諾頓 (NLOK) 2004 Q3 法說會逐字稿

Good day and welcome to the Veritas Software 3rd 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 Rudig. Please go ahead, ma'am.

Great, thank you. Good afternoon and thank you for joining us today for our report on Veritas Q3 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 the key areas of the Company's business and management of the Company's business to drive growth and 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 including our form 10(K) and 10(Q) which are on file with the SEC and available on both our website and the SEC's website. In addition, during this 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 in our 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 Investor Relations page of our website. I will now turn the call over to Gary Bloom.

Thank you, Renee. I am pleased to announce that our revenue for the 3rd quarter was $497 million. In both nonGAAP and GAAP EPS for 22 cents. Our results represent year-over-year revenue growth of 11% and nonGAAP earnings per share growth of 16%. We ended the quarter with $2.5 billion in cash and short-term investments after acquiring K-Vault software and Envio for roughly $256 million and spending $71 million on our stock repurchase program. In addition we generated approximately $106 million in cash from operating activities during the quarter. We are pleased with our results for the quarter, particularly after considering our over performance in Q3 a year ago as well as on going IT spending challenges. As a reminder our strong performance last year was primarily influenced by the revenue upside from our government vertical which did not occur this quarter. But even without the upside from our government business, the strength of our products and sales channels allowed us to grow our total revenue this quarter by 11% which reinforces our view that our overall business remains strong despite a difficult economic climate. On a global basis license revenue grew 2% year-over-year and 6% sequentially. The two tier distribution channel again saw strong growth, up 18% year-over-year and service revenue continues to contribute to the growth of our business, up 27% year-over-year. There are a number of positive indicators for the business during the quarter. Firstly, our data protection license revenue grew 5% year-over-year and 6% quarter-over-quarter demonstrating our continued leadership position in this market. Both Backup Exec and Net backup posted solid results and when combined with our strong channel performance continues to validate our view that EMC is having a relatively neutral effect on our data protection business. We are also seeing an increase of activity within traditional IBM Tivoli Storage Manager account which has the potential to further improve our business in large accounts. Our out force product saw its first million dollar deal, a good indicator that this new product is gaining meaningful traction in the market. And our ATM licencing grew 43% over last year with good large deal activity. Although delayed in getting our ATM business to this point, I am pleased the business is now heading in the right direction. We also had success with our focus on geographic expansion where we saw continued payoff despite the seasonal effects of the summer months. Europe, Middle East and Africa grew 29% and the rest of world, which includes Asia Pacific and Japan as well as Canada and Latin America grew 20% year-over-year. And we further improved our leadership position in several key markets. In a recent report by industry analysts from IDC, Veritas gained 2 percentage points in the backup and archiving market from the 1st half of 2003 to the 1st half of 2004. The IDC report also showed Veritas's file system revenue grew 38% year-over-year. Doubling the category growth with 62.2% market share. While the next closest file system competitor had only 3.1% market share. In addition, our leadership position in the Windows market was highlighted by the readers at Windows IT Pro Magazine with 8 of Veritas's Windows data protection, storage management and utility computing products being recognized among the best in class in that publication to annual ranking. We are also executing very well on our product and platform expansion strategy.

Most notably we successfully acquired K-Vault software. The market leader in e-mail archiving. This acquisition allows Veritas to leap frog into the number one position in the fast growing e-mail archiving market. Besides helping customers address major business issues such as management of e-mail and environments of regulatory compliance, KBS also opens new opportunities to drive additional Veritas product sales such as file system archiving, data protection and other utility computing building blocks. And in addition to the acquisition we also continued our investment strategy in our existing product lines, expanding our storage management product support for IBM AIX and launching our Red Hat enterprise Linux certified storage management and high availability products. We also recently announced the general availability of version 7 of the Veritas I3 application management software and we are nearing a major release of our Backup Exec product which will feature new enhancements, especially in the area of disk space data protection for backup and recovery. Let me close by saying while the IT environment remained challenging this quarter we encouraged by the many positive indicators and the healthy demand for our products and services. I will now turn the call over to Ed Gillis for the detailed Q3 financial results. When Ed completes his discussion I will provide our outlook for Q4 and open up the call for questions. Ed?

