Introduction Helyn Corcos, Vice President Investor Relations Good afternoon, and thank you for joining our call to discuss fiscal first quarter 2011 financial results. With me today are Enrique Salem, Symantec s President and CEO and James Beer, Symantec s Executive Vice President and CFO. In a moment, I will turn the call over to Enrique. He will discuss how Symantec executed during the quarter, then James will provide highlights of our financial results as well as discuss our guidance assumptions as outlined in the press release. This will be followed by a question and answer session. Today s call is being recorded and will be available for replay on Symantec s investor relations website at www.symantec.com/invest. A copy of today s press release and supplemental financial information are posted on our website. And, a copy of today s prepared remarks will be available on our investor relations website shortly after the call is completed. Before we begin, I d like to remind you that we will review our financial results focusing on year over year constant currency growth rates unless otherwise stated. Sequential growth rates are based on as reported results. For the June 2010 quarter, the actual weighted average exchange rate was $1.26 per Euro, and the end of period rate was also $1.26 per Euro compared to our guided rate of $1.35 per Euro. For the June 2009 quarter, the actual weighted average rate was $1.37 per Euro, and the end of period rate was $1.40 per Euro. We ve included a summary of the year-over-year constant currency and actual growth rates in our press release tables and in our supplemental information. As a reminder, we will provide a currency update following the end of each quarter. This will be posted on our website s quarterly results section. Given the rapidly fluctuating exchange rate environment, we encourage everyone to apply our rules of thumb as a guide to estimating the impact of currency fluctuations on our financial metrics once the quarter has ended. Moving on, some of the information discussed on this call, including our projections regarding revenue, operating results, deferred revenue, cash flow from operations, amortization of acquisition-related intangibles and stock-based compensation, for the coming quarter contain forward-looking statements. These statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in the statements. Additional information concerning these risks and uncertainties can be found in the company s most recent periodic reports filed with the U.S. Securities and Exchange Commission. Symantec assumes no obligation to update any forward-looking statements. In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, Symantec reports non-gaap financial metrics. Investors are encouraged to review the reconciliation of these non-gaap financial measures to the most directly comparable GAAP results, which can be found in the press release and on our web site. And now, I would like to introduce our CEO, Mr. Enrique Salem. 1
Enrique Salem, President and CEO Thank you, Helyn, and good afternoon, everyone. I would like to start off by highlighting our key priorities for fiscal 2011. These priorities are: extending beyond the PC in consumer security, growing license sales, expanding the adoption of our SaaS offerings, and simplifying the customer and partner experience. While we made progress in some of these areas during the June quarter, a number of enterprise deals slipped due to longer than expected customer procurement cycles driven by continued cautiousness among IT buyers. In particular, this affected our storage management results. With that said, we are confident that these deals have not been lost to competitors, in fact, we have closed many of them in July. Having said that, highlights for the quarter included strong results in our Public Sector business and continued strength in DLP and SaaS. In addition, we are beginning to reap the rewards of our new backup solutions and are pleased with the steady growth in the consumer business. The integration of PGP and GuardianEdge is off to a great start with customers excited with the addition of new encryption offerings to our portfolio. We are pleased with the year over year growth in Public Sector deals for state, local, and federal governments. We signed a multi-year contract with the US Marine Corps who chose to use NetBackup with their Enterprise IT Services program. In addition, SESCAM, a Public Health Care Department in Spain, signed a multi-year contract spanning across our endpoint security, backup, storage, and services offerings. Our recent acquisition of GuardianEdge is resonating well within the government sector due to the adoption of standards-based solutions and increased regulatory encryption requirements. This positions us well for the federal government fiscal year end in September. In our Enterprise Security segment, we continue to do well in the large and midsized enterprise market segments. In particular, customers are adopting DLP, which generated another