諾頓 (NLOK) 2004 Q2 法說會逐字稿

Good day and welcome to the Veritas Software second quarter 2004 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 the Vice President of Investor Relations, Renee Budig. Please go head, ma'am.

Good afternoon and thank you for joining us today for our report on Veritas' Q2 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 future revenue, earnings per share, operating margins and revenue mix, future investments in key areas of the Company's business and management of the Company's business to drive growth in revenue and profitability, 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 reports on forms 10(K) and 10(Q) on our file on our Web site and on the SECs Web site. In addition, during the call we will be referring to nonGAAP 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 comparative numbers provides consistency of our financial reporting at this time. We have posted a quantitative reconciliation of the nonGAAP financial measures discussed during this call with the most directly comparable GAAP measures on the investors page of our Web site at Veritas.com. I'll now turn the call over to Gary Bloom.

Thanks, Renee. I will provide an overview of our fiscal second quarter financial results, business climate, as well as discuss some of the highlights of the quarter. Our revenue for the second quarter was $485 million. Our nonGAAP EPS came in at 21 cents. And GAAP earnings per share was 20 cents. While our results were lower than we had projected, they represent year-over-year revenue and nonGAAP earnings growth of 19% and 17% respectively, and our third highest revenue quarter ever. As you know, we reaffirmed guidance when we completed the restatement of prior periods and filed our 10(K) and 10(Q) on June 14, 2004. At that time we were confident in our ability to meet our quarterly guidance and our forecasts supported our projected revenue range. However as we approached the end of the quarter we saw a softening in our U.S. enterprise business and a number of deals that we expected to close in the second quarter did not, leading to our preannouncement.

Veritas has historically delivered solid financial performance so we are clearly not happy about coming in below our expectations. Let me share with you my perspective on some of the factors that may have affected IT spending and our results in our U.S. business this quarter. With the exception of government sales in the U.S., customer buying patterns in enterprise accounts became more cautious during the second quarter, leading to longer sales cycles and a smaller average deal size. Recent announcements from other large software companies suggests similar patterns. We also saw signs that Sarbanes-Oxley 404 implementation may be impacting customer buying patterns similar to the Y2K effect the industry experienced in 1999. In many cases management and IT are focused on meeting certification deadlines and spending on Sarbanes-Oxley rather than on new I.T. projects, especially those that would go live prior to the end of the year when they need to complete certification.

And lastly while the process of completing our restatement had little impact from our customers perspective it did require significant time and attention from our executive team. Although our U.S. enterprise -- direct enterprise business was challenging we saw solid performance in other areas, specifically our channel business performed well across the global with our two tier distribution channel growing 22% year-over-year, demonstrating our continued strength in the fast growing small and medium business market. Our international markets were very strong, especially in Europe and Asia-Pacific where we grew 44% and 34% year-over-year respectively. And our services business grew 38% and was well ahead of our plan and expectations driven by strong maintenance renewal rates. With all this said the business fundamentals that have made Veritas successful have not changed. In addition to delivering 19% top line revenue growth, the top line growth year-over-year, we strengthened our balance sheet, generating approximately $104 million in cash from operating activities during the quarter. We exited the quarter with $2.75 billion in cash and short term investments. License revenue for all product categories grew on a year-over -year basis. Our data protection business grew 3%, storage management grew 16%, and utility computing infrastructure products grew 7%. In addition our services business grew 38% year-over-year, again well above our expectations.

If we look at the first six months of the fiscal year our results show considerable growth overall. We had an especially strong first quarter, total year-over-year revenue nonGAAP earnings growth was 22% to 26% respectively, with license revenue growth at 14% year-over -year. And services revenue growth at 34% year-over-year. On an operational basis, we continue to focus on our three dimensional growth strategy during the quarter with new innovative product upgrades and support for major hardware and software platforms including Intel's Itanium 2 processor based platform and Solaris X86. In addition in early July we announced our acquisition Invio software a privately held supplier of work flow automation technology for $35 million in cash. Invio addresses key customer requirements and is already integrated into our command central service product. Early feedback from partners and customers is encouraging. Given our strong international performance, continued investment in our sales and service capacity remains a key element of our geographic expansion strategy. We will also continue to invest in our worldwide Veritas vision conferences which have now attracted more than 8500 customers and partners and is a strong indicator of customer interest in our utility computing vision. I will now turn the call over to Ed Gillis for the detailed Q2 financial results. But then to complete the discussion I will provide our outlook for the second half of 2004 and open up the call for discussions. Ed.

Okay. Thank you, Gary. Good afternoon, everyone. I'll begin today by providing some comments on our income statement. As Gary indicated revenue for Q2 was $485 million, up 19% over the same period a year ago. And flat sequentially. Included in revenue is approximately $10 million benefit from favorable foreign currency rates when compared to the June quarter a year ago. License revenue for the quarter was $270 million, up 7% year-over-year. License revenue from our data protection products was $151 million, again as Gary indicated up 3% year-over-year. License revenue from our storage management products was $74 million, up 16% year-over-year. Our storage foundation and replication products posted solid growth this quarter. Finally license revenue from our utility computing infrastructure products was $44 million in Q2, representing year-over-year growth of 7%.