Okay. Thanks, Gary. Today I will begin by providing some comments in our income statement. As Gary stated earlier, we're pleased with our performance this quarter given the difficulty we saw at the end of Q2. While not completely unusual for this summer quarter, this quarter was back end loaded but our increased focus allowed us to execute effectively on our plan and deliver the results we expected. Revenue for Q3 was 497 million, up 11% over the same period last year and up 2% sequentially. And more importantly, in line with our long stated objectives of getting to $2 billion in revenue for the year. Reflected in revenue is approximately $9 million benefit from favorable foreign currency rates when compared to the September quarter a year ago. Licensed revenue for the quarter was $287 million, up 2% from last year. For the September quarter we shipped 11 end user transactions valued at over $1 million down slightly from the June quarter. In addition we shipped 231 transactions over $100,000 up from 202 in the June quarter and the median Gill size for transactions over 100k was $178,000. License revenue from our data protection products was $161 million, up 5% year-over-year and up 6% sequentially. Licensed revenue from our storage management products was $64 million, down 7% year-over-year and 13% sequentially. License revenue from our utility computing infrastructure products was $62 million in Q3 representing year-over-year growth of 6% and 41% sequentially. As we have said before, both the utility computing category and storage management tend to be influenced by the number of deals greater than $1 million. Which were down both sequentially and year-over-year. In addition, these categories have especially difficult comparisons to a year ago when the government vertical was especially strong and had a positive impact on these product segments.

With that said, we saw improving performance in both our high availability products and our APM products. From a platform perspective, license revenue for the quarter was 51% Unix and Linux, 39% Windows and 10% multi platform. Service revenue for the September quarter was $209 million, up 27% year-over-year. Service revenue represented 42% of total revenue for Q3. Service revenue declined slightly quarter-over-quarter and as a reminder this was expected given the $14 million in nonrecurring maintenance revenue from an OEM during the 2nd quarter. The services business continues to provide a steady revenue stream as a result of our increasing install base and our high level of maintenance and support contract renewal. The channel mix for total revenue for the quarter was 54% from end users and buyers. 34% from two tiered distribution and 12% from OEM partners, again continuing to show the balance and breadth of our go-to-market strategy. Geographically, our business in the U.S. was $292 million, up 2% year-over-year. U.S. license revenue was up 7% from the June quarter, but on a year-over-year basis U.S. license revenue was down 8% reflecting again the difficult comparison mentioned previously that was primarily due to the strength in our government business a year ago. Although we saw seasonality typical of the 3rd quarter in our international business, revenue from Amia grew 29% year-over-year to $142 million. Or 22% when adjusted for currency. Amia license revenue grew 18% year-over-year.

Rest of world revenues which include primarily Asia Pacific and Japan grew 20% year-over-year to $63 million or 18% currency adjusted with licensed growth of 13%. Our total gross margin on a GAAP basis was 84% The gross margin on licensed revenue excluding amortization of developed technology was 98% and the gross margin on service revenue was 67%. Driven largely by the strength of our maintenance revenue. Operating expenses on a GAAP basis were $293 million. The sequential increase in terms of absolute dollars is primarily attributable to our investment in sales and overseas research and development. This also includes just under $2 million for KVS operating expenses. GAAP operating income was $125 million or 25% of revenue. Interest in other income net of interest expense was $7 million in Q3 compared to $4 million in Q2. The sequential increase was primarily due to an increase in interest earned on our investment portfolio. Tax rate for our GAAP results was 27% and for our nonGAAP results was 31% reflecting the increasing mix of our international business. For Q4 we also expect our nonGAAP tax rate to remain at 31%. Our GAAP earnings were 22 cents per share based on fully diluted share counts of 438 million. Historically we have excluded from our nonGAAP operating results amortization of intangibles in process research and development and stock based compensation. In connection with our acquisitions of KVS we wrote off approximately $11.5 million related to in process research and development. These plus restructuring reversals of approximately $10 million related to facilities totaled $1 million net of tax for Q3. When adjusted for these items our nonGAAP earnings per share for Q3 was 22 cents, up 16% versus Q3 a year ago.

Going forward we expect the aggregate dollar amount of amortization expense from the acquisition of KVS and Envio related to intangibles and stock based compensation to be approximately $12 million in total per quarter pretax. NonGAAP operating margins for Q3 is 27%, down slightly compared to the same period a year ago. We continue to target full year, 2004 operating margins of approximately 28%. Our head count exiting Q3 was just over 7,400. Including the addition of 252 employees from both KVS and Envio. Non acquisition head count increased by 327, over half of which was outside the U.S. We expect to add approximately 100 net new employees in Q4. I will now comment briefly on our balance sheet. We exited the quarter with $2.5 billion in cash and short-term investments. We generated approximately $106 million in cash from operating activities for the quarter. Primary uses of cash this quarter included 220 million -- 221 million for our acquisition of KVS, 35 million for acquisition of Envio in July, and capital expenditures of 31 million. In addition, during the quarter we spent approximately $71 million buying back our stock. As an update on our stock buy back program, we have repurchased approximately 13 million shares as of yesterday, October 25th with an average cost of $19.19 per share for a total of $250 million. As previously disclosed, we have an authorization to spend an additional $250 million which we expect to execute over the next 12 months. Accounts receivable as of September 30 were $205 million. Our DSO was 38 days and included a 3-day impact from the addition of KVS receivables. DSO was also affected by the previously mentioned back end loading of the quarter. For Q4 we expect DSO to be in the upper 30-day to low 40-day range. Deferred revenue was $418 million in September, up from $313 million in Q3 of '03. And down slightly from $423 million in Q2. The $5 million sequential decline is due to seasonality in our maintenance renewal billings.

