MOUNTAIN VIEW Nov 5, 2015 (Thomson StreetEvents) -- Edited Transcript of Symantec Corp earnings conference call or presentation Thursday, November 5, 2015 at 1:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Jonathan Doros Symantec Corporation - VP of IR * Mike Brown Symantec Corporation - President & CEO * Thomas Seifert Symantec Corporation - EVP & CFO ================================================================================ Conference Call Participants ================================================================================ * Raimo Lenschow Barclays Capital - Analyst * Walter Pritchard Citigroup - Analyst * Daniel Ives FBR & Co. - Analyst * Brad Zelnick Jefferies & Co. - Analyst * Michael Turits Raymond James & Associates, Inc. - Analyst * Matt Hedberg RBC Capital Markets - Analyst * Keith Weiss Morgan Stanley - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen, and welcome to the Symantec second-quarter 2016 earnings conference call. As a reminder, today's call is being recorded. And, at this time, I'd like to turn the call over to Jonathan Doros. Please go ahead, sir. -------------------------------------------------------------------------------- Jonathan Doros, Symantec Corporation - VP of IR [2] -------------------------------------------------------------------------------- Thank you. Good morning, and thank you for joining our call to discuss second-quarter 2016 earnings results. By now, you should have had the opportunity to review our earnings release supplemental information. We posted our presentation and CFO commentary that complements our prepared remarks. If you have not reviewed these documents, they can be found on our Investor Relations event page. A copy of today's prepared remarks will be available on the website after our call is completed. Speakers on today's call are Mike Brown, Symantec's President and CEO; Thomas Seifert, Executive Vice President and CFO. This is a live call that will be available for replay via webcast on our website. I'd like to remind everyone that all references to financial metrics are non-GAAP unless otherwise stated. Implied billings refer to revenue plus a change in sequential deferred revenue, and we include a trended history of this metric in our supplemental information. Also, we provide year-over-year constant-currency growth rates in our prepared remarks, except for statements about net income and EPS. I would like to take this opportunity to highlight a few dates for you. Thomas will be presenting at the Nasdaq Conference on December 2 in London and the Barclays Technology Conference on December 9 in San Francisco. Mike will be presenting at the Credit Suisse Technology, Media & Telecom Conference in Scottsdale, Arizona, on December 3. We intend to announce our third-quarter earnings on February 4. Please note, non-GAAP financial measures referenced during this call are reconciled to the comparable GAAP financial measure in the press release and supplemental materials posted on our website. Lastly, today's call contains forward-looking statements based on the environment as we currently see it. Those statements are based on current beliefs, assumptions and expectations, speak only as of the current date, and as such, involve risks and uncertainties that may cause actual results to differ materially from our current expectations. Please refer to the cautionary statement in our press release for more information. You will also find a detailed discussion about our risk factors in our filings with the SEC, and in particular, in our Annual Report on Form 10-K in the year ended April 3, 2015. And now, I'd like to introduce our CEO, Mike Brown. Go ahead, Mike. -------------------------------------------------------------------------------- Mike Brown, Symantec Corporation - President & CEO [3] -------------------------------------------------------------------------------- Thank you, Jon, and good morning. 18 months ago, we embarked on a three-year transformation to refocus Symantec's product strategy, improve our cost structure, rebuild executive talent, and deploy capital to maximize shareholder value. Over that period, we advanced our long-term strategy by separating Symantec into an information management provider, Veritas, and a pure-play cybersecurity company focused on delivering upon our unified security strategy. We remain on track to close the Veritas transaction by January 1. We have added new executive leadership across Symantec to complement an already talented employee base. During this transformation, we improved our cost structure, resulting in our non-GAAP operating margin increasing from 25% in the first quarter of FY15 to 28% in the second quarter of FY16. We also returned $1.4 billion of cash to shareholders through dividends and share repurchases. Now that we are entering the next stage of our transformation, we are focused on four priorities that include: realizing our unified security strategy; building our Enterprise Security pipeline and go-to market capabilities; improving our cost structure; and efficiently allocating capital. Let's start with why our unified security strategy is the right approach for today's complex and evolving threat landscape. Cyber attacks are damaging the ability of enterprises across the world to conduct business efficiently. Today's leaders, including CISOs, CEOs, and governments, are looking to Symantec to be their trusted cybersecurity partner. Symantec's current set of Enterprise Security solutions provide our more than 370,000 customers actionable visibility into the security control points across their on-premise data and in the cloud. In an environment where hacking has evolved into highly funded cyber espionage, we must not only create better solutions, but we must think differently in order to stay ahead of zero-day attacks. Our unified security strategy does just this by harnessing our vast telemetry, including that from our 175 million endpoints, to provide customers with insights on the next generations of threats and, as a result, more secure outcomes. The first of our four priorities is centered on new product development and increased product integration. We are bringing to market applications which run on top of our analytics platform, a core tenet of our unified security strategy. As an example, one of these new offerings is our Risk Insight application, which