Earnings Labs

Gen Digital Inc. (GEN)

Q4 2008 Earnings Call· Wed, Apr 30, 2008

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Transcript

Operator

Operator

Good day everyone and welcome to Symantec’s fourth quarter and fiscal year end 2008 earnings conference call. (Operator Instructions) At this time I would like to turn the call over to Ms. Helyn Corcos, Vice President of Investor Relations.

Helyn Corcos

Management

Good afternoon and thank you for joining us. With me today are John Thompson, Chairman of the Board and Chief Executive Officer of Symantec; Enrique Salem, Chief Operating Officer; and James Beer, Executive Vice President and Chief Financial Officer. In a moment I will turn the call over to John. He will provide high level comments on our fiscal fourth quarter and year end results which ended March 28, 2008, as well as provide an overview of objectives for fiscal year 2009. Enrique will follow with highlights and James will wrap it up with a review of the financial details and a discussion of our guidance 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 homepage at www.symantec.com/invest. A copy of today’s press release and supplemental financial information are available on our website and a copy of today’s prepared remarks will be available on the Investor Relations website shortly after the call is completed. During the March, 2008 quarter we modified the definition of our segments in order to best focus our efforts and maximize the cross-utilization of our resources and expertise. We consolidated two of our business segments, the Security and Data Management Group and the Altiris Group into one segment called the Security and Compliance Group. We also moved our Backup Exec product from the Security and Data Management Group to join our Net Backup Products in the Server and Storage Management segment. Our Consumer and Services segments remain unchanged. We provided historical compares for these new segments in our press release and supplemental information which has been posted on our website. Before we begin I’d like to remind everyone that 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 contains 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 US 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 principals or GAAP, Symantec reports non-GAAP financial results. 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 website. And now I would like to introduce our CEO, Mr. John Thompson.

John Thompson

Management

Thanks Helyn and good afternoon everyone. We are pleased to announce another record revenue and earnings quarter for Symantec; our fifth in a row. More importantly we were quite pleased with the momentum we’ve built over the past several quarters and I’m particularly proud of our team and their efforts and accomplishments. This performance is a great close to fiscal ’08 and a good start to fiscal ’09. In addition to strong revenue and earnings results, our deferred revenue and strong cash flow generation during the March quarter underscore the strength of our business. This strength was driven by our broad portfolio of offerings and continued focus on solid execution. In addition to continued solid performance in our consumer segment, there were a number of key product areas that delivered strong double-digit growth including email archiving, storage management, backup, and systems management. Throughout fiscal year ’08 we made significant progress in cross-selling and up-selling an expanded portfolio of Symantec’s products and services to both new and existing customers. In addition adjustments to sales and marketing programs as well as improved execution fueled more than 1,500 large deals during the year. We fortified our strength at the endpoint with the addition of Altiris and Vontu. We believe the combination of Symantec and Altiris will enable our customers to better manage and enforce security policies at the endpoint, identify and protect against threats as well as remediate and manage IT assets. Vontu has enabled us to immediately achieve a leadership position in the rapidly growing market for data loss prevention solutions. These transactions represent a natural extension of our security strategy and reflect the way our customers have told us they want to manage their infrastructure. We launched innovative new products in areas of the market where we already have strong leadership…

Enrique Salem

Management

Thanks John and good afternoon everyone. I am very pleased with the strong performance or our team during the March quarter. Sales execution continued to show improvement around the world with all regions posting double-digit revenue growth. In addition there were a number of key product areas that generated strong growth. These include email archiving, backup, storage management, systems management, and consumer. Each of these products have one thing in common; they are industry leading and allow our customers to secure and manage their information. We continue to execute better than expected in the archiving market and are winning against our competitors. Our market-leading product Enterprise Vault had another very strong quarter with our revenue growing faster than the market growth rate. The ever increasing demands on long-term storage of email combined with increasing regulations around compliance and e-discovery continue to drive the demand for this product. We have been the only vendor positioned in the leadership category of Gardner’s Magic Quadrant for four years in a row. Enterprise Fault is recognized as the leading archiving product by Gardner, IDC and Forrester. Our market-leading data protection franchise which consists of Backup Exec and Net Backup posted solid results and grew by double-digits year-over-year on a revenue basis. We intend to leverage these technologies such as continuous data protection, de-duplication, and virtual platform support across both product sets and also align our ongoing go-to-market activities to further capture market share and extend our leadership position. In the March quarter we released Backup Exec 12.0, the first fully certified backup product for the newly released Windows 2008 Server. The release is a great example of how we’re leveraging and integrating technologies across our product portfolio. For example, this new version of the Windows backup product is integrated with our threat con sensor…