strong quarter of double-digit growth. Our DLP solution continues to shift the focus of security from simply locking down infrastructure to protecting the information itself. As a result, we are leveraging our relationships with CISOs to sell our data protection suite along with our endpoint security, management, and compliance suites. Customers are increasingly turning towards vendors that offer complete Security solutions vs. point product tools. Our suites enable customers to protect completely, manage easily, and control automatically the assets most crucial to their business. We are seeing higher net promoter scores for our enterprise security suites, driven by the recent improvements in the customer experience and quality. We continue to address the SMB market by increasing our focus with channel partners. For example, we have expanded our small business specialization partner program. More and more small business customers are increasingly adopting managed services to reduce upfront licensing costs and operational expenses. As a result, we expanded our service provider program enabling our partners to offer customers a monthly subscription. This licensing model aligns with the way these partners do business with their customers. 2
The Symantec Hosted Services business posted strong double digit revenue growth. Our performance was driven by Hosted Email Security and newer products such as Web Security. In the last 12 months, we grew our customer base by 50% and we remain the clear leader in this fast growing market by gaining share from our competitors around the world. In May, we launched our internally developed Symantec Hosted Endpoint Protection solution. The early response from our customers has been very positive due to its ease of use and lighter footprint on the endpoint. Our Hosted Endpoint Protection solution was jointly developed leveraging the combined expertise of our enterprise, consumer and hosted services teams. We will continue to expand our portfolio by delivering additional hosted services such as data loss prevention and archiving. I am pleased with the progress we are making in this part of the business. Now, moving on to our backup and archiving business. Backup Exec posted double-digit bookings growth year-over-year across all geographies. Backup Exec 2010 has been one our strongest backup releases to date. There have been more than 155,000 installations since its February release. Small and medium sized organizations are excited about our ability to simplify data management through integrated deduplication and archiving as well as virtual machine protection. We will continue to educate and engage our partners on the new features and benefits of the product. Since the launch of NetBackup 7, we have seen more than 2,350 installations and over 12,000 customers are evaluating the product, representing approximately 25% of the NetBackup installed base. Customers value the improved storage efficiency with integrated deduplication, greater infrastructure utilization, and faster recovery times which reduces the total cost of ownership. We expect this release to benefit us in the second half of the fiscal year. In the September quarter, we expect to ship a new version of our archiving product, Enterprise Vault 9.0. With this release, we plan to include support for Exchange and SharePoint 2010, enhanced deduplication, and additional e-discovery capabilities. These features will make it easier for our customers to adopt and standardize on our archiving solution. Our Consumer business generated another quarter of solid growth, driven by our award-winning products, superior user experience, and multi-channel strategy. We continue to enter into agreements that are beneficial to both Symantec and our partners. As we announced in June, we are pleased to have extended our worldwide consumer security relationship with HP for another three years. This quarter we expanded our security OEM relationship with Toshiba to include Norton PC Checkup in the U.S., Australia and New Zealand. Norton PC Checkup helps customers become aware of PC performance problems and recommends possible solutions. This is an opportunity to up-sell our Norton security, backup and remote service offerings. Our PC Tools business achieved double-digit revenue growth this quarter. We are leveraging Symantec s extensive distribution network to distribute PC Tools. For example, PC Tools is now being sold in retail stores in France, Spain, Portugal and Hong Kong taking shelf space from competitors. We also introduced PC Tools into the Japanese market through a co-branded 3