is a risk-assessment benchmarking offering that combines data across SEP and Norton as well as other external data sources. The solution provides a realtime assessment of both internal and external risk using the latest techniques in machine learning and data analytics, and has been well received by several large banks. We expect to release this application by the June quarter. Including Risk Insight, we have a pipeline of a dozen new Enterprise Security products set for release in the next three quarters across threat protection, information protection, and cybersecurity services. The second of our four priorities is improving our Enterprise Security sales pipeline and go-to market capabilities. Symantec has trusted brand recognition in cybersecurity, we have deep thought leadership in the world's most influential security experts, and we have a focused global Enterprise sales force and channel partners to address this opportunity. Now we need to better leverage these competitive advantages, and to do so, we recently hired a new Chief Marketing Executive, Dan Rogers. A key part of improving this go-to market strategy involves renewed focus on the channel. At our October partner event, the feedback was overwhelmingly positive as we laid out our strategy with the launch of Secure One, an enhanced channel partner program tailored specifically for security-focused channel partners. The new program consists of training, [real] registration, technology support, and incentives to drive the results for successful, long-term relationships. Our third priority is optimizing our cost structure now that we are a pure-play cybersecurity company. We remain committed toward reaching our long-term operating margin target of 30%. However, after we separate Veritas, there will be a number of remaining costs related to corporate overhead expenses that we previously shared with the Information Management segment. We are focused on rightsizing our cost structure to properly position the Company for the next stage of our growth. Thomas will provide more detail in his prepared remarks. That brings me to our fourth priority, which is to continue to allocate capital to maximize shareholder value. As we previously stated, we remain committed to our aggressive share repurchase program. The Board of Directors has authorized us to pursue a $500 million accelerated share repurchase to be executed as soon as possible. While returning capital to shareholders will be a core pillar of our capital allocation strategy, we also see opportunities to deploy capital toward acquisitions that we expect to result in an appropriate risk-adjusted return for shareholders. I'm confident we have the appropriate strategy, product development team, and distribution capability that can successfully acquire, integrate, and accelerate acquisitions. Next, I'd like to provide an overview of Q2 results and outlook for the remainder of the year. Our Q2 top-line performance improved from Q1, which is evident in the strong sequential improvement of our year-over-year implied billings in Q2. Enterprise Security revenue grew year over year for the second consecutive quarter. Operating margin of 28% was at the high end of our guidance range as we remained disciplined with our investments across the business. While we are making progress in building our Enterprise Security sales pipeline for the second half of FY16, it is not at a rate to offset the shortfall we saw in Q1. As a result, we now expect full-year revenue to be at the low end of our previous guidance for Symantec Security, which includes Enterprise Security and Consumer Security. Thomas will provide additional detail in his prepared remarks. Now let me provide an update on each of our major product areas in Enterprise Security -- that includes threat protection, information protection, cybersecurity services, and website security, a more descriptive name for our trust services solutions. In threat protection, the endpoint and e-mail control points continue to be ground zero for targeted attacks within the enterprise. Compared to competitive solutions, our subsolution -- Symantec Endpoint Protection -- offers the most complete and scalable set of technologies in a lightweight agent. For instance, our largest SEP deployment covers a footprint of approximately 600,000 endpoints, orders of magnitude larger than most, if not all, of our competitors. Endpoint Protection grew again in the second quarter, driven by continued strength in our SEP offerings. Additive to this growth in FY17 will be our recently introduced advanced threat protection solution, which consists of three integrated modules -- endpoint, e-mail, and network. In fact, our comprehensive ATP solution addresses the increased complexity of managing security as the only product in the market that uncovers, prioritizes, and remediates advanced threats across multiple control points, all from a single console with just a click and no new endpoint agents to deploy. Moving to information protection. With more data moving to the cloud and the sheer increase in mobile users, information protection that spans across cloud and mobile, combined with behavioral analytics, is a critical imperative for organizations. The strongest performing part of our portfolio today is information protection, where revenue for our offerings grew 10% year over year in the second quarter, driven by robust customer traction for DLP 14. A number of our large DLP deals included new DLP 14 capabilities to secure information stored in the cloud for Box and Office 365. Combination of our DLP, encryption, and identity and access management assets puts us in a unique position to capture this expanding market opportunity. Moving on to cybersecurity services. Most companies around the world do not have the in-house security skills needed to address the changing threat landscape, especially once compromised. Our monitored security incident response, threat intelligence, and security simulation services provide customers with a broad set of offerings to manage every phase of the attack life cycle. During Q2, cybersecurity services revenue grew 3%, which is below what this business is capable of achieving. To accelerate our cybersecurity simulation service offerings, we recently acquired the company Blackfin. Within 45 days of the acquisition, our team brought a new service called phishing