Clustering showed solid year-over-year growth of over 20% in the second quarter, and we're encouraged by the traction we are seeing with our Opforce server provisioning project. However our high availability bundles were down reflecting in part weak enterprise business in the U.S. While our APM performance was relatively flat sequentially we are encouraged by our growing pipeline of deal opportunities the continued confidence of our distribution organization, and early signs of a strong maintenance business associated with these products. From a platform perspective, license revenue for the quarter was 51% Unix and Linux, 43% Windows and 6% multi-platform. Service revenue for the June quarter was $215 million, up 38% year-over-year. Included in service revenues is approximately $14 million, of catch up maintenance revenue related to an OEM contract which is non recurring. Service revenue represents 44% of total revenue for the second quarter. The service business continues to provide a solid and predictable revenue stream as a result of our increasing installed base and our high level of maintenance and support contract renewals.

On the channel side, the channel mix for total revenue for the quarter was 55% from end users and buyers, 32% from our two tiered distribution channel, and 13% from our OEM partners. Again showing the balance and breadth of our go to market strategy. Note these percentages are of total revenue and not of license revenue. In Q2 we saw strong growth in our international business, particularly in Europe. Even allowing for the impact of currency. Revenue in Europe was $140 million, and grew 44% year-over-year. Or 36% on a currency adjusted basis. EMEA license revenue grew 32% year-over-year. Revenue from the rest of the world which primarily includes Asia-Pacific and Japan, as well as Latin America and Canada, was $56 million and grew at 22% year-over-year, or 18% on a currency adjusted basis. Rest of world license revenue grew 16% over Q2 a years ago. Our business in the U.S. was $289 million and grew by 9% over the second quarter a year ago. U.S. licensed revenue was down 6% compared to the same period last year.

For the June quarter, we shipped 15 end user transactions valued at over $1million, but only 201 transactions over 100 K., representing our lowest level of transactions over 100 K in two years. The medium deal size per transactions over 100 K was $179,000. Our total gross margin on a GAAP basis was 84%. The gross margin on license revenue excluding amortization of developed technology was 97% and the gross margin on service revenue was 69%. Driven largely by the strength of our maintenance revenue. Operating expenses on a GAAP basis were $284 million. The sequential increase in terms of absolute dollars, primarily attributable to Q2 product releases, and the added expense of our annual vision user conferences. GAAP operating income was $121 million, or 25% of revenue. Interest and other income net of interest expense, was $4 million for the second quarter, compared to $5.6 million in Q1. We expect interest and other income net to continue at the Q2 level for a gross slightly going forward, assuming no significant change in interest rates. The tax rate for our GAAP results was 31%, and our nonGAAP results was 32% reflecting again, the increasing mix of our international business. Our GAAP earnings were 20 cents per share based on a fully diluted share count of 442 million.

Historically we've excluded from our nonGAAP operating results amortization of intangibles, in process research and development, stock based compensation, and gains or losses on strategic investments. These totaled $5 million net of tax for Q2. When adjusted for these items our nonGAAP earnings per share for Q2 is 21cents, up 17% versus Q2, 2003. NonGAAP operating margin for Q2 is 27%. Flat compared to the same period a year ago. We continued to target full year operating margins of 28 to 29%. Our head count exiting Q2 was just under 6900, reflecting 162 net additions. For the third quarter we'd expect to see a similar number of additions. Turning now briefly to the balance sheet, we exited the quarter with a record 2.75 billion in cash and short term investments. We generated approximately $104 million in cash from operating activities for the quarter. Cash from option exercises was approximately $9 million. Primary usage of cash this quarter included $33 million for Capital Expenditures and technology purchases.

Accounts receivable as of June were $171million, and our DSO was 32 days. For the third quarter we would again expect DSO to be in the low 30 day range. Deferred revenue was $423 million, up from 297 million in the second quarter a year ago, and down slightly from 427 million in the first quarter of this year. We expect deferred revenue to be flat to up slightly for the third quarter. Unfilled license orders and gross deferred licensed revenue were approximately $69 million, compared to $63 million the second quarter of '03. Finally, I'm also pleased to announce that the board has authorized a stock repurchase of up to $500 million which is intended to offset future dilution from employee stock plans. We currently expect to execute this program over the next 12 to 18 months. With that I will turn the call back to Gary.

Thanks, Ed. Before we open the call up for questions I will provide some perspective on what we see for Q3 and the second half. Given the challenges we faced at the end of Q2 we have spent a good deal of time of reevaluating our models for the second half of 2004. Taking the factors I covered earlier that impacted our business this quarter into consideration our Q2 results have not dampened our optimism that 2004 will be an important growth year for Veritas. We continue to forecast our business based on measured IT recovery and expect revenue in Q3 to be in the range of $485 million, to $505 million. Our strategy for margins continues to be one of investing for growth with a disciplined approach to spending. We will continue to primarily focus our investments in growth areas of our business, particularly sales capacity in our international markets, product development, and services.

