Q4 to Q1 that we anticipated.

So again, you know, off to a great start. We really like the position, and we think we're in strong shape, in really, every region. I don't feel uncomfortable about performance in any of our regions, it's all great. Clearly Europe and Asia Pacific growing more rapidly, but we expect that, as well. That's where a lot of our investment in heads is going, as well.

We'll take our next question with Robert Stimson with Banc of America Securities.

Yeah. Good afternoon, everybody. Just a couple quick ones. On the product side, Gary, can you just give us an update on when the 9i rack, Linux+ is going to ship? Is it going to ship in Q2? And just give us a status on when that's coming out?

I think it's a Q2 shipment, but I'm not able to give you an exact date on that particular product sitting here right now. So I'm just not sure of the exact date on that one. We'll make sure that we include that as an update in the product road map at the Vision Conference on May 5th.

Is that supposed to be a pretty big incremental revenue product, you think, kind of going into second half of '04?

Well, it's important from a strategic perspective that we stay very well aligned to the Linux opportunity. The reality is, when you look across our support for the rack environment, in particular in the Sun and other environments, the major deployments of -- the larger enterprise systems is really happening on more traditional UNIX systems, you know, Sun, HP, and IBM, and it's showing up in, you know, I think in our platform revenues on those boxes.

Linux is fast growing off of a small base. It's an important longer term trend. A lot of Linux boxes are still being used in the middle tier, and as they move up more and more in the enterprise, it becomes important to be there and have a real solid offering. So it's kind of one of these things that, yes, it's very important from a trend basis, but the exact timing of it isn't the most critical thing. And then, clearly, we do have some customers that are waiting on it, so we're anxious to get it out into the market.

Our next question comes from Adam Holt with JPMorgan.

Hi. Good afternoon. We talked about the deals that fell out of the fourth quarter into the first quarter, and it sounds like linearity was a little bit different than you had maybe expected. Does that mean we saw a similar amount of slippage, or at least some slippage, into the second quarter, and is it possible to quantify what that might have been?

Well, so Adam, typically, the book to bill ratio is pretty positive in the fourth quarter, negative in the first. And then generally, what we see is a flat one in Q2 and Q3. In other words, orders and revenue are pretty approximate, approximate each other. So I think the fact that we had a more linear quarter, in other words, the fact that we saw good order growth in the back half of the quarter, the month of March, was a pleasant surprise. We hadn't planned on it.

I also think that some of it is particularly contrasted with a year ago March. If you recall, a year ago we had the SARS issue in Asia. And we had the Iraq issue in the U.S. And I think at the time, we indicated that something like 26% of our billings occurred in the month of March. This quarter we're probably up around 35%. So a substantially stronger March.

And as you look into the guidance for the second quarter, would you expect roughly the same mix as we saw in the first quarter?

Yes, I think on a normalized basis we tend to be more linear because of our distribution diversity than most software companies that rely heavily on direct. So we're still prone to fix skew at the end of the quarter. That's particularly exacerbated in the fourth quarter, but I think our issue is probably a little bit less than some because of the two-tiered distribution mix and the OEM mix.

And that does mix on a linearity basis, if you look at product mix, platform mix, geographic, then, you know, you kind of -- fluctuation quarter-to-quarter is pretty normal if you look back overtime. Again, there, point you back to the trend rates overtime versus any particular quarter-to-quarter fluctuation.

Our next question comes from Drew Brosseau with S.G. Cowen.

Hi. Just a couple. On the regional question, can you give us a feel for, in the U.S. in particular, I guess, how you performed in licenses versus services? I'm just trying to get a feel for -- and maybe a little elaboration on why you're growing so much faster overseas?

The second question is, if you can give us any sense as to what risk, if any, there is about the S.E.C wanting to investigate on the restatement stuff?

Okay. So, let me take the last two, and I'll let Ed jump while he sorts through the numbers and gets you the license versus services if we can kind of come up with it at that granularity.

The, you know, why faster in the overseas market, the why faster in the overseas is actually a pretty simple one. We've been investing in our international business. We had a goal in our business to continue to drive the international business up. Ultimately, we want to get it towards a 50/50 mix, which is pretty typical of enterprise software companies of our size.

If you remember, if you roll back three years ago, we were about 28% international. Today we're running at roughly 40% international revenues. It was 41% in Q4, 40% in Q1. So international revenues is an investment area. But what does it mean by investment area? We continue to put more sales capacity and more expertise into those regions, and we bias some of our hiring towards the higher growth markets, which is what we're seeing over there.

And so we're going to continue that investment model. And I think you'll see on a, kind of a continual basis here, exactly what we've said we're going to do, which is change the shift in our business, our domestic versus international mix by 2 to 3 points per year. And that's just purely all around investment side of it.

Again, before Ed jumps in with your other question on license numbers, relative to this kind of current restatement and the S.E.C investigation and so forth. As I think you already know, we self-reported this matter and the restatement investigation that we had to the S.E.C, along with our decision to restate our financial results. The S.E.C also, as we've said before, there's the investigation, the company's transaction with AOL has been ongoing, and we're going to continue to cooperate with the S.E.C in both the AOL matter and our pending restatements.