James Beer

Management

Thank you Enrique and good afternoon everyone. I am pleased to report solid execution on each of our four key financial metrics. In fact this is the fifth quarter in a row in which we have met or exceeded our revenue and earnings guidance demonstrating our focus on consistent execution. In addition we continue to improve the efficiency of both our operations and our cost structure. Now first I’ll review the financial details of the March quarter. GAAP revenue for our March, 2008 quarter was $1.54 billion. Non-GAAP revenue grew 13% over the March, 2007 period to $1.548 billion. Foreign currency movements positively impacted non-GAAP revenue by six percentage points year-over-year. The March quarter’s fully diluted GAAP earnings per share were $0.22. Non-GAAP fully diluted earnings per share for the quarter were $0.36, up 50% year-over-year. International non-GAAP revenue of $813 million grew 15% versus the year-ago period with all regions posting double-digit growth. International revenue accounted for 53% of total non-GAAP revenue. We were also particularly pleased that the America’s grew 10% year-over-year. Now I’d like to move on to our non-GAAP revenue by segment. The consumer business generated record revenue of $449 million, up 10% versus the March, 2007 quarter. Electronic distribution represented nearly 75% of consumer revenue and grew 12% as compared to March, 2007 driven primarily by strong activity from our subscription renewals, ISPs and OEMs. In the enterprise arena the breadth and quality of our security, availability and services solutions continues to drive the number of our large transactions. In the March quarter we generated a total of 449 transactions valued at more than $300,000 each, up 15% compared to 391 deals in the year-ago quarter. We generated 115 deals worth than $1 million each, up 14% compared to 101 deals in the March, 2007…

Helyn Corcos

Management

While the operator is polling for questions I would like announce that Symantec plans to attend the Merrill Lynch Conference on May 6th and JP Morgan’s Conference on May 19th. In addition we will be hosting our Annual Analyst Meeting on June 12th in Las Vegas. This event is by invitation only and registration is required. If you would like to take advantage of the special hotel rate for this event we encourage you to register by this Friday, May 2nd. A live webcast and replay of the event will be available on the Investor Relations homepage for those who cannot attend. Finally we will be reporting our fiscal first quarter results on July 30th. For a complete list of our Investor related events, please visit our Events calendar on the website.

Operator

Operator

(Operator Instructions) Your first question comes from Sarah Friar - Goldman Sachs

Sarah Friar - Goldman Sachs

Analyst

I’d like to just ask on the Enterprise Security side, so how far along are we in the SEP11 upgrade cycle, can you give a sense of penetration and then as customers have upgraded can you also give a sense for how many have taken newer products like NAC or Altiris for example?

John Thompson

Management

We shipped about 21 million clients in the most recent quarter which was down a little bit from the December quarter but that’s a function of December being a seasonally strong renewal period if you will. So SEP is doing quite well in its first two quarters in the market. The NAC component is getting very, very strong lift in the marketplace and its helping us to drive higher unit value if you will per endpoint sold. So we’re quite pleased with the early receptivity of NAC and would expect that to continue certainly as the product continues to mature in the market.

Sarah Friar - Goldman Sachs

Analyst

And just on that 21 million clients this quarter and then what you had in December, penetration wise is that a quarter in, a third in?

John Thompson

Management

Well we don’t typically give numbers on the install base but let’s put it this way, we think we have close to 100 million users out there on the enterprise side so with 40 plus million to date that might give you a sense of where we are.

Sarah Friar - Goldman Sachs

Analyst

Just on the op margin side, James terrific job year-over-year, what’s kind of the goal as you look forward over longer term in terms of how much more upside could we get to operating margins?