We expect deferred revenue to be up in Q4. Unfilled license orders and gross deferred license revenue were approximately $76 million compared to $70 million in Q3 '03 and $69 million at the end of Q2. Before turning the call back to Gary, I would like to provide you with an update on the KVS acquisition. We completed the transaction on September 20th. The acquisition did not have a material impact on our Q3 results contributing approximately $1 million in revenue and $2 million in operating expenses. With that said, the early indicators on this acquisition are very encouraging in terms of both customer interest and the ease at which our sales force is able to leverage this acquisition and sales opportunities. For Q4 our revenue expectation for KVS is approximately $8 million after adjusting for the effect of purchase accounting on deferred service revenue. As a result we do not expect KVS to have a material impact on our business in 2004, but we plan to drive the acquisition to be accretive within the next 12-18 months. As Gary will discuss shortly, we are in the middle of our planning process for 2005. As this point when including the impact of KVS for the full year and 2005 we are looking at holding margins flat with 2004 at the 28% level. Meaning margin expansion that we would have expected in 2005 will be reinvested into KVS. Going forward we do not expect to break out the results of KVS from our data protection revenue reporting, but given the initial response from customers we believe that the growth rates indicated by Gartner of 57% compounded growth are realistic for this business. With that I will now turn the call back over to Gary.

Thank you, Ed. Before we open the call up for questions I will provide some perspective for what we see for Q4 and 2005. For a year now we have been talking about driving the business to $2 billion in revenue for 2004 and that continues to be our goal. This target reflects a measured recovery in IT spending and takes into consideration end of year seasonal strength. This leads us to a revenue expectation for Q4 in the range of 530 million to $550 million including KVS. On a nonGAAP basis, the operating margin target for Q4 is expected to be in the range of 27 to 29% resulting in nonGAAP earnings per share in the range of 24-26 cents. GAAP margins are expected to be in the range of 25-27% resulting in GAAP EPS in the range of 22-24 cents. The $2 billion in total revenue for 2004 represents 14% top line growth. Looking forward to calendar year 2005, it is still too early to provide specific guidance for the year as we are currently in our planning process and IT spending for next year is still uncertain. With that said we view next year as another growth year for Veritas, though we may see some shift in the typical seasonal patterns due to an uncertain economic climate and the effect of Sarbanes Oxley compliance. As is normal in our industry, we expect the seasonal sequential decline from Q4 to Q1, the magnitude of which will depend on performance in Q4 followed by stronger results in the second half of the year. We will refine our thinking for 2005 as we get through Q4 and will have better insight into 2005. IT spending projections on our next earnings call. Although the current environment is still challenging, our position as the leader in the storage software market remains strong as demonstrated by our solid performance and strong customer demand for Veritas technology. Operator, I will now turn the call over for questions.

Thank you, sir. Today's question and answer session will be conducted electronically. If you would like to ask a question, please press the star key, followed by the digit 1 on your touchtone phone. If you are using a speaker phone please turn off your mute button to ensure that our equipment can read your signal. In the interest of time, I would like to ask everyone to limit themselves to one question initially and to requeue for any follow-up questions. Once again that is star, 1 to ask a question and we'll pause for just a moment to assemble our roster. We'll take our first question from John Rizzuto with Credit Suisse First Boston.

Yeah, Good afternoon. I guess with the one question I want to go with -- Gary, the sales force around the I3 product line, you feel good that you are headed in the right direction? Is that a function of demand? Is it a function of execution? What are you seeing out there that gives you confidence that this is going to start accelerating?

The answer is it is really both of those, John. Demand seems to be pretty strong out there. There still seems to be a pretty powerful perspective in the market that when it comes to the deep down performance analysis we really do have the best product in the market place to do that performance analysis. On the sales side of it, you know, the way I look at the sales side is our overall Veritas traditional sales force is simply becoming more self-sufficient relative to being able to pitch the products, include it as a standard part of the sales process and be able to explain them and then with the recent announcement of the version 7 product it gives them another reason to reengage in the dialogue with the customers. So if you take kind of all of the self-sufficiency of the sales force together with the new version of the product and together with the, you know, kind of a solid response in the market, and what looks, you know, by all measures for us to have been a pretty good quarter for the APM products it definitely suggests that, you know, we've got this heading in the right direction.