We are targeting minimum nonGAAP operating margins in the range of 25 to 27% for Q3, and nonGAAP earnings per share in the range of 20 cents to 22 cents. GAAP margins are expected to be in the range of 24 to 26%. And GAAP earnings per share in the range of 19 to 21cents. Notwithstanding what we saw in the U.S. enterprise business at the end of the quarter we have demonstrated strong growth in revenue and earnings in Q2 and year to date. We have the following objectives for the full year: One, we are targeting $2 billion in total revenue, representing 14% top line growth. Secondly, our revenue model includes a mix of approximately 58 to 60% licensed and 40 to 42% service revenue. And lastly our spending plans are based on our target of nonGAAP operating margins of 28 to 29% for the full year. Our commitment to providing value to our customers and shareholders has never been stronger and the addressable market for our products and services remains robust. We will continue to focus our efforts on meeting the needs of our customers while executing our strategy for continued growth, and managing our business to drive growth and profitability. I remain confident in both our strategy and our ability to win in the market. I will now turn the call over for questions. Jamie.

Thank you, sir. Today's question and answer session will be conducted electronically. If you would like to ask a question, please signal by pressing the star key followed by the digit one on your touch tone telephone. If you are using a speaker phone please turn off the mute button, so our equipment can read your signal. You will come in in the order that you signal and will take as many questions as time permits. In the interest of time please limit yourself to one question. Again that is star, one to ask a question and we'll pause for just a moment to assemble our roster. We'll take our first question from Tom Berquist with Smith Barney.

Thank you. You mentioned a couple of, two things I wanted to follow up on. One was the deals, the smaller deals not being as good as they have been over the last couple of years. It certainly begs the question about competition from Legato. And then I'd also just be curious to know if, when you look at the split between license and service, whether or not a lot of those OEM revenues, that 13% number you mentioned are now going to services revenues after some of the adjustments that you made after your reaudit.

Yeah. Okay, Tom, so let me take the second one first. So, no, I don't believe that the reaudit had any impact on the classification of this, certainly the reaudit ended up in showing comparable results. So I think that what you've got is kind of apples and apples in all periods between license and service. There was a small effect that wasn't anticipated related to marketing development funds. I think it was probably 1.5 to $2 million a quarter. That came up out of the restatement. Our attitude was we could drive-through that. It was a negative to license revenue. So in the grand scheme of things it didn't help but it's hardly explanatory. But I think from a comparability perspective that's the only item that I kind of point to that wasn't already in our thinking. In terms of the deal size, actually the point that I think we are trying to make was the opposite, namely that we kind of characterized or at least we measure deals over 100K as kind of a proxy for what's going on in the enterprise business. Deals under 100K are generally regarded to be either enterprise, DISB types of business or commercial business. And so I think that one of the indicators of softness in the enterprise was the fact that our deals over 100 K were pretty light relative to what we've seen over the last couple of years. And that's concentrated, again, and I just want to be clear on this, that was very much a U.S. issue. So if we looked at the same data for Europe, for example, the European data was actually quite strong. Both in the over $1 million category and over 100K category. So the effect in the U.S. was even kind of more disproportionate.

Okay. So you are essentially saying then that that over 100K bucket is not a place where you face a lot of competition with Legato? You would suggest it come at the lower level, below that?

Yeah. The over 100K is really where we are talking about our direct business and the macro factors in the margin I talked about, things like the Sarbanes-Oxley compliance issue, customer buying patterns, that's where those kinds of things actually came into effect, more so than competition. We've looked at this thing kind of every which way until Sunday and when we look at it we just don't see any kind of significant or material shift in the competitive landscape or anything else. These macro issues hit us very directly in larger transactions in the U.S. direct. It shows up in the total deals over 100,000 being 201 deals, as Ed mentioned, that's down from 246 in Q1, down from 286 in Q4. So points specifically to these macro issues we're talking about.

Got it. Okay. Thank you.

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

Yes. I was wondering if with your own Sarbanes-Oxley compliance and my sense that auditors, I think, all over the place have become much more stringent, if you guys had any significant amount of business that you thought would pass muster that perhaps didn't pass muster in the quarter and perhaps got delayed -- recognition got delayed to other quarters -- future quarters?

Yeah. Neil, so again, Ed Gillis, no I would say that our approach has been consistent. Our procedures are rigorous and uniformly applied. I think the real issue with stocks is because for most calendar year companies, you have got certification requirements that need to really kind of cover two periods. What I think most companies are doing is looking at really trying to lock down quote, unquote distracting activities in a September through December time period. Inside an IT organization, that it wouldn't be unusual for that to involve new production applications. And if you look at the buying cycle and the implementation cycle, it's probably reasonable to think that Q2 saw some of that impact. Now, this is speculation on our part, right? It'sanecdotal? It's the type of thing that is very difficult to quantify. But we take some measure from the fact that the one thing that's apparent in our results is that we are not alone and that there have been a large number of other enterprise oriented macro sized companies that have experienced something going on in the U.S. enterprise piece of their business in June. And I think that this is certainly a contributing factor.