James Beer

Management

Well one of our financial objectives is to improve operating margins by around 100 basis points each year and obviously we’re pleased that we have been able to deliver that in fiscal ’08 and that’s the plan going forward.

Operator

Operator

Your next question comes from Heather Bellini – UBS Heather Bellini – UBS: Just a follow-up to Sarah’s question you were just referring John to an uptick in the average unit value that you see as people are adopting the NAC offerings, could you give us an idea of what that uptick in average unit value is?

John Thompson

Management

Well competitively I’d really rather not start to talk about what kind of price yields we were seeing in the marketplace, I just don’t think in light of the economic environment that’s in our best interest. But I do think its fair to say that the combination of SEPT and maintenance price increase that we’ve built in and NAC are helping us drive higher price yield per endpoint. That’s ultimately the objective.

Enrique Salem

Management

It also varies by the size of deal that we do. Heather Bellini – UBS: I was listening to James’ comment, you’ve now had two very strong quarters in a row, not just revenue and EPS but also deferred, there’s really nothing to complain about when you look at these numbers, and I guess this is the level of consistency that I know the market’s been waiting for, I was wondering if you could share with us what you think has changed that has enabled this to happen? What do you think, where do you think you are in the process of taking this to the next level and having this consistency going forward?

John Thompson

Management

Let me beg to differ with you just a little bit, this is the fifth consecutive quarter beating all four of our primary metric. So while March was strong, and December was strong, we have had five consistent… Heather Bellini – UBS: I was referring to September when you lowered guidance to December, so in terms of everything connecting together.

John Thompson

Management

But let’s get to the second question which is where do we think we are. We think we are in terrific shape. We have a very strong pipeline coming in to this quarter. The sales leadership team around the world is really, really operating quite well. We just finished our worldwide sales kick off for this fiscal year. It was probably the most exciting kick off I’ve ever attended in the 37 years I’ve been in this business and so I’m pleased with where our company is. The back office is working well. The front office is doing well and the guys are building some pretty innovative products day in and day out so all in all I think we’re on a roll.

Operator

Operator

Your next question comes from Brett Thill – Citigroup Brett Thill – Citigroup: John just in your comments on the strong pipeline can you just contrast the demand environment when you look at the US versus EMEA and APAC?

John Thompson

Management

We don’t see any real distinction between the regions of the world given candidly the product portfolio that we have, our products tend to be the hygiene components of every IT infrastructure. You must secure and manage the digital content that you’re creating regardless to whether you’re a small business or a large business or a consumer. And so around the world there’s fairly even pull on the reins from a demand perspective. We would expect Asia to continue to do well given that those are economies that are growing faster than anywhere else in the world. Japan and Germany continue to be challenging environments but nonetheless overall EMEA and APJ are doing well. And candidly the leadership change that we made in the America’s what Bill has done with his team has really got the America’s on track and we’re quite pleased with their performance.

Operator

Operator

Your next question comes from Israel Hernandez - Lehman Brothers

Israel Hernandez - Lehman Brothers

Analyst

Can you comment on what you’re seeing in the SMB channel, a number of companies have commented that they were beginning to see some signs of weakness there.

Enrique Salem

Management

We aren’t seeing any real changes in the SMB space. There continues to be strong demand for our security products and our backup offerings. Backup Exec continues to do very, very well for us particularly focused on that segment. So we haven’t seen anything that causes us concern.

Israel Hernandez - Lehman Brothers

Analyst

And James we’ve got an extra week here in Q1 does that mean we have one less week in your Q2 and that we should model that accordingly so that we don’t get this wrong when we model it out?

James Beer

Management

That’s right, in Q2, Q3 and Q4 we go back to the traditional 13 week quarter.

Operator

Operator

Your next question comes from Todd Raker - Deutsche Bank

Todd Raker - Deutsche Bank

Analyst

On the consumer side can you talk about what you’re seeing in terms of economics, you announced nice [inaudible] on the OEMs side, McAfee announced some nice wins, are we continuing to see the economics of the OEM channel continue to deteriorate or how do you see that playing out over the next few years?