Great. Just a quick follow-up on that. The version 7, when did that become available and does it have a material impact on the results in the quarter?

No it would not have had a material impact in the quarter. It just became available in the last week or two. And, you know, we are just now getting the shipments out there. But obviously our sales force is already talking about it and we have beta customers that have obviously seen the product as well.

Okay. Thank you very much.

Sure.

We'll take our next question from Tom Berquist with Citigroup.

Thank you. Nice quarter, guys.

Thanks.

You had a big upside to the license numbers that I anticipated. Is there a way to quantify whether some of that -- that there is an amount that you can quantify that had fallen out of Q2 that was signed in Q3?

Tom, I guess the best way to kind of describe that is the volume of unshipped orders and deferred license revenue increased by I think $7 million sequentially. So that's probably the best evidence on any kind of roll over basis. The quarter was much more heavily weighted to the end of September than to early July.

Got it. And then as a just a follow-on with the government side of the business, you mentioned it was weaker this year. Is there a way to qualify the magnitude in terms of what the license short fall would have been in the government business?

Well, last year it was a blowout quarter for the government. Way above our expectations and I think frankly the industry's expectations. I don't think we were alone in that regard. This year we saw a sequential increase, but way below, well below last year. And so I think it is frankly a testimony to the fact that the rest of the business did pretty well. Notwithstanding the fact that the government business was off year-over-year pretty substantially. But up sequentially.

Tom, that's pretty consistent with what I think we said at your conference which is, you know, completely aligned to that notion that we just didn't expect this particular year to see the upside out of the government. And that's really what didn't come through is we didn't get any upside performance from it.

Got it. And then on the 8 million you mentioned, Ed, for KVS in the 4th quarter, should we assume that will that fall largely in the license bucket then?

Yeah. I think on a normalized basis, about 75% of the business is licensed. We run into kind of an abnormal issue at least in the first several quarters because of the acquisition accounting around services. So yes is the short answer. It would be predominantly licensed.

And as a reminder please one question initially and requeue if you have any follow-up questions. We'll go next to Neil Harmon with Lehman Brothers.

Nice job. If you could talk about maybe what you're seeing in the market with respect to disk to disk backup and how the SISCO relationship is going. Is that starting to generate significant revenue for you guys?

So on disk to disk backup, disk to disk backup continues to be kind of a topic of increasing interest in our customer base. And I think we are doing a completely effective job of addressing it. As you know, we do kind of both the traditional tape backup and we also very effectively do the disk base backup. And certainly our increased focus on the relationship with network appliance is helpful around the disk base backup area as far as, you know, continuing to kind of address that market space and help customers in that particular area. On the SISCO relationship, I don't think I'd characterize it materially different than we characterized it in the past. You know, we're still in the early stages of that, revenue is very small and that relationship, you know, has still at this stage not matured to, you know, any great degree. It is an early relationship of -- you know, no different than what we said before and we have to continue to watch it and see how it plays out.

Thank you.

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

Hi, Gary. I was wondering if you could give as you sense -- it doesn't seem like you guys are losing market share to Legado and maybe those concerns were over blown following 2Q results. Could you give us an idea though what -- how Lagado has changed the competitive environment in terms of the pricing landscape, if at all for Veritas? Thank you.

Well, you know, on the pricing front, Heather, you know, there is pretty clearly some pricing pressure out in the market place. And I think you are hearing that and I am hearing it from all my -- you know, from a lot of the customers. We are hearing it in the market and I am hearing it from other companies. I see it in our own negotiation process when we're buying technology from other venders. So with kind of a continued constraint around the economy people are going to continue to negotiate and be smart about how they spend money and what they are willing to pay. And I think that's the primary impact on pricing and, you know, whatever pricing pressure we're feeling, I believe is within the norm of what the industry is feeling. And it is certainly from my view doesn't feel like it is being impacted by the Legado revenues. If you look at the absolute numbers on Legado, Legado's license revenue was $42 million. You know, and against our number which was roughly $161 million. And, you know, if you look at kind of the fluctuation year-over-year, you know, we grew 7 million and they grew 5 million in that year-over-year period. So it is just not a number and they don't have enough market share to have that big of an influence on the pricing given our strong market leadership. And then if we take that combined with, you know, what we're seeing as, you know, good indicators of opportunity in the traditional IBM TSM area, you know, you kind of put all those together and it suggests we are dealing effectively with EMC as a competitor in this space and as I indicated in the prepared remarks, we really see, you know, the effect of the EMC as relatively neutral on our business.