So there's not, really, at the end of the day, there's not a lot more we can say about the restatement or what's going on there. Other than what we said on March 15th when we announced it. And there really hasn't been any real change since March 15th either. We continue with a sense of urgency balanced against the desire for accuracy. We said the June quarter before, the June quarter still. We gave estimates in the press release, we think the estimates are still accurate.

So, Ed, I don't know if you want to jump in on the license question?

Yeah. So again, I don't think that we've traditionally been this granular, at least on a call. But of the 299 of U.S. revenue, the license component's 173, and the services component is about 125, 126. And I think from a growth perspective, the license -- year-over-year license growth is single digit, and the services growth is strong, although less than the consolidated. And I think that reflects in part the issue that Gary had referred to, which was, we expected services growth to be down about $20 million, sequentially, because of the big push at year-end to drive the maintenance renewals and particularly the retroactive pieces of maintenance.

So again, I think in contrast to international, which has been -- which has demonstrated a really good, strong quarter, the U.S. was a little bit weaker. But we're feeling good about the U.S., strongest start in several years, and we're very upbeat about the balance of the year. Really across the geographies, as Gary had indicated earlier.

And we'll take our next question from John DiFucci with Bear Stearns.

Yes, most of my questions have been answered. Just a quick one. Can you comment on the head count increases last quarter, and what's planned this quarter? What areas do you plan on increasing head count?

Yeah. The head count went up by about 200 people. Over half of that was outside of the U.S. The head count is really directed at 2, I guess, probably 3 primary areas. The first area is in the sales organization. Again, particularly international because of the growth opportunities.

We've been continuing to add head count to development as our product portfolio expands. And as our acquisitions increase, head count in development, our investment in development continues to increase.

And then the third big area is around customer support where, again, we think that we've been differentiated with high-quality customer support, and we're committed to maintaining that on an around the world basis.

In terms of Q2, I'd expect to see a similar level, something in the, probably, 200 range.

Okay. Thank you.

Operator, one more question, please.

Thank you, sir. We'll go next to Laura Lederman with William Blair.

Yes, a few quick questions. One, we talked about EMC LEGATO. Can you talk a little bit about where you see ComVault?

And separately, turning to the long term a little bit. Where do you see operating margins going, let's say, three years out? Just a kind of a view of where you see them in the long-term. Thanks.

Do you want to take the margin question, and I'll take --

Yeah. So, Laura, on the margin question, I think we've indicated that we believe the right long-term kind of operating model is operating margins in the 30% to 32% range. We think that strikes the right balance between investment for growth and kind of return in the form of profit. That -- the negative aspect of that will be driven as the services component of the business grow. That's probably a pressure on margin. On the other hand, clearly there's a scaling opportunity that contributes to margin expansion.

So net, we think 30 to 32 points is the right long-term target. We're getting pretty close to that. And our expectation would be to try to stabilize it there.

And Laura, on your question about kind of -- besides EMC LEGATO, on ComVault. Yeah, a couple of comments there. One is, you know, ComVault, from everything that I'm aware of, represents a little bit less than 2% of the market right now. So, obviously, given our 45%, roughly, of the market, a 2% player isn't terribly visible in the marketplace.

I had indicated in previous calls that, again, the EMC LEGATO combination was a little bit detrimental, in my belief, to ComVault, in that EMC was partnering with both LEGATO and partnering with ComVault as part of there "anything but VERITAS" strategy at EMC. And so when they actually picked up LEGATO, I've got to believe that was a little bit like pulling the rug out from under ComVault as far as that piece of alignment for their business.

And so, we don't see a lot of them. The real competitive market in the backup marketplace, if you look in UNIX, it's really what VERITAS is competing against with IBM. And, obviously, we're in a much better position without the hardware agenda in competing in a UNIX market against IBM. And then when you switch over to the kind of Windows backup market, that's where we see Computer Associates, and where we have to continue to compete aggressively there.

So the market's kind of -- you know, a little bit different depending whether you're looking at the UNIX market or you're looking at the Windows marketplace. But overall, you know, the vast majority of the market share, I think, 85% or 90% of the market share, if I do the rough math, is a combination of VERITAS, IBM, and Computer Associates. And LEGATO, ComVault, all these players, periodic noise in the market, but generally not materially setting the trends in the marketplace in any way.

Sure. With them becoming a public company, it's just -- it's going to come up more as a topic, so it's good to get the stats out. Thank you.

Sure. No problem.

Alright, on that note, we're going to go ahead and call it a day. I want to thank you for joining us. We're obviously very enthused about our results in the quarter. We like the momentum we're seeing in our business. We like the fact that it was Q1 and it was one of our strongest ever.

And we look forward to seeing you at our Vision User Conference in Las Vegas on May 5th, which is the day of the Analysts' Day. And, obviously, we have a customer event running in parallel, customer and partner event, that we expect great attendance at. So, we think that's going to be just another momentum help relative to Q2.

So, thank you for joining us.

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