Enrique Salem

Management

Ultimately the economics in that channel it’s a competitive market, but they have stabilized from what we have seen over the last several years. But make no mistake about it, we will continue to compete with a number of folks in that channel but it does continue to be an important customer acquisition channel for us and so we will always make sure that we’re doing deals that allow us to continue to bring in a nice steady stream of new customers into the consumer business.

Todd Raker - Deutsche Bank

Analyst

You have talked about divesting some of the slower growth businesses, any kind of update as you look at the portfolio of products today and thoughts in terms of potential divestitures going forward?

John Thompson

Management

Contrary to popular rumor we have no plans in place to divest of anything; none.

Operator

Operator

Your next question comes from Daniel Ives - Friedman Billings Ramsey

Daniel Ives - Friedman Billings Ramsey

Analyst

Question with the sales force, can you maybe just give us some insight in regards to quotas or just [inaudible] in the sales force they continue to do good things there, and what you’ve been doing, changes on the sales force model?

Enrique Salem

Management

Our focus right now is to continue to move our team to be more focused on new license, because that is ultimately what drives our business and so we started that change last year, focusing on our specialist organizations and now as we look at fiscal year ’09 we have broadened that to include more of our field team. So ultimately the priority for Symantec is to drive new business and ultimately new license sales; that’s the number one thing that we’re focused on in fiscal year ’09.

Operator

Operator

Your next question comes from Aaron Schwartz - JP Morgan

Aaron Schwartz - JP Morgan

Analyst

Just a follow-up on the last question, it looks like the license as a percentage of revenue has picked up by about a point in the second half of the year and I’m just wondering if that is a factor of the shift to new license or if there’s just been stabilization in the amount you’re deferring, I’m just trying to contrast the change in the sales organization with maybe what’s being deferred and recognized on the license side.

Enrique Salem

Management

What I would comment on is we definitely have had a focus on driving new license and that would lead to what you’re saying. As far as it being one percent, that’s not a number that I’m looking at right now but ultimately our focus is on driving new license.

James Beer

Management

And remember that a lot of our new sales are accounted for in the subscriptions line, so consumer new sales, a lot of our enterprise security new sales so when you look at the line labeled license on our press release it doesn’t give you the full picture for the new sales that are going on in the organization.

Aaron Schwartz - JP Morgan

Analyst

I know there’s been a lot of changes on your channel side; I think the latest news has been, I’m just wondering if you could update us with changes in your strategy there?

Enrique Salem

Management

Ultimately when we look at our go-to-market trends, you’re always going to keep refining who are our priority partners and we will concentrate our business on a number of key partners and what you heard there is that we’re narrowing who are the folks that we go to market with. Expect to continue to see us refine where we invest both from a resource and focus perspective and that’s what you heard on that announcement. In particular though expect us to continue to leverage our broad based two tier distribution model where it makes sense and there are places where absolutely we will continue to leverage it and there are places where we will refocus some of our efforts. So ultimately though we have a very broad distribution channel that we’ll continue to leverage.

Operator

Operator

Your next question comes from Philip Winslow - Credit Suisse

Philip Winslow - Credit Suisse

Analyst

You mentioned an OEM relationship with Guardian Edge to get into the endpoint encryption market through a partnership, I’m wondering if you could comment on integration there, obviously McAfee has been pitching with [inaudible] to see the time with [Epolicy Orchestrator] just curious what you plan to do from that standpoint and then also, you’ve been mentioning license, revenue, license, revenue, this quarter was also particularly stronger, probably one of the best quarters you’ve had year-over-year in a few years, what is driving that on the storage side if anything in particular, what product lines?

Enrique Salem

Management

On the first question expect the new encryption technology will be integrated with our Symantec Endpoint Protection technology. So you’ll manage all aspects of security from the Symantec Endpoint Protection console. But more importantly to us is not only what we’re doing on the security side but it’s also the integration with our new systems management technology from Altiris. Because that’s where we really drive the higher value as we continue to say its all about not only security but managing that endpoint because that’s the only way you truly have security and so expect that we’ll continue to bring all these technologies much closer together as we’ve already started to with the release of Symantec Endpoint Protection 11. The second part of the question on new license, what we think about is we had very good performance across the businesses, both in our storage business and our security business and so we’re seeing very good performance across a broad range of our portfolio and that is really all about what we focus on is what we’re going to deliver and we’ve been focused on new license and that’s why you’re seeing it in our results.