Do you think that any of your competition in any way was staying more effective in terms of being able to somehow delay deals for you guys, any thoughts about that?

No, again, Neil, I mean, it's really the same comment I made to Tom in a similar question. That no real material shift that we can see out there in the competitive landscape. There has been competition out there. I'm not saying there's no competition. There's been competition. There continues to be competition out there. But when we look between kind of Q4, Q1, on into Q2, that seems to be pretty consistent quarter to quarter. And the difference being that right at the end of the quarter the large deals started slipping off. And certainly given, as Ed mentioned, all the preannouncements and the kinds of companies that preannounce, tends to point to products that need to go in this year being deferred because you can't get them in this year so you save up and do the purchase either in the third quarter or the fourth quarter for implementation at the first of the year when certification is done. So it fits that pattern more than any kind of competitive landscape shift or Veritas specific issue necessarily.

And some of this isn't speculative, I mean, in the sense of, IBM was pretty clear with their story relative to software and Tivoli. CA was pretty clear with their description, frankly EMC was pretty clear with their description of their software businesses, and so, again, I think if we come back to what's going on, it feels like given where we are with a strong product cycle and with five quarters of kind of momentum, that we are dealing with something else that is pretty U.S. specific.

And then last question, what are your thoughts on hiring going forward?

Well, as I said in the kind of opening remarks, we hired about 160 people net this quarter and we're looking at something similar next quarter. Much of that was outside the U.S. In other words, we are trying to really put our investment where our opportunity has been the sharpest. And I think commensurate it with the fact that we are targeting $2 billion for the year which represents growth of something in the order of 14% we are going to invest for that growth. And, again, the governor on that or the structure around that is a 28 to 29% kind of operating margin objective.

Neil, just coming back real quick for a second on this competitive landscape issue, Ed kind of touched on it I don't know that he emphasized it very much which is the strength in the international business, really a pretty strong indicator that says we are managing the competitive landscape pretty effectively. Because certainly some of the competitors we're up against are very strong in overseas markets, yet we had very, very strong results in the overseas markets. So that's again one of these things that's kind of pointing for us when we look at the data, pointing more and more back to macro issues around Sarbanes-Oxley, around just change in buying patterns and economic type issues through what's really measured recovery still, versus, again, any competitive landscape shift.

Very good. Thank you very much.

Sure.

Next question?

Thank you, sir. We'll go next to Heather Bellini with UBS.

Hi. Thank you. Two questions, first, Ed, you mentioned unfilled license orders, I believe the number was 69 million. Is that correct?

That's correct.

And does that compare to the 51 million last quarter that you reported in your Q.?

No, it compares to the unfilled license orders plus the deferred license fees in the Q. (INAUDIBLE TWO PEOPLE SPEAKING AT ONCE) That's right.

Can you break those down for us since they are going to be in the Q anyhow?

Last quarter I think the aggregate was about 78.

Correct.

And so we're looking at a decline of about 10 million, approximately $10 million.

Okay. And broken down, was that mainly -- is the decline mostly coming from off balance sheet commitments or deferred license revenue.

Heather, I'm sorry, I don't have that. All I have got is the aggregate number in front of you.

Okay. But that will be published in the Q.

Yeah. It will be broken down in the Q.

Okay. Great. And then the second question I have is, the Cluster file systems for Linux, I guess, Gary, could you give us an update on when you would expect this to go GA and then what type of impact you would expect this to have on the file systems growth rate?

Yeah. I don't have, again, in front of me on this question either, the specific release information on it. But relative to the Cluster file system, our continued strategy is moving all of our products into the Linux environment. And certainly the more technology we put in Linux that brings it enterprise credibility my belief is we help influence and impact the trend of that technology curve around Linux. Renee just pointed out to me that it's planned for the second half as far as the deliverable goes. But at the end of the day Linux continues to be an important trend for us. We saw a pretty consistent result in the Linux environment. There wasn't a big mix shift in our business. And when I talk to customers, what I'm still hearing from them is Linux is predominantly being used for applications server level deployment and Web server level deployment. It's as they start moving mission critical databases, enterprise applications, and other things into Linux, that's where our opportunity really becomes much bigger. So I think our deliverables are generally aligned to the way that markets emerging and I feel like we are timely relative to meeting the requirements that are out there for our technology.

Okay. And then I guess one roll-up, in regards to the catch up of the maintenance related to the OEM contract, is that related to the Foundation Suite release that happened in Q1? Or is that related to something else?

I think that's a driver but again it's, I think this is much more a function of reporting issues on the part of our OEMs. Periodically we will go off and audit, I don't mean in an adversarial context but I think it's much more related to simply reporting issues with our OEMs as opposed to any specific product cycle.

