Symantec 4Q07/FY07 Earnings Transcript

Transcription

1 Helyn Corcos, Vice President Investor Relations Good afternoon and thank you for joining us. With me today are John Thompson, Chairman of the Board, and Chief Executive Officer of Symantec and James Beer, Executive Vice President and Chief Financial Officer. In a moment, I will turn the call over to John. He will provide comments on our fiscal year 2007 results, which ended March 30, 2007 as well as highlight our results for the fiscal fourth quarter. He will then turn it over to James who will provide financial details for the fourth quarter and review our guidance as discussed in the press release. John will conclude by outlining our plans and objectives for fiscal year 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 home page at A copy of today s press release and supplemental financial information are available on our website and a copy of today s prepared comments will be available on the investor relations website shortly after the call is completed. As mentioned in our press release, Symantec adopted Staff Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, during the March quarter. As such, our GAAP and non- GAAP results for the fiscal year and the fiscal fourth quarter include the adoption of SAB 108. SAB 108 also impacted our previously reported quarterly results for the first three quarters of fiscal year We believe the resulting changes to the previously reported amounts for the quarter and fiscal year are immaterial. Our filings with the SEC will provide a detailed explanation of the impact of our adoption of SAB 108. We have also provided the impact of SAB 108 in this quarter s supplemental financial package, which is available on our web site. Before we begin, I would like to remind everyone that some of the information discussed on this call, including our projections regarding revenue and operating results for the coming quarter and fiscal year, and projections of deferred revenue, cash flow from operations, amortization of acquisition-related intangibles and stock-based compensation, 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 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 web site. And now, I would like to introduce our CEO, Mr. John Thompson May 2, 2007

2 John W. Thompson, Chairman and CEO Symantec ended fiscal year 2007 with a solid March quarter. Our performance represents a combination of strong demand for our products and services and a much improved operational focus to optimize revenue yield. As a result, a greater proportion of the largest contracts signed by customers included terms and conditions that drove higher in-period revenue. The performance included solid results in a number of key enterprise product areas, including NetBackup, Storage Foundation, messaging, IT compliance and services, as well as another great quarter for our market leading consumer suite, Norton Internet Security. In addition to better than expected revenue and EPS results, we are pleased with the growth of our deferred revenue, and our strong cash flow generation during the March quarter. We continue to believe these are two important metrics to consider in evaluating the strength of our underlying business. The breadth of our security, availability and services solutions continues to drive the number of large transactions for Symantec. In the March quarter, we generated a total of 376 transactions valued at more than $300,000 each, compared to 384 in March And, 99 deals worth more than $1 million each, compared to 91 in March In addition, 77% of the large transactions included multiple products or services, which under scores the success of our solutions selling approach. During the quarter, we signed a multi-million dollar, multi-year extension of a federal government contract which included a variety of our market leading solutions including antivirus, anti-spam, endpoint compliance, policy compliance, storage, backup, message management, as well as our business critical services offering. Other large multi-million dollar customer wins included: a large US telco, for Storage Foundation, NetBackup, Cluster Server and Enterprise Vault; and a global financial institution for Storage Foundation, NetBackup and Enterprise Security Manager. The market trend of customers interested in doing business with fewer vendors is becoming more evident every quarter in our results. And, our global scale and deep product portfolio is central to their decision and purchase process. The March quarter was a strong finish to what was unquestionably a challenging year. Fiscal year 2007 was a transition year for Symantec marked by the implementation of several major, but necessary, changes in our operations as we continue to evolve our business. One of the most significant changes was implemented on the first day of fiscal 2007 when we integrated our enterprise sales force. We aligned our model to a more typical industry approach of having a single account manager supported by individual product or solution specialists. We are pleased with this structure as it allows for better account and opportunity coverage, while leveraging our broad product portfolio May 2, 2007