Operator

Operator

Your next question comes from Katherine Egbert - Jefferies and Company

Katherine Egbert - Jefferies and Company

Analyst

We’ve seen a lot of weakness in some of the smaller point centers in the enterprise security area, do you feel like you’re taking share or are you at any rate taking advantage of weakness in those areas and then conversely are you seeing your major competitors doing anything unusual to try to take share?

John Thompson

Management

I think what’s playing out is what we believed for the last five or six years that large enterprises want to do business with fewer providers and they want to do business with providers that have a broader portfolio of offerings that helps them reduce the cost and complexity of deploying those technologies and so I think in more challenging economic times, you’re going to see pressure perhaps first to the less scaled enterprises that don’t have the richness of portfolio or the richness of relationships. That could in fact lead to price pressures but we haven’t seen that so far.

Katherine Egbert - Jefferies and Company

Analyst

James, did you say what the impact of currency was on revenue and expenses?

James Beer

Management

Yes, in terms of the overall impact on revenue, we were up 13% year-over-year and six points of that was driven by foreign exchange and we don’t breakout the expenses but its going to be a similar type figure.

Operator

Operator

Your next question comes from Robert Breza - RBC Capital Markets

Robert Breza - UBS Capital Markets

Analyst

James I was wondering as we look to our models and think about adjusting for the one extra week here in Q1, would you expect a similar split, the 48% 49% in the first half, 51% 52% in the second half, or is there anything else seasonally that we need to think about as we model through the yea?

James Beer

Management

Well aside from this incremental 14th week I wouldn’t say we’re seeing anything different seasonally than we were looking at this time last year.

Operator

Operator

Your next question comes from Michael Turits - Raymond James & Associates Michael Turits - Raymond James & Associates: Question first on the storage, what are the dynamics you’re seeing in the core backup business with Net Backup and some of the associated products like replication and data [inaudible]. You’ve bought some good products, you’ve made some big improvements with Net Backup 6.5, do you see any change in the competitive environment to share trends?

Enrique Salem

Management

Ultimately when you look at what we’ve done with our data protection group which is the combination of both Net Backup and Backup Exec, we are gaining share. I mean that combination is serving us very well and the thing that’s most encouraging is as customers are migrating from tape-based backup to disk-based backup we are seeing a significant opportunity around our new de-dupe capabilities and our peer disk offering. So we are encouraged because now with our 6.5 platform, our Net Backup 6.5 platform, we can continue to add these new modules which I think will obviously benefit the overall performance of our data protection group. Michael Turits - Raymond James & Associates: On the security and compliance group it sounds like Altiris did well, if you were to strip out the compliance and look at the enterprise security, what are the growth rate trends there, are they picking up, any way of characterizing what those growth rates are?

Enrique Salem

Management

I haven’t broken it out that way. Michael Turits - Raymond James & Associates: Anything you can do to give me some color on how that’s doing, even directionally?

Enrique Salem

Management

Our security business is doing great.

Operator

Operator

Your next question comes from Rob Owens - Pacific Crest Securities

Rob Owens - Pacific Crest Securities

Analyst

Looking at the security group along the lines of Michael’s question, as you talked about some of your double-digit growers in the quarter, you didn’t talk about the Endpoint and I’m wondering if you’re stripping out the NAC and Altiris capabilities separately or if the Endpoint in aggregate is growing at less than 10%.

James Beer

Management

Yes, the Endpoint is growing at less than 10% but we’re very comfortable that that is the overall performance. As we said a couple of quarters back before we rolled out the new SEP product the first job was going to be focused on upgrading the very large installed base and we’re well down that track as John was alluding to in one of the earlier questions. So that’s been the primary focus. We are pleased that we’ve been able to see some lift year-over-year even while we’ve been doing all of this on the revenue side.