Great, thanks, Gary.

Sure.

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

Hi, everybody. Good afternoon. Good quarter. Hey, just a quick question. On the storage management line, you know, 64 million you commented that some business slip. My question is, are you guys seeing more competitive from more bids between Hitachi through AP-IQ. Is that really becoming kind of a battleline for you guys in that area? Or is that really just -- not really a big issue, just more of a timing issue in storage management?

Yeah. I'm thinking a little bit. I mean, I haven't heard that mentioned. So, I really don't think that's where the real impact on the business is. As Ed indicated in his prepared remarks, the real impact is around the big deal flow. And, you know, storage management software when the big deal trends down a little bit so does the storage management software area. And that tends to get wrapped up in more of the standards type of decisions where you standardize on Veritas volume management style system, those kinds of things which tend to be bigger transactions. So I really don't think it is the Hitachi angle you are talking about as much as our big deal flow.

Great, thanks a lot.

The other thing, Bob, is we suffer particularly in that category with some really tough compares. Grew 16% year-over-year last quarter, 37% year-over-year the 1st quarter, 17% year-over-year in the 4th quarter. So we're really looking at some fairly tough compares. The business has been really strong and, again, I think this quarter was somewhat seasonal, somewhat big deal and somewhat tough compare.

Great. Thanks a lot.

We'll take our next question from Curtis Shauger [ph] with CIBC World Markets.

Yes, Good afternoon everybody. Can you hear me okay?

Yep.

One quick question to follow-up on Bob's about the storage management category. It seems as though your relationship with Novell would seem to dove tail into that and they both have a somewhat a common interest in commoditizing Linux distribution and maintaining your market share in file system and volume management. Does that play into your strategy? Or could you just comment on your relationship with them in general?

Yeah, I mean, we have talked publicly about our relationship with Novell around the Susay Linux and we continue to focus on building out that relationship, continuing to offer our technology on that platform. And, you know, in balance with also doing, you know, quite a bit of work around Red Hat, you know, right now in the market place, you know, Red Hat has some pretty significant relationship positions in the Linux distributions. And so, you know, we're clearly seeing more activity around Red Hat than the Novell products, but that's a market share issue. And then for us in general, we continue to view Linux as an opportunity for us as we continue to move forward. We continue to see good results there and, you know, very high growth rates. Although off of a relatively small rates. So there's going to be a little bit of volatility in those growth rates and they're going to tend to be high growth because it is small. But, you know, we kind of like what we see there and we think we're well positioned with both our high availability offerings but also our storage foundations. And as I mentioned, you know, we also just in the recent quarter updated our products around the Red Hat line as well to support some of their newer versions as well. We are just generally well aligned there and I am pretty optimistic how we stand in the Linux space.

Thank you.

Sure.

We'll go next to John Difucci with Bear Stearns.

My question is about KVS. You said it did about 1 million this quarter and you expect about 8 million next quarter. Given that KVS is I think did something like 23 million in 2003 and I believe it was on a run rate of something in the low 40s, it just seems that those numbers seem kind of low. I don't know, do you have any comment on that?

Well, I would start by reiterating what I said earlier which is, we're pretty pumped up about the business. They are the leader in e-mail archiving. They've got a lot of spring in their step relative to momentum. We think it is a great fit with what we're doing. Their audited financials were 23 million and I think we had indicated that our expectation was that that market was expected to grow by something in the kind of mid to high 50s. We endorsed that point of view for 2004 and frankly for 2005. And there is some small hit we take on purchase accounting relative to the service component. But again we're looking at the business with -- you know, with real optimism. The million dollars that we're talking about was largely related to the fact that the deal closed very late in the quarter. And so we got very little revenue contribution from it this quarter. Expect better revenue contribution in the 4th quarter and obviously we're working hard to ensure that we're well integrated and doing our best to get -- to capitalize on it. We also don't want to get ahead of ourselves.

Yeah, everything you said makes sense, but you did have it at the last two weeks of the quarter which are probably the two most important weeks of the quarter plus, I mean, you are going to have it in the 4th quarter and if it was on a run rate and like you said you endorse the high 50% growth rate and actually I think Gary said in the last call that it was growing at greater than that rate so the run rate is somewhere in the 40 millions and assuming, you know, like most software companies that is weighted to the 4th quarter. Granted, I understand the hit you take on purchase accounting, but it seems like -- I don't know. Is there something else going on there or is it conservatism in your outlook for right now?