Okay. So a catch up cycle for Foundation Suite to the extent there is one could still show up later in the year?

Well, certainly for -- that would be true across our customer base generally, yes. Okay.

I think it's also fair to say that in a number of quarters we have some aspect of catch up revenue coming from OEMs because there is kind of an ongoing and continual process of review of reporting from OEMs. Sometimes initiated by us, just as frequently initiated by their own reviews and their own and kind of diligence on data information being reported. So just in the normal nature of managing those relationships there is periodic catch up revenue to factor in every quarter. Great. Thank you.

We'll take our next question from, Brenden Smith with Goldman Sachs.

Hi. Thanks very much. On a similar line, the $14 million in catch up, should we then assume that similar to December that that 14 will go away in September? And then secondarily, on the product segment revenues, the stacking so to speak of which did the best and the worst sequentially was a little different than I would have thought. Do you expect that to reverse potentially into September or do you think that we're just going to see continued sluggishness in the newer growth of your categories?

Well, let me take the non-recurring piece first. So on the non-recurring piece we did 215 million in services, something close to 90% of that is related to our maintenance business. The maintenance business is reasonably predictable and it's been growing pretty steadily with the exception of this catch up revenue which is hard to predict. You can see it coming but it's hard to predict when it closes because we recognize the revenue only upon receipt of the PO. So I would say as we look at the next quarter, where you kind of adjust from 215 down to something closer to the 200 level and that allows for some normal growth and I think that will probably give you a reasonable guesstimate of what we are looking for in the third quarter.

Relative to your question, Brendan, on revenue and product category, clearly the utility computing infrastructure category, which is I think the one you were surprised by probably on its growth rate, tends to be pretty lumpy. There is a pretty high correlation between the results on utility computing infrastructure and our big deal flow and our larger transaction flow, meaning that the more large enterprise type deals we do, the more those tend to include the broader set of utility computing products. And I'm just looking quickly at some data over the last two years. Q2 has been the weakest quarter now two years in a row. This is the third year so far, assuming that it bounces back in Q3, that the utility computing infrastructure category was Q2 being the weak quarter. And it just, but again it seems to correlate to the big deal flow more than anything. And then when I look back across it, the weakest quarter for big deals over $1 million was Q2 in both of the last two years as well. Obviously we are down in Q2 from Q1 of this year. So there seems to be just all the data suggests high correlation to the big deal flow. There are smaller numbers but they tend to be a little bit lumpier. But I, you know, the product when we look at pipeline, we look at forecasts we look at opportunity, we have plenty of reason to be optimistic there and relative to how it shakes out in September we'll have to wait and see.

Okay. And then just one final question. In addition to all the Sarbanes-Oxley speculation that's been out there we've heard a lot about potential pricing pressure on ELA's whether that's tied to oracle or not, I guess, who knows, but any comment on that front from a macro perspective?

You know, it's hard to tell. There's definitely money being diverted from traditional IT spending. It's both time and it's attention and it's money. And I see it even in my own IT group. I pin down my own CIO on the question, asked him how much new technology he's deploying and looking at and he's diverting spending. He's distracted by it. It's a lot of work. There's a lot of documentation to be done. There's a lot of consulting fees for most companies, ourselves included associated with getting it done. We've talked to a number of other companies, obviously a number of companies going through it, and we are seeing pretty consistent spending levels and they are above where the estimates were. So there's an unexpected piece of it that is more costly than most people expected. And that's true internally for ourselves as well. So I think there is slowly money being diverted over there. I think the bigger issue than the diversion of money, though, is that you pretty much in order to certify and test your processes and everything for four '04 you have got the situation where kind of have got to free things down like you did for Y2K where you stop making changes until you get past it. And so the things that you would buy today that would implement in the fourth quarter tend to get deferred a little bit because you are talking about implementing in Q1 while you go through the certification for four '04. So I think it's more of a timing issue than a dollar issue.

And as it relates to the pricing piece, things are certainly competitive but our issue, I think had less to do with ELA pricing and more to do with the fact that the yield out of the pipeline and the close rate was below what we expected it to be. So, again, I wouldn't point to price per se as an event in the quarter.

Great. Thanks a lot guys.

And we'll take our next question from Shebly Seyrafi with Merrill Lynch.

Yes. So thank you very much. So I noticed that your accounts receivable balance grew 16 million sequentially, or 10%. That's not exactly in sympathy with the weak late June. So maybe you can talk about this disconnect? And separately, what is your expectation for license growth in Q3, should we expect maybe around 5% mid single digits? Thank you.

I will take the first one. So in terms of the receivables for the quarter was skewed to the end of the quarter relative to Q1. So I think from a billing perspective, something in the order of about 42% of our business went out in the last month. That I think is reflective of the fact that although June was weak, the business was back end loaded. That's in contrast to the first quarter where we had somewhat of the, a better experience, opposite experience is probably overstating it. But we had a more levelly loaded quarter in part because we got a very strong start in January from business that didn't close in December. So the kind of the carry over from the fourth quarter I think helped that skew in the first quarter. And the load in the first quarter was much more, much more even. The other observation, if you look at our first quarter cash flows, they are always very strong because in the first quarter we're collecting a lot of the receivables that were created in Q4.