security solution with BBSS, a Softbank group company, displacing our largest Japanese competitor. We completed the transition to our ecommerce platform in June as planned. The performance from our online store is surpassing our expectations. We can tailor the user experience depending on where the customer acquired our product to maximize customer spend and improve close rates. I am very proud of the team s strong execution on this very strategic initiative. I am pleased with the progress we have made since closing the acquisitions of PGP and GuardianEdge in early June. Through the efforts of our integrated sales force, we exceeded our bookings expectations. The acquisitions generated revenue of $4 million and diluted EPS by half a penny, in-line with our plans. Encryption is being sold by the combined sales force and the integrated product roadmap is complete. Customers and partners are responding well and I am pleased with how we executed so far. The acquisition of VeriSign s security business is on track to close shortly. I am very excited about adding identity security to our portfolio as it strengthens our core value proposition in securing and managing information. By bringing together our security portfolios, we will be the only company capable to protect identities online and create hassle-free experiences for our consumer and enterprise customers. I look forward to updating you on this acquisition in subsequent quarters. In conclusion, we remain confident in our strategy and vision of securing and managing information and identities. We are focused on delivering industry leading products, integrating technologies, and cross selling the portfolio. I am confident that we have laid the foundation to continue to improve execution in the September quarter. I ll now turn over the call to James too provide the financial details of the quarter. James Beer, EVP & CFO Thank you Enrique and good afternoon everyone. In the June quarter, we saw strength in our backup, data loss prevention and public sector sales. In addition, our Software-as-a-Service offerings posted double-digit growth. However, these positive developments were offset by the longer enterprise procurement cycles that Enrique referred to. Given the relatively high volume of our business that typically gets booked during the last week of a quarter, the additional time taken by some of our corporate customers impacted the June quarter s results. This buying dynamic was primarily a factor at some of our larger customers who typically buy products such as our Storage Management offerings. GAAP revenue was $1.43 billion and increased 2% in constant currency terms versus the June 2009 period. The US dollar strengthened 8% against the Euro as compared to the year ago period, reducing our international revenue as measured in US dollars. As a result, foreign currency movements negatively impacted revenue growth by 2 percentage points year-over-year. 4
Net income was $284 million resulting in fully diluted non-gaap earnings per share of 35. The reversal of accrued interest related to the successful outcome in our Veritas 2000 to 2001 tax case added a one-time tax benefit of 1 to this quarter s non-gaap earnings per share. Other one-time tax benefits recorded during the quarter generated another half a cent of EPS benefit. Looking at our geographic results, international revenue of $711 million increased 3% yearover-year and accounted for 50% of total GAAP revenue. Revenue increased 2% year-over-year in each of our three geographies, the Americas, EMEA, and Asia Pacific Japan. Now, I d like to move on to our GAAP revenue by segment. The Consumer business had another strong quarter generating revenue of $473 million, up 7% versus the June 2009 quarter. With the launch of our ecommerce solution, our renewal and upselling efforts continued to perform well. For example, our Norton 360 revenue grew 22% versus the reported results in the year ago period, and accounted for approximately 40% of total consumer revenue. Our enterprise business, generated a total of 245 transactions valued at more than $300,000 each, down 6% year-over-year. 37 of these transactions generated more than $1 million, down 30% year-over-year. The lengthening procurement cycles that I mentioned earlier particularly affected the number of large deals closed this quarter. The Storage and Server Management group generated revenue of $524 million and declined 3% as compared to the June 2009 quarter. We experienced fewer new license sales in our storage management business however, our newly refreshed backup products performed well. Our midmarket product, Backup Exec generated double digit bookings growth as a result of the successful launch of the 2010 product. New releases of our enterprise scale Net Backup product tend to be gradually adopted by data center managers over 12-18 months, although we are pleased with our early deployment results and with the positive customer reaction we ve seen thus far. The Security and Compliance group generated revenue of $340 million equivalent to an increase of 2% year-over-year driven by strong growth in both Data Loss Prevention and Hosted Services. The percentage of Symantec Hosted Services bookings driven by referrals from the on-premise sales force increased sharply year-over-year. Our Services business generated revenue of $96 million an increase of 2% as compared to the June 2009 quarter. We have received positive feedback on our recently launched partner-led consulting program, and we believe that our core software business will benefit from the resulting strengthening relationships with our partners. Turning now to margins. Non-GAAP gross margin was 84.9% for the June 2010 quarter, down 30 basis points from the year ago period. Cost of Goods Sold increased as this line item now includes credit card fees driven by our new e-commerce store and also reflects our increased investment in offshore technical support centers. Our non-gaap operating margin of 26.5% in 5