Let me jump in. I'll take a shot at it from a different angle. I would be a little careful about drawing any conclusions on a acquired business as to what happened between September 20th and the end of the month of September. Just relative to you're closing a transaction, you're bringing a team on board. They have to close the business, but it's -- they are in the Veritas umbrella and they are not a stand alone entity anymore. And so, I think, you know, to over analyze the million dollars would be a mistake. It is also completely consistent with what we said is it would close late in the quarter. We didn't expect it to have any material impact on the quarter and it didn't have any material impact on the quarter. So it is completely consistent with it. So I just think that Q3, you know, what happened in Q3, whatever you want to read into that, I chalk it up to an anomaly of roughly 10 days from an acquisition. And then beyond that, you know, what we look at is, you know, we are integrating the business into Veritas. It is going very well. There is incredibly strong demand and interest for the product and customer base. It is going to take us a little time to sort out how that materializes and converts to revenue and the thing that makes us feel really good about this is it is a business, like a three-legged stool. It addresses the compliance problem which is well known for, but it also plays in very nicely with the backup market and it plays in very nicely to the Windows storage management market. And these are, you know, kind of two areas, the storage and the backup space that we have a sales force that understands completely. So this is a really good fit and, you know, we feel comfortable about it. You know, 57% growth market and our anticipation is to, you know, leverage that opportunity and be a participant in creating that market. I think we are well aligned.

Okay. Thanks a lot.

Sure.

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

I am not good at following rules so I will give you two. The first is if you can comment on the cash flow in the quarter down from about 120 last year and I was just wondering if that is an anomaly and expecting that to snap back this coming quarter and second on the guidance on revenues for Q4, we take out KVS and services, it looks to me as though you are talking about licenses going to be flat to down year to year against what I think is a more normal compare. Am I missing something or are you worried about that kind of softness?

Let me start with the cash flow. I think the principal difference in the cash flow, Drew, is about a $30 million tax payment that impacted Q3 of this year and not Q3 a year ago. As it relates to our outlook for the 4th quarter, you know, at one level, you know, the numbers are the numbers. We're looking at 530 to 550. I think that a reasonable point of view on the services business would be to take the 209 that we reported in Q3 and grow that modestly. I mean, it has been growing at a 5-$10 million level. So that gets you up into the, you know, kind of the teens to maybe 220. The balance is license revenue. And as you say you back out 75, 80, 85% just kind of the KVS number. And you have what you got. The target is $2 billion for the year. And I think that we're looking at a spending environment both in terms of IT and in our markets that are pretty reflective of that level of license growth. And until we see some improvement in the IT spending and in our segment of that market, I frankly don't think we're going to see a big increase in that growth.

Okay. Is there any -- is that weighted toward any product line or is that just kind of a general expectation for all of the product lines?

Yeah. That's license revenue generally.

Okay. Okay. Thanks.

We'll take our next question from Adam Holt from J.P. Morgan.

Good afternoon. Question on the storage management business, given what you said about, you know, obviously the difficult comps but also the large deal environment, can we read anything into that from a product perspective? Was maybe core storage a little bit stronger and some of the ancillary products that might be sold with larger deals a little bit weaker?

You know, I have looked at the numbers from a couple different angles and kind of what transpired there. I don't know that there is a lot of trend analysis you can read into it. Whenever we get the volatility in our big deal flow, the large transaction flow we tend to get volatility in a couple different places, this being one of them. So that's the primary indicator versus any particular product. We mentioned, you know, in some of the opening comments or I should say I mentioned the performance around the Opforce technology and the fact that we saw, you know, kind of our first million dollar deal. That -- a new product, you know, in this kind of storage management, server management related areas. So, you know, all indicators are, you know, good market out there. And its, you know, fluctuation predominantly based on big deal flow.

And Ed given what you said about the back end loaded nature, can you comment on what the book to bill looked like in the quarter?

Well, again we exited the quarter with $76 million in unfilled licenses and deferred license revenue. That is about $7 million higher than last quarter, so in other words that grew by about $7 million.

So any bookings that not on the balance sheet are immaterial?

They would be included in this unshipped license revenue.

Great. Thank you.

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

Thank you very much. I get the feeling that some investors may be concerned about the ex KVS year to year license growth in Q4 being maybe being single digit, low single digit. But is it fair to say that you were shocked, if that is the right word by EMC Lagado earlier in this year and now you learned how to compete in the backup market better and maybe you can talk about your long-term growth rate and data protection that you expect? Thank you.