3 We also undertook a major business process and systems consolidation project. Project Oasis integrated our two ERP systems into a single enhanced system allowing us to implement new buying programs, drive operational efficiencies and create a platform to improve the ease of transacting business with our customers and partners. This project is important as it provides the foundation for scaling our business and lowering our costs over time. We believe many of the major challenges we faced are now behind us and our efforts are now directed toward the continuous improvement process so essential for a business of our scale. We also undertook action to better align our operating expenses with our revenue expectations and implemented several initiatives that we believe will result in annualized cost savings of at least $200 million. James will outline our progress in this area in a few minutes. Also, last June, we took a series of actions to optimize our capital structure with the issuance of a $2.1 billion convertible subordinated note. In addition, during fiscal year 2007, we repurchased a total of $2.8 billion of our common stock. And finally, we fortified our strength at the endpoint with the addition of Altiris. Our customers know that you can t have true endpoint security without the configuration management and software distribution capabilities so necessary to protect them. 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 their IT assets. We were pleased with how swiftly we were able to close the transaction and with the progress we have made towards integrating Altiris into Symantec. While we are not providing specific financial details about the Altiris quarter, it did perform solidly and well within the range of our expectations. At the beginning of the new fiscal year, I reorganized the senior leadership structure. We have a strong leadership team and the goal of these changes was to ensure that every executive has the necessary cross-functional experience to better position the company for long-term success. Now, I d like to take a few minutes to discuss some of the highlights of our business units performance during the March quarter. We are pleased with the Data Center Management Group s March quarter performance and with the sequential improvement in revenue. We saw strength primarily in our Storage Foundation solutions and NetBackup product family. Results were driven by our customers desire to standardize and simplify their data center infrastructure. The complexity of enterprise IT environments is making it exceedingly difficult for organizations to keep up with the growing performance and availability demands for key applications, while at the same time keeping costs under control May 2, 2007

4 Earlier this year, we introduced a customized ROI tool that clearly demonstrates how our solutions can improve the performance and availability of data centers, as well as drive dramatic direct cost improvements in several cases, well over $100M over a three-year period. While our data center standardization and ROI program was primarily focused on Storage Foundation and Clustering areas, we have now expanded this approach to include NetBackup as well. An example of our success in this area is the opportunity we won with Sun Microsystems during the March quarter. Sun displaced a Symantec competitor in order to standardize on NetBackup throughout its enterprise. Sun will use NetBackup and Backup Reporter to streamline its IT operations and provide global data protection reporting. Overall, we feel confident that standardization and the growing adoption of new data protection, storage and server management technologies will help drive revenue growth in this segment during FY08. Our Security and Data Management group posted in-line results with our expectations. We continue to see solid growth in the emerging product areas where we are investing, such as our compliance solutions and enterprise message management. For example, we achieved record results in our BindView and Enterprise Security Manager compliance products. Companies face increasing challenges with IT compliance, especially in highly regulated industries. These products help our customers manage their internal, as well as external, regulatory compliance requirements and reduce the growing costs of doing so. We also achieved record revenue with our message management offerings with strong growth coming from our antispam products and Enterprise Vault, our archiving and retrieval solution. These two products are category leaders and we continue to gain traction in these market place with them. Many of these represent technologies we acquired and successfully integrated over the past few years. Our technology and company acquisitions are an important part of our strategy to diversify our revenue mix in the security arena toward segments of higher growth. Most of you are familiar with Project Hamlet. Hamlet will integrate technology components from our leading antivirus, antispyware, endpoint firewall, zero-day protection and network access compliance offerings, all to be managed by a single management platform. The solution will not only deliver a more advanced approach to end point protection, but address the all important issue for our customers on agent proliferation and systems resource consumption. We plan to launch the product at our Vision conference next month. Given the phenomenal success we experienced with Norton 360 s extended beta program, we have decided to expand the scope of the Hamlet beta program prior to the full scale release of such an important product. Like Norton 360, this will ensure a higher quality release for a very, very important product launch May 2, 2007

5 Our Services group performed solidly during the March quarter. Our focus on helping customers manage IT risk to their infrastructure is really starting to gain traction. With more than 1,100 consultants around the world, we have the skills to deliver a more complete solution for protecting and managing business critical assets. We also recently launched a beta for the Symantec Protection Network, our first Software as a Service (SaaS) offering. The Protection Network is a SaaS platform designed to deliver easyto-use security and availability offerings to small and mid-sized companies. The Online Backup Service will enable cost-effective, reliable backup and restoration of business-critical data from the convenience of a web browser. We expect this new service to go live later this year. And, you should expect to see us announce additional SaaS offerings throughout fiscal year Our consumer business posted another strong quarter. While the online threat landscape and competitive environment continue to evolve, there has been one constant Symantec s Norton products are the clear market leader. We couldn t be more pleased with the launch of Norton 360 as the industry and market reaction have been very positive. Our continued focus on technology leadership and product quality has clearly shown through in many of the published reviews on Norton 360. It has already garnered the prestigious Editors Choice awards from both CNET and PC Magazine. The OEM channel continues to be an important route to market for our consumer products. During the quarter, we announced the extension of our relationship with HP with a new multiyear agreement. We also announced that Acer will now be shipping a Vista-compatible version of Norton Internet Security And, at Dell, Symantec will be positioned as the default solution in North America from May through July. So, all in all, it was a very solid March quarter to cap off a challenging fiscal year. I believe we have taken the necessary steps to improve our global operations and our results in FY08 will benefit from these actions. After James provides you details of our financials, I ll come back and talk about our specific focus areas for fiscal year James James Beer, Executive Vice President and CFO Thank you John, and good afternoon everyone. I m encouraged by the progress we ve made as evidenced by the March quarter results. Over the past twelve months, a lot of change impacted our operations and financial performance as John mentioned in his opening remarks and although we have faced challenges, I believe we have emerged stronger and better-positioned for future growth. We grew our fiscal year non-gaap revenue by 5% to more than $5.25 billion compared to the prior fiscal year and generated $1.01 in non-gaap earnings per share. Given the recurring nature of our business model, deferred revenue and cash flow from operations are also important metrics in measuring the overall strength of our business May 2, 2007