Rob Owens - Pacific Crest Securities

Analyst

On the 14-week quarter, I think last time you faced this, it actually provided a couple pennies dilution in the quarter, so is this more a function of the ratability of the model this time around six years later or is this some expectations for the first week of July in terms of just general sales and demand?

James Beer

Management

Well it’s hard for me to go back six years, but no, it’s fair to say that it’ll be $0.02 positive this time around. Yes we do have a relatively large amount of amortization that rolls off the balance sheet now more so than would have been the case in the past. But the flip side to that of course is that six years ago we would have had more new license sales and the overall sales activity being reflected in the P&L immediately. So I’m not sure there’s necessarily a big difference there in the way the numbers play out, but again I haven’t gone back six years to study how it used to be.

Enrique Salem

Management

One thing I would add though is that we have products in the portfolio that have a higher license yield for example, our Backup Exec business and that would probably have some [inaudible]

Operator

Operator

Your next question comes from Tim Klasell - Thomas Weisel Partners

Tim Klasell - Thomas Weisel Partners

Analyst

First just a quick housekeeping, James can you hit us on, you said there would be an impact on the other income from the Huawei joint venture, can you give us a magnitude there? And how that should ramp throughout the year?

James Beer

Management

Well no, I’m not going to throw out the specific numbers associated with the Huawei joint venture. I think it’s fair to say when you look at the other income line and think about its primary constituents obviously interest income has been coming down and recent times as interest rates have been reduced around certainly in this country, if not around the world. And then the other thing that’s been happening there is we have a smaller cash balance year-over-year and we’ve been looking to bring in the duration of our investments so that we have more cash available to us to do things like the buyback and to invest in our business in ways such as the Huawei joint venture presented itself. So on the interest expense line, that’s pretty much a constant given the defined nature of the interest associated with the convert of a couple of years ago. And then the additional item this coming year will be the Huawei joint venture and obviously we’ll look to minimize the start-up costs but there I think going to be some of those.

Tim Klasell - Thomas Weisel Partners

Analyst

Jumping over to Enrique to your comments about focusing in on new license sales, obviously the maintenance streams are very valuable, are you getting a separate sales force or what are you doing to help protect that as your field sales force focuses in on the new license sales?

Enrique Salem

Management

We have a number of different things that we do as you know, by segment we have different things that we do but if you look at our storage business we have a team that is focused on renewals and they work very closely with our field force so it’s really a matter of, it’s not that we’re saying there’s no focus or there’s no compensation on the renewal component, its just that we’re putting a higher emphasis on new license and that’s where you really drive the acceleration for our field organization. So we’ve got a combination of things that we’re doing to ensure renewal rates and I don’t expect to see renewal rates in this business drop. If anything given some of the improvements we’re making online in both our small and medium business and in consumer, I expect to see renewals rates continue to improve.

Operator

Operator

Your final question comes from Philip Rueppel - Wachovia Securities

Philip Rueppel - Wachovia Securities

Analyst

Quick question on the channel, any changes in management and focus on new personnel, are there any other new initiatives or major initiatives that you’re focusing on in ’09 that should also have an impact?

Enrique Salem

Management

I’m not sure that we’ve made changes on our personnel; we’ve actually been very stable on our channel personnel. The leadership team across the regions has been very stable through fiscal year ’08 and I expect that to continue. As far as what we’re doing with the channel, we’re always reviewing the various programs and how they work but I don’t expect to see any material changes in fiscal year ’09 but expect us to continue to look at how do we incent the partners and the channels that drive new business. That is the focus for our company and that’s where we’re going to continue to drive incentive around.

Operator

Operator

That does conclude our question and answer session. At this time I’d like to turn the call back over to you Mr. Thompson for any additional or closing remarks.

John Thompson

Management

Thank you very much everyone for joining us this afternoon. I’m awfully proud of our teams’ performance not just in the March quarter, but throughout fiscal year ’08. We had a very strong finishing quarter. We have a very strong pipeline as we head into fiscal year ’09 and I am very, very encouraged that this is our year. So thank you very much.