Let me jump in there. I would not apply the shock term at all. My thoughts on that, we have been saying and I don't think there has been any fluctuation on it from the day that acquisition was announced that we thought it would have a relatively neutral effect on our business and I continue to believe it is having a relatively neutral effect on our business. You know, clearly it had some degree of impact relative to selling into the traditional EMC account base. But I believe that's been more than offset by allowing us to get closer to network appliance, get closer to Sun, get closer to HP. There is a lot of people -- a lot of other vendors, in particular the hardware vendors that saw EMC's move to Lagado to be, you know, very threatening to their storage business, their hardware business which put emphasis back on the Veritas relationship. So I think that's been generally positive. As I mentioned in the IDC report, we gained market share during the last kind of 12-month period that IDC measured it. So we picked up market share. They are still in the number 4 position in the storage software market. I have seen very few software technology markets where the number 4 player in the market has dramatic influence on the overall market. And then the other rumor that we just keep responding to through results really quarter after quarter is that they are coming after our channel and our channel business continues to be very strong. I think as I mentioned before I think it was up, if I remember, 18%, you know in this last period. So very strong channel performance and, you know, a good chunk of our revenue in the backup business comes to the channel. That's been strong as well. So you know, really no surprise and no change in our ability to sell backup products. It is very strong and I am very, you know, I'm happy with the way the business is performing and again relatively neutral effect there. And I get a little added optimism around my business in that area given what I'm seeing in some of the traditional big stronghold IBM accounts which is where our competition really is in the market because they are the number two player.

Thank you.

Sure.

And we'll go next to Kevin Buttigieg with AG Edwards.

Thank you. Within the data protection business, I was wondering if you could contrast the growth rates within the U.S. versus internationally as well as contrast the competitive environments, U.S. versus internationally for data protection as well.

Yeah, we don't break out the -- as I think you know we don't break out the numbers at that level of granularity. At a kind of qualitative basis on the competitive landscape, pretty consistent competitive landscape around the world. We saw, you know, good transaction flow through the channel and good transaction flow through the larger transactions in the backup space throughout the world. You know, this kind of increased interest I would say around some of the stronghold IBM accounts we saw certainly more of that in the U.S. than we saw overseas, but that's where I would expect to see it as well. So really nothing surprising in the trend data there.

Well, with the -- if I could just follow on that then, with the better two tiered distribution growth, you know, 18% and the data protection licensed growth that you showed, I mean, it would sort of suggest that the direct data protection business was a bit weak. Is that all attributable to the government business a year ago? Would that suggest that the government business was disproportionately data protection business?

Well, I think if you look at the U.S. license revenue which was down year-over-year and obviously half of which or more was data protection related, that is certainly due in strong part to the fact that the government business was down year-over-year. So, I mean remember data protection is roughly half of the business. So, it mirrors to a certain extent the relative license performance by geography or by channel. So I think the short answer is, yes, the government had a disproportionate effect in the U.S.

And on data protection?

Well, certainly half of it. Would be related to to data protection.

Okay. Thank you.

We'll go next to Mark Kallaher with Adams Harkness Hill.

Thanks. If I could go back to the number of deals greater than a million, is the volatility, talking about the volatility around that, is that a change in customers adoption? Is that a change in customer buying patterns and if it is, does that put a systematic impediment into your ability to grow the management and utility computing parts of your business?

The answer is no. This is a number that fluctuates. I'm looking at trend lines over the last, you know, couple years even, and, you know, kind of a 10-15 range is pretty normal. We had an anomaly in Q1 of '04 at 25 deals over a million dollars and so kind of the 11-15 is actually kind of right in there as, you know, pretty normal, pretty standard. So that's where it tends to fluctuate in set. So I don't really see it as an impact there. The other thing that Ed made a comment about which we didn't link the two together, but there's certainly a relationship to them is unfilled license orders. And if you take unfilled license orders combined with the quarter being somewhat back end loaded, you know, clearly some of the big deal activity came in late in the quarter and did not shift during the current period.

Okay. Thanks.

Sure.

We'll take our next question from Clay Sumner with FBR.

Thanks very much. Can you talk about what percent of the ATM revenue is associated with the large deals over a million? Are you starting to see any smaller one off deals in that area or is it still pretty much a product that tends to get bundled with larger deals?

I don't have a specific break down of how many of the big deals pertain to that either over the hundred thousand or over the million dollar range. But the big deal activity was pretty good. The answer is we see a pretty good mix in that business and the reason you see a good mix in the business is a lot of the business and a lot of the revenue that comes in with the ATM products is repeat revenue from within the existing customer base. And has been the case really since we acquired it and we continue to see transactions around the globe where customers are simply adding on additional licenses. I was in the Asia Pacific region during the last period and, you know, one of the banks back there, you know, just routinely they did an order in the hundred thousand dollar range, simply adding on a couple more modules on to a couple more platforms and that's just repeat business that came in. It was not aggressively sold and we're servicing an installed customer base. And so that tends to drive a pretty good mix in that business.