6 In fact, we generated operating cash flow of approximately $1.67 billion during FY07. In addition, during the fiscal year, we grew non-gaap deferred revenue to approximately $2.8 billion. Our financial results will benefit from this strong deferred revenue balance during fiscal The contribution from our consumer business to deferred revenue growth is moderating, consistent with the now ratable revenue recognition policy, while Data Center Management s contribution has grown in line with our business model evolution that emphasizes long-term customer relationships. But before I get into the new fiscal year, I d like to spend a minute reviewing the financial details of the March 2007 quarter. GAAP revenue for our March 2007 quarter was $1.357 billion. Non-GAAP revenue grew 5% over the March 2006 period to $1.365 billion. Foreign currency movements positively impacted non-gaap revenue by almost $48 million in the March 2007 quarter as compared to March Sequentially, foreign currency movements had approximately a $9 million positive impact on revenue. The March quarter s fully diluted GAAP earnings per share were 7. Non-GAAP fully diluted earnings per share for the quarter were 24. During the March quarter, GAAP earnings per share were impacted by a $51 million restructuring charge related to our recent reduction in force and further facilities consolidation activities. International non-gaap revenue for the March quarter grew 9% versus the year ago period to approximately $706 million and represented 52% of total non-gaap revenue. Year-over-year, the Americas grew 3%, the Europe/Middle East/Africa (EMEA) region grew 7%, and Asia Pacific, including Japan grew 9%. Excluding currency effects, EMEA revenue declined by 2% year-over-year. Now, I d like to move on to non-gaap revenue by segment for the March-07 quarter. Consumer revenue came in at $408 million up 11% versus the March 2006 quarter. Electronic distribution represented nearly 73% of consumer revenue and grew 25% compared to March 2006 driven primarily by strong activity from our online store, subscription renewals and upgrades. From a product perspective, Norton Internet Security revenue grew nearly 40% yearover-year, and represents more than 60% of total consumer revenue. Moving on to our enterprise segments, our Security and Data Management group generated revenue of $520 million, up 2% from the March 2006 quarter May 2, 2007

7 The Data Center Management business generated revenue of $368 million. This was flat with the March 2006 results and up 8% sequentially. Our Services group generated revenue of $69 million - - up 31% year-over-year and represented 5% of our total revenue. The services business was positively impacted by the reversal of onetime administrative challenges that occurred during the December quarter, as well as from revenue generated by our team of consultants from the recently acquired Company-i. Non-GAAP gross margin was 84 % for the March 2007 quarter compared to 83.2% in December Gross margin was higher than expected sequentially because of a change in accounting for certain consumer OEM relationships. We have negotiated new contract terms with various OEM partners which solidify our relationships for an extended period of time. The revised terms also drive an accounting change that has the effect of moving our OEM payments from cost of goods sold to operating expenses. Our total in-period expenses will increase since they will now reflect the average economic cost of each relationship over the term of the agreement rather than the cash impact to Symantec in a particular fiscal year. Our segment reporting for the consumer business unit will reflect this change during FY08. Non-GAAP operating expenses were $842 million for the March 2007 quarter. This includes approximately $55 million of expenses, incremental to our previous guidance, related to the OEM item that I just mentioned. Foreign exchange rates negatively impacted operating expenses during the March quarter by approximately $23 million as compared to March GAAP net income was $61 million for the March 2007 quarter. Non-GAAP net income was $227 million compared to $279 million for the March 2006 quarter. Symantec exited March with a cash and short-term investments balance of almost $3.0 billion. However, our current cash balance is considerably lower as a result of closing the Altiris acquisition on April 6 th for an effective cost of $815 million. Approximately, two-thirds of our cash balance resides overseas. As you may recall, in January, we announced a new $1.0 billion share buy back program. During the March quarter, we repurchased $500 million worth of the new program at an average share price of $ Our net accounts receivable balance at the end of the March 2007 quarter was $667 million. Days-sales-outstanding, or DSO, was 45 days, in line with normal seasonal trends. Cash flow from operating activities for the March quarter is expected to be between $560 and $570 million. This is higher than cash flow from operations of $487 million in the March 2006 quarter primarily due to strong collections and to the timing of tax payments. As I already mentioned, we generated approximately $1.67 billion in cash flow from operations during FY07. This is in line with our original guidance issued a year ago May 2, 2007