And then just bridging over to your other question about the license growth, we didn't get kind of specific license breakouts but what our guidance does encompass is slight to moderate growth but definitely flat to slightly up licensed revenue growth going forward into Q3. Yeah. And that's consistent with the guidance range as well relative to what we actually did and consistent with the comments Ed made about services mix.

And you are seeing an improvement in July from the weakness in June?

You know, it's one of those things where every quarter there are deals that don't come in in one quarter and close in the following period. It's a little early to know, are we seeing improvement. What we do know is that, as Ed mentioned, some of the deals were deals that slipped and didn't close as we expected them to in the second quarter and at least some of those deals have closed already in the third quarter. I don't want to characterize that as an abnormal thing though. There is every quarter deals that slip and close the following quarter. But we did already close some of the ones which is a good indicator that they were real deals, they just didn't make it in buy the deadline.

Thank you.

As a reminder, please limit yourself to one question in today's question queue. We'll go next to Chris Russ with Wachovia Securities.

Yeah. Hi. You mentioned that the clustering business I guess was reasonably good but that the high availability bundles were disappointing. I was just wondering could you sort of quantify that in percentage terms, either sequentially or year-over-year, are they flat or down? Were there any specific factors behind that, I don't know, competition or any other factors affecting the high availability suites?

Yes. For the high availability suites of the largest component of the utility infrastructure segment, they were down sequentially and down year-over-year. And at this juncture our attitude, or at least our perspective, is based on the fact that that is a product that is very enterprise related. So while certainly the enterprise is important to most of our products, high availability bundles is very specifically an enterprise product. So pronounced weakness in the U.S. enterprise is going to have a disproportionate impact on that kind of product line.

Okay. And then with regard to the Opforce product line, how was that tracking this quarter.

So Opforce is very small. Frankly, at this juncture still somewhat of a rounding error. The encouraging thing is we are seeing lots activity. It's beginning to contribute to revenue. And we're upbeat about it. It's going to be a long time before it has a material impact on our results.

Okay. Great. Thanks very much.

Part is indicated there by the way on Opforce is just very positive sentiment out of our field sales organization in both the U.S. and Europe, meaning that they are seeing opportunities materializing as part of the dialogue and its important component utility computing, so they're encouraged by it.

Okay. All right. Thank you.

Next question.

Thank you, sir. We'll go next to David Rudow with Piper Jaffray.

Hey, guys. In terms of your guidance, do you assume a similar fall off in closure rates at the end of Q3 or do you think the Sarbanes-Oxley delays have passed and that we're clear between now and year end.

Yeah. There's always a tough one, we didn't expect this one so we have no reason to believe that we will have anything outside of our normal patterns in the third quarter. So we expect to return to normal patterns. If it goes along the path that Y2K did which is what, you know there is a little bit of similar behavior here, as I think most companies saw in the third quarter going on into the fourth quarter of '99, spending starting freeing up on the basis of you're then buying products and technologies for Q1 deployment. So the real question is what's the lead time under which people get certification done and focus on the future.

And part of our thinking would be with the range, was to try to cover ourselves a bit right at the 485 level, 505, it's a $20 million range and part of the thinking is, we are likely or to the degree that stocks had an impact this quarter there's probably no reason to think that it wouldn't continue to bleed into Q3. At some point as Gary indicated you have to get on with buying software for implementations that are going occur in the new year. So our attitude is it's unlikely to impact Q4 and should diminish in Q3 but we've tried to factor that into our thinking.

To some extent it's a change as we mentioned in the prepared remarks, it's a change to customer buying patterns. And the question is until the pattern plays out you don't know what the pattern is for sure. Certainly it's encompassed by a broader range.

And what we're struggling with and we assume that others are struggling with, is to what degree is some of the issue as simple as IT spending rates are slowing a little bit or the enthusiasm around IT spending rates is diminishing a little bit. And that's obviously what we are trying to keep our eye on. We think that's contemplated in our guidance. But that's obviously what we need to kind of get our arms around. We continue to not believe this is a Veritas related issue given the performance of so many other companies. That are large companies relative to their sector, or relative to the size of their sector. So, again, the guidance we think makes an effort to balance that.

Okay. Then in terms of your own four '04 work, what type of projects are you guys delaying?

Well, certainly as we look at the period from September through December, we are stopping, shutting down, delaying new production implementations. So, for example, we are in the midst of an Oracle 11i upgrade. We deferred that to a February go live date as opposed to a August, September go live date. That's an example specific to us.

Okay. All right. Thank you.

Your next question comes from Dan Renouard with Robert W. Baird.