Okay. Thank you.

We'll take our next question from Kaushik Roy with Susquehanna.

Thank you. You know, G&A expense went up close to 3 million. What are your expectations for Q4?

I would think the G&A expense for Q4 would be relatively flat to slightly down. I think as you know that over time we're trying to manage the G&A line items as a percent of revenue. Down substantially. This quarter I think it actually hit 10%. We would like to see it closer to 7% in a long-term basis. So I would expect to see that flatten out and start to come down. Probably not in absolute dollar terms over the long-term, but certainly in percentage terms and in Q4 I think flat to down in dollar terms.

Okay, great. Thank you.

Sure.

We'll take our next question from Dan Renouard with Robert Baird.

Hi, thanks. Can you expand a little bit on your comments? You mentioned a few times that you're excited your TSM opportunities and competitive situations. What is happening or why -- what has changed I guess to lead you to think that that's a bigger and bigger opportunity for you competitively?

The thing we have seen in those particular accounts is that we have seen a couple replacements. We have seen a couple standardizations where the account was predominantly TSM and had a relatively minor Veritas component. You went with Veritas as kind of the standard deployment through the company. So we have seen it on kind of a combination of customer interests when we are out doing sales6 calls. We are seeing in deal activity. We're actually closing transactions and actually seeing some replacement type activity and then again winning kind of some of the standard decisions where we're up against that as a competitor. And I'm not really -- it is a little premature to kind of know why we are seeing it. As a practice when we see a stronghold TSM account, we typically don't go in and try to force a replacement. Backup products tend to be pretty sticky. When we see a traditional TSM account we tend to go in and sell storage software, high availability, application performance management and, you know, if the customer asks us to look at their backup environment we go do that. And that's really what we're seeing is, you know, more and more customers asking us to go ahead and take a look at that and see if we can help them in that particular area. So just good strong customer interest.

I guess my question is, it doesn't sound like things have changed that much and maybe your point is just that the -- your competitive opportunities versus TSM are much larger than Lagado in terms of impact to your business. Is that kind of the broader point?

I'm not sure I follow your question. The reality is in the TSM space, and yeah, I don't want to over blow, you know, kind of that opportunity or inflate the opportunity. It is an area of the business where, you know, at the high end of, you know, kind of your top end accounts running backup you don't typically see a lot of changing around and venders shifting there. Yet we have had good success recently in some of those accounts. That leads me to believe that there is probably, you know, something happening in either their products or their customer relationships that might be opening a window or opening a door for us to kind of expand our business in that space. What is happening at that high end of the market against, you know, TSM has, you know, essentially almost nothing to do with what we see relative to the EMC Lagado business.

That's fair. Thanks.

And we'll go next to Christopher Russ with Wachovia Securities.

Thank you. Gary, a question on the storage management revenue. I guess, you know, that declined 13% sequentially to 64 million. Would you expect it to stay at this lower level in future quarters and was there any impact from Sun Solaris systems and sort of was that a factor in the quarter? Were there other factors that were impacting that line item?

Yes. I'm just looking quickly across, you know -- I don't want to call it a trend line, but just across kind of the last 7 or 8 quarters and I see numbers ranging anywhere from 61 to kind of 83, $84 million. And I see numbers starting with a 6, you know, 1, 2, 3, 4 different times within that range. So it certainly fluctuates around, it is, as I indicated previously, predominantly tied around this big deal flow. We've said that a number of times. That is the primary indicator. Relative to the impact on Sun, you know, Sun had some, you know, kind of decent results and our Solaris revenue grew. It is clearly not an impact of the Sun environment. Our AIX and HP numbers tend to be more volatile because they are off a smaller basis.

So Solaris grew. Do you expect any impact from Solaris 10 or really neutral?

We haven't really seen any kind of release after release of new -- Sun release any real impact. You kind of have to remember that in a typical customer even if they start on a new machine adopting Solaris 10 they don't immediately upgrade everything else from 7, 8 or 9 on Solaris. They tend to leave it alone. So, you know, our competitive advantage is go back so far into the Sun revenue -- into the Sun customer base on releases that were even in some cases before Sun even had products that we have a very strong position in the Sun market irrespective of what Sun thinks they are doing in that space.

Okay. Thank you.

Sure.

Thank you. That is all the time we have for questions today. At this time I would like to turn the conference back over to the speakers for any additional or closing remarks.

Okay, well thank you very much. We appreciate you all joining us. We are obviously, you know, happy with our results and happy with the kind of change in the trend there from the 2nd quarter. So thanks again for joining us and we look forward to talking to you on our Q4 call. Thanks.

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