8 Consistent with the past several quarters, deferred revenue increased substantially as we continue to move our business model to one that generates significant recurring maintenance activity and thus more predictable cash flow. GAAP deferred revenue at the end of March 2007 was approximately $2.75 billion. Non-GAAP deferred revenue at the end of March 2007 reached a record $2.77 billion. Sequentially, deferred revenue grew $187 million or 7%. Foreign exchange rates had a positive impact of approximately $105 million versus the balance as of March 2006, and a $19 million benefit versus the December 2006 balance. Our year end deferred revenue balance exceeded the high end of our guided range of $2.65 billion, as provided in January. Now, I d like to spend a few minutes discussing our guidance. Our FY08 plan has revenue and earnings growing at a faster pace than FY07. Specifically, we expect GAAP revenue for the fiscal year to be between $5.59 and $5.69 billion. Non-GAAP revenue is expected to be between $5.65 and $5.75 billion as compared to $5.253 billion in FY07. This includes the revenue contribution from the Altiris acquisition and on a non-gaap basis, reflecting the impact of deferred revenue lost due to the purchase accounting method associated with acquisitions. During fiscal year 2008, gross margins will come under some pressure as we continue to grow our services businesses, while the change in accounting for our consumer OEM fees will have the opposite effect. We expect the net result to be an improvement in gross margins year-overyear. Our operating expenses during the year will benefit from the results of our cost savings initiative. We have clearly defined budgets in place that will achieve the $200 million annualized savings target during FY08. The largest element of this plan is represented by an approximate 5% reduction in force. This has been completed in the Americas and Asia while EMEA s implementation is underway. The addition of the OEM fees to our operating expense base will, however, create a situation in which total operating expenses increase substantially year-over-year. That said, we do believe that operating margins will improve during FY08 as compared to FY07, as a result of our revenue growth, the expansion of our gross margins and the benefits of our cost reduction program. GAAP diluted earnings per share is expected to be between 45 and 50. Non-GAAP diluted earnings per share is expected to be between $1.10 and $1.15 as compared to $1.01 in FY May 2, 2007

9 This guidance assumes a common stock equivalents total for the year of approximately 925 million shares. We have assumed an exchange rate of $1.27 per Euro for the fiscal year. Continuing the trend seen throughout FY07, we expect FY08 to be another year in which deferred revenue growth outpaces our recognized revenue growth, particularly in the first half of the fiscal year. We expect annual cash flow from operating activities to continue to grow versus fiscal year 2007 levels. Our strong cash flow generation will underpin our ongoing share buyback activity which will in turn support improvements in our earnings per share growth. We expect revenue during the first half of the fiscal year to represent approximately 45% of the non-gaap FY08 revenue forecast. Diluted earnings per share during the first half of the fiscal year are expected to represent approximately 35% of the non-gaap FY08 EPS forecast. For the June 2007 quarter, we expect our core business to exhibit similar seasonal patterns to those we ve seen in prior years. We typically experience a sequential decline in revenue, earnings and deferred revenue from the March to June quarter. This year, the impact of the Altiris acquisition will grow our revenue base while the accounting for our new OEM agreements will put additional pressure on earnings per share. As such, our guidance for the June 2007 quarter is as follows: GAAP revenue is estimated to be in the range of $1.275 and $1.305 billion. Non-GAAP revenue is estimated to be in the range of $1.295 and $1.325 billion as compared to $1.288 billion in June GAAP earnings per share are forecasted to be in the range of 0 and 2. Non-GAAP earnings per share are estimated to be in the range of 18 and 20, as compared to 24 in June For the June quarter, we expect GAAP deferred revenue to be between $2.71 and $2.75 billion. We expect non-gaap deferred revenue to be between $2.75 and $2.79 billion as compared to $2.34 billion in June During the June quarter, we expect about $840 million of our deferred revenue balance to convert into recognized revenue. This is approximately 10% higher than the equivalent figure from the March quarter, continuing to illustrate how our business model is now generating increased volumes of predictable recognized revenue May 2, 2007