Hi thanks. I just have two quick ones. One is just on the buy back, can you just clarify, is there any chance that you would use that buy back to reduce share count or is it purely for option dilution. And then the second question, if I might, is just on terms of gross margin, even normalizing for the 14 million action this quarter you still come up with a 67% gross margin on the service line. What should we be modeling or thinking longer term in terms of service gross margin? Should we expect it to stay in that 67, 68% or do you think it will trend lower?

Okay. On the gross margin front, I think that something in the mid 60s is probably a fair place to be. We've said on any number of occasions that we believe the professional services piece of our services business is important to maintaining account control, to kind of driving our agenda inside of our customers. And we are investing in our professional services business. Now our maintenance business has been on fire and has been growing more rapidly and that's helped margins. But I think mid 60s is probably the right place to be. And I'm sorry, I lost sight of the second part of your question. Oh, the buy back, yeah, sorry. So the buy back really consists of kind of two trenches. One piece of approximately $250 million that we would expect to execute sooner rather than later, Q3, Q4 at the outside. And a second piece that we would expect to execute from cash generated from future, option exercises. And that's the piece that would really get executed over kind of a 12 to 18 month time frame.

Okay. But it's fair to assume that there could be some share, or you could actually--

Yeah. No, for the first 250, absolutely. You ought to have some positive effect on a share reduction. And then the second 250 is probably more in the category of mitigating ongoing option exercises. The objective of both pieces is to attempt to mitigate the dilution created by the options. But we are going to try to execute one quickly and then the other out of cash from option exercises.

Okay. Thank you.

Well go next to Glenn Hanus with Needham.

I know you've talked about this. Can you just help me a little bit more with what really gives you confidence, say as we get into this late Q3 and fourth quarter time frame, that this Sarbanes issue will sort of have gone away, if will you? That's sort of question one. And, then two, could you just maybe talk about, do you guys see any link between, just on your backup business, between there's been the library business, the hardware side has been sort of squishy, and do you see some link with that, and does disk to disk backup have a mitigating effect on your revenues in the, in the backup business?

Okay. So I'll try to take both of those. And then Ed can interject here. On the Sarbanes-Oxley going away, I guess part what have we look at is there is normal seasonality that comes into play in the business. If you back up away from Sarbanes-Oxley just for a second and you look at the fundamentals of the business we are fundamentally a strong business. And we've had four, five record quarters before this one. This was still, although not as strong as we would like, clearly a good quarter relative to the third largest quarter we've ever had in the company's history. So the fundamental strength of the business is there. Then when we come into the third quarter, there's always seasonality. It's the end of the government fiscal year for the Federal Government here in the U.S. Our government business is growing. We continue to invest in it. We have a lot of capacity. We have lots of opportunity. But it's government spending. And we all know how those projects do or don't get awarded as the period goes on. We have the, you know, August summer months of the European region.

We have all of these things, and we have Sarbanes-Oxley out there as you point out. All of these are factored into the guidance that we're giving. We try to do the best job we possibly can to factor in all the different impacts. My general belief, and it's speculation, is that the Sarbanes-Oxley constraint on the business will start mitigating as we get further into the third quarter. I have no reason that I can see out there that says it doesn't start letting up as people start moving their horizon beyond certification. Meaning that they start at some stage, they've been constrained by economic downturn for a long time. There's actually a really good article on this whole topic in CIO magazine, that goes through it and says, you know, it talks about generally it's been constrained for all this time by economic downturn, finally seems to be getting some wind into the spending of IT to meet some of the backlog of demands for projects and then Sarbanes-Oxley comes around and solves it again. So the fundamental demand for IT and IT computing technology in particular in the infrastructure areas that we're in which are all strong all of that's still there and it's just a matter of when it's going to happen, whether the external factors, whether they be economic, economics, Sarbanes-Oxley, or typical seasonality that affect it.

And so I generally think we've factored it in effectively into the guidance and I think that's the best thing we can do at this stage. On the backup business, I think most of the backup revenue, first of all, we had license revenue growth in backup as we did in all of our segments. So it's adjusted, still a growing business. The library business and other things going on in the hardware side, don't seem to have a dramatic correlation to what we're doing. The fact is that with Sarbanes-Oxley, with compliance, with other things people are saving more and more information. Disaster recovery and back up and recovery of information continues to be an important trends. And disk to disk backup doesn't really change our business. We don't really differentiate dramatically between you back up the tape or you back up the disk. Our technology does both. We have a growing partnership and relationship with Network Appliance around providing disks, you know, disks as backup solution.

And so by all indications the back up business should continue as the rest of our components of our business to be growth business going forward. And so I continue to think it's a good business to be in. We have strong maintenance renewal rates and everything which suggest our products are being used and it's fundamentally a business that has a big market requirement with no dramatic change in spending surveys in that category, either.