the June 2010 quarter was down 60 basis points year-over-year driven by higher consumer OEM fees. Cash flow from operating activities for the June quarter totaled $335 million. Cash flow was negatively affected, year-over-year, by higher OEM fees and cash taxes. We exited the June quarter with approximately $2.74 billion in cash, cash equivalents and shortterm investments. During the quarter, we spent $362 million to acquire PGP and GuardianEdge. In addition, we spent $200 million to repurchase nearly 14 million shares at an average price of $14.49. We have $547 million remaining on our current board authorized share repurchase plan. GAAP deferred revenue at the end of June 2010 was $3.0 billion, up 3% year-over-year. GUIDANCE: Now, I d like to spend a few minutes discussing our guidance for the September 2010 quarter. We are assuming an exchange rate of $1.26 per Euro for the September 2010 quarter versus the $1.44 per Euro that we experienced during the September 2009 quarter equivalent to approximately a 13% currency headwind. Also, the end of period rate for the September 2009 quarter was $1.46 per Euro versus our $1.26 per Euro assumption equivalent to approximately a 14% currency headwind. Our guidance assumes a common stock equivalents total for the quarter of approximately 790 million shares and an effective tax rate, before consideration of any loss from our joint venture, of 28%. The acquisition of VeriSign s Identity and Authentication business is on track to close shortly, and therefore we have already included approximately two months of revenue and contribution from the VeriSign assets in our guidance. Thus, for the September 2010 quarter, we expect GAAP revenue to be in the range of $1.445 to $1.465 billion, as compared to revenue of $1.47 billion during the September 2009 quarter. We are expecting PGP and GuardianEdge to contribute $10 million and VeriSign s security assets to contribute $16 million to our September quarter revenue. These acquisition related assumptions are already included in our revenue guidance. We expect year-over-year revenue growth to be down 1 to 2% on an as reported basis, and up 1% to 3% on a constant currency basis. GAAP earnings per share are estimated to be between 9 and 10 as compared to 19 cents in the year ago period. Non-GAAP earnings per share are estimated to be between 27 and 28, as compared to 36 in the year ago period. Our September quarter EPS guidance already includes four cents of dilution as a result of our three new acquisitions. Specifically, we are expecting VeriSign to dilute EPS by 3 and PGP and GuardianEdge together to dilute EPS by 1 in the September quarter. We expect GAAP deferred revenue to be between $2.830 and $2.860 billion, compared to $2.9 billion at the end of September 2009. We expect deferred revenue to be down 2% to 3% on an as reported basis, and up 2% to 3% on a constant currency basis. We expect approximately 70% or $1.03 billion of our September quarter revenue to come from the balance sheet. In closing, we are very focused on quickly and successfully integrating our recently announced acquisitions while also executing on the growth opportunities inherent in our core business. We 6
will continue to redirect our spending to areas with the best growth opportunities as we benefit from the various cost reduction initiatives that are driving additional efficiencies across the business. And now, I ll turn it back to Helyn so that we can take some of your questions. Hand over to Helyn for Q&A Thanks. Operator will you please begin polling for questions. While the operator is polling for questions, I d like to update you on a few upcoming events. We will be presenting at the Citi Conference on September 8th. And, we will be reporting our fiscal second quarter results on October 27th. For a complete list of all of our investor related events, please visit our events calendar on the IR website. Operator, we are ready for the first question. Return to Enrique Salem for Final Remarks Thank you everyone for joining us on the call today. While the June quarter was challenging, we remain focused on our key priorities. The consumer and enterprise products we offer are more capable and valuable to our customers than ever before. And our recent acquisitions strengthen our product portfolio, enabling us to better serve our customers. I look forward to speaking with you again soon. Thank you very much. Thank you Please direct all questions to investor relations at 650-527-5523. 7