10 We expect cash flow from operations in June 2007 to exceed the June 2006 result of $368 million. This guidance assumes a common stock equivalents total for the quarter of 920 million shares. We have assumed an exchange rate of $1.32 per Euro for the June quarter. We plan to continue to work on our current $1 billion share repurchase program during the June quarter. Fiscal 2008 will also be a year in which we further evolve our capital structure in order to create a balance sheet that is consistent with the strong cash flow generation capability of Symantec. Finally, in fiscal year 2008, our segment reporting will include the new Altiris business segment and our recently reorganized Security and Data Management and Services segments. To better align our business units with our go-to-market activities, all of our services-related offerings, including Managed Security Services, Symantec Security Response and our new Software as a Service initiative, will become part of the services business segment. These services have different margins and capital requirements than those of the software business but were previously included in the Security and Data Management Group. We will provide you with a historical view of the new business segments on our next earnings announcement. We re enthusiastic about the competitiveness of our product set, the capabilities of our sales force and distribution partners, and are focused on executing on our plans quarter by quarter. Now, I d like to hand the call back to John. John W. Thompson, Chairman and CEO Thanks James. We believe we have entered fiscal 2008 with the most difficult part of our transformation behind us and more importantly, we are much better positioned to deliver our market leading security and availability products to our customers and partners around the world. We re placing much greater emphasis on managing our diverse portfolio of products and striving for better balance between revenue growth, operating costs and margin expansion. There are several areas of focus for FY08 that should lead to better operating returns. Perhaps the most significant ones are stronger delivery between sales and marketing, tighter alignment between product integration activities and product launch quality, increasing our internal operating leverage, and continuing to realign our capital structure May 2, 2007

11 First, on sales force alignment, we are satisfied with the structure implemented in As a result, we enter this fiscal year with a sales team better trained on the breath of our product portfolio and our major marketing campaign initiatives. We will make slight modifications in the compensation model to ensure a better balance between growing our annuity revenue stream that drives strong cash flow growth, and growing new license sales. We also intend to tighten the linkages between our marketing campaign actions and the key geographic sales activities around the world. The October launch of our new brand and product marketing platform is a great starting point, particularly given the strong feedback we ve received on overall aided and unaided recognition. Next, we intend to leverage a combination of the Hamlet product launch and the integration of Altiris as a significant proof point to the strength of our M&A strategy. Customers continue to tell us they see value to operating with fewer vendors supporting their IT initiatives, and they d like to see the real benefits of our integration actions. In the security and compliance area, the combination of Altiris, a significant new endpoint security product, and an integrated compliance offering, which combines the strengths of ESM and BindView, will be proof positive. In the storage arena, a refresh of our market leading offerings should strengthen our competitive position. And finally, our consumer team will continue its focus on out executing the competition in both our product initiatives, as well as with our key channel partners. Next, with the implementation of Project Oasis behind us, we intend to shift our focus to areas that should yield improved operational effectiveness and overall company efficiencies. Many of the important customer and partner facing activities associated with our Quote to Cash process will be the target of our reengineering efforts. We have teams in place and some of the work has already begun and is starting to bare fruit. And finally, we took our first step in FY07 to move the company toward a capital structure more fitting a company with the strength of our cash flow generation. We clearly think more can be done and expect to make additional progress in that direction during this fiscal year. We will spend considerably more time on our plans in these areas at our Analyst Day event next month. With the tremendous number of changes implemented during fiscal 2007, we re looking towards fiscal 2008 to be a year of greater stability and growth. I believe Symantec is a much stronger company today, largely due to the broad portfolio of award-winning technologies and our diverse base of enterprise and individual customers around the world. More than ever, our customers and partners are looking to Symantec for IT risk management solutions across a broad spectrum of operating platforms and we look forward to delivering on those expectations. And now, I ll turn it back to Helyn so we can take some of your questions May 2, 2007

12 Helyn Corcos, Vice President Investor Relations Thanks. Operator will you please begin polling for questions. While the operator is polling for questions, I d like to announce that Symantec plans to attend the JP Morgan conference on May 22 nd. In addition, we will be hosting our annual analyst meeting on June 14 th 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 4 th. A live webcast and replay of the event will be available on the investor relations home page for those who can not attend in person. Lastly, starting now and on a go forward basis, we will announce our next quarterly earnings date on the current earnings call. As such, we will be reporting our fiscal first quarter 2008 results on July 25. This information will also be posted on our events calendar. For a complete list of investor related events, please visit our events calendar on the investor relations website. Operator, we are ready for the first question. Please direct all questions to investor relations at May 2, 2007