The other thing I'd add is that, you know, there's a whole bunch of areas where we're taking initiative. We just completed our America sales conference last week. It was an outstanding event and frankly, great timing. Because we had our entire sales organization together in North America. And we were able to relook at contests, scripts, incentives, training, opportunities, marketing. So the folks left that meeting, left that week long meeting pumped up. And these guys are loaded for bear and they are positive. There's a host of other specific initiatives we are taking. We are trying to line up our top opportunities with specific exec. sponsors. We've got volume programs in terms of enabling the enterprise Windows opportunities. We've got APM specific targets in the field. So we certainly don't want to kind of leave you with the impression that we are sitting back or we are waiting for this market issue in the U.S. to diminish. We are out there attacking. And we are upbeat about the year.

Thank you.

Thanks.

And we'll go next to Nitsan Hargil with Friedman, Billings, Ramsey.

Hi, guys, just trying to get a better idea around your longer term operating margin assumptions here. You are still target targeting numbers below 30% operating margins and it looks like there should be strength in the model going forward for operating margins beyond that. I just want to get your thoughts on the longer term possibilities here.

Well, our description of our long-term operating model objective has been 30 to 32%. We continue to think that's appropriate. That's based on kind of our thinking that the license business is still a good growing business and at 28 to 29% target for this year obviously we have got some head room as we look out over the next couple of years. We'll reevaluate that perspective based on license growth rates. Right, so we are trying to be opportunistic and invest where the opportunity is.

Clearly part of the margin strategy here is to invest for growth. And if you look in the overseas market and you see what's happening, the positive results in our business in Asia-Pacific and Japan and throughout our European region, the primary kind of meter on our ability to continue to grow those businesses is our investment in sales capacity and service capacity in the region and in the countries. And so relative to margin, our view on it is there's growth opportunities out there, we're going to invest for the growth opportunities and we're going to go after the market opportunity that exists. And we think that's a smart strategy for a company that still has strong fundamentals and strong growth prospects.

Thank you very much.

We will go next to Drew Brosseau with SG Cowen.

Hi. Thanks. I guess I'm wondering if you can talk a little bit about the U.S. operations, and whether you think any of the softness had to do with internal issues in sales management changes and the like, and if so what , in addition to what Ed already described you guys trying to do to fix that? Thanks.

Yeah, I mean I think Ed already touched on it to some extent. We generally continue to believe there is always sales challenges. There is always some level of attrition. There is always management changes. We've had, that's an area going on for a long period of time. And generally what I would tell you is, those things from a trend basis I'm not terribly concerned about those particular issues. When we look at it and we look at what we think went on and transpired here, we believe we have the team in Q3 and beyond that can deliver the results we are looking for. And that's the key thing is, do we have confidence in the team? And I personally and I know Ed and I know the rest of my executive team, have confidence in our team in the Americas to generate and deliver results. So it fits right in that category, like competition and other things, that there has really been no kind of material, huge, enormous shift of any kind in this general direction that we are going there. There is a macro issue that affected us, we are focused on, as Ed said, we are focused on things to make sure we keep everybody's head in the game and in the process of keeping everybody's head in the game, that's why you do things like (INAUDIBLE) that's why do you a sales kick off and you get them fired up, that's why you do more training, so you invest in their success and that's what we are doing, because we believe they are more than capable of being successful and that's what we plan to do.

As you come into the summer quarter in particular with Europe and Asia having been the real source of strength recently, are you assuming that those are growing sequentially as well? Are you assuming they're down and that the U.S. is really going to snap back?

Well, Drew, I guess, I'd love to tell you that consistent with guidance that we haven't provided that you are going to see a rocket ship here in Q3. Our guidance at $4.85 to $5.05 suggests kind of flat to slightly up. And so there is not, we haven't put a scenario on the table in which it's going to require a lot of growth to achieve that guidance. So I think we are looking for realistic performance out of Asia-Pacific. We are looking for consistent performance out of Europe. It's very consistent with their pipelines. But I would, I think we'd all recognize that Europe cannot continue the torrid rate of growth that they've been on. So that's, that's not in our model. It's not in our guidance and it's not what gets us to $2 billion in terms of year-over-year revenue growth.

I think the key thing here is that we have in the guidance range, we brought in the range a little bit because of the uncertainty surrounding what transpired at the end of Q2. So that factors into a broader range. And then beyond that the range takes into account other things like the non-recurring pieces of service revenue and takes into account what I deem kind of or term both positive and negative seasonality. You know, something like government is a positive seasonality trend. Something like August in Europe, it's harder to look at that and say, that's my favorite month of the year when it comes to the European business. So I think we factor these things in and continue to be optimistic about our business and hopefully this macro issue surrounding Sarbanes-Oxley is going to surpass the (INAUDIBLE) and we'll continue to move forward on the similar trend we were on for five quarters in a row which is delivering record revenue.

Okay. Thanks.

Thank you. That does conclude today's question and answer session. At this time I'd like to turn the call back over to you, Mr. Bloom, for any additional or closing remarks.

Okay. Well I would like to thank everyone for joining us on the call. Obviously or hopefully it's obvious through the Q&A area here as well as the guidance we've given, we continue to be very optimistic about the fundamental strength of our business and we appreciate you joining us today. Thanks.

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