simulation to market and announced its availability in October. Now on to website security. Website security is an essential component of unified security, and it's not just about SSL certificates. Symantec takes a more holistic approach through offering complete website security and management tools in discovery and automation. Additionally, we offer the Norton Shopping Guarantee, which increases consumer confidence through our Symantec-trusted endorsement. Shoppers know they're dealing with a retailer they can trust, so they're likely to become loyal buyers who purchase more and come back more often. Norton Shopping Guarantee has proven to deliver 7% higher conversion rates and 5% more repeat purchases for our retail customers. Website security revenue grew 5% this quarter, an acceleration from 3% in Q1. Now on to the Consumer Security segment. There has been no let-up in the threats that attack consumers. An increase in crypto-ransomware and the continual discovery of new vulnerabilities in the commonly used operating systems reinforce the need for consumer security and data protection. The Norton Security subscription service supports Microsoft Windows, Apple OS X, iOS, and Google Android, enabling our customers to protect their devices from malware, phishing, and scams, as well as manage passwords, back up data, and supervise children's Internet browsing. In converting customers to our subscription service, we are shifting away from unprofitable channels, focusing on reducing churn, and acquiring customers directly online and through our growing list of service provider partners. Our Consumer Security segment performed in line with expectation, as we continue to convert all of our millions of customers to a cloud-based subscription service. We are about halfway through this conversion which we expect to be complete in the summer of 2016. We're also seeing continued improvements in key levers of our Norton business, such as online customer acquisition -- our most profitable channel -- which generated over 600,000 new units of our core Norton Security in Q2, up 8% year over year. More importantly, we believe the lifetime value for these customers is 30% higher with a subscription model. The anonymous telemetry gleaned from the large Norton customer base continues to provide Symantec with a unique perspective into global threat patterns. Last quarter, we saw several high-profile attacks on a broader set of IoT devices, such as cars, that we continue to believe Norton can play a bigger role in protecting our customers in the future. As the global leader in cybersecurity, we operate one of the world's largest cyber intelligence networks. We see more threats and protect more customers from the next generation of attacks. We help companies, governments, and individuals secure their most important data, wherever it lives. I couldn't be more excited about the opportunities ahead. Now, I'll turn it over to Thomas to provide a review of our second-quarter financial results and guidance for our third and fourth fiscal quarters. Thomas? -------------------------------------------------------------------------------- Thomas Seifert, Symantec Corporation - EVP & CFO [4] -------------------------------------------------------------------------------- Thank you, Mike, and good morning, everyone. Before I get started, let me point out that, given that the Veritas transaction has increased the complexity of our results and guidance, we've included a CFO commentary document on our website this time which will provide additional detail to my prepared remarks. On October 3, we completed an important milestone with the operational separation of Veritas. This is a substantial accomplishment that would not have been possible without the hard work and commitment of our employees. We remain on track to close the Veritas transaction by the end of the fiscal third quarter. In conjunction with the separation, we have committed to returning significant cash to shareholders. We previously announced our intention to return $2 billion to shareholders over 18 months, after the closing of the Veritas transaction. I'm pleased to announce that we are going to commence this $2 billion capital return ahead of the expected January close of the Veritas sale. The Board of Directors has authorized us to pursue a $500 million accelerated share repurchase to be executed as soon as possible. The expected $500 million ASR will be in addition to our normal repurchase activity of approximately $125 million of shares for the third fiscal quarter, of which about $105 million have been completed to date. The ASR and our ongoing open-market repurchases reflect the Board of Directors' and Symantec's confidence in our ability to achieve significantly improved performance and create sustainable value for shareholders, while it allows us to retain flexibility as we finalize our capital allocation strategy in anticipation of the transaction's closing. Now, let me turn to second-quarter financial results. Total revenue declined 1% year over year, to $1.5 billion, and was in line with our guided range. As expected, growth in Enterprise Security and Information Management substantially offset declines in Consumer Security. Deferred revenue was flat year over year, at $3.3 billion, an improvement from a 1% decline in our June quarter. As a result, implied billings were flat, also an improvement from last quarter. The US dollar strengthened against most major currencies compared to the year-ago period, which created a headwind of $99 million to second-quarter revenue and $144 million to deferred revenue on a year-over-year basis. Non-GAAP operating margin for the second quarter was 28.1%, an increase of 50 basis points year over year and at the high end of our guidance range as we continued to seek our efficiency opportunities throughout the organization. I will provide more detail in regards to efficiency initiatives later in my remarks. Non-GAAP net income of $301 million resulted in fully diluted earnings per share of $0.44. Moving now to our business segments. Enterprise Security revenue grew 1% year over year, to $485 million, the second consecutive quarter of year-over-year growth. We saw revenue outperformance from our DLP products, which grew 37% year over year. Endpoint security also had another solid quarter, increasing 2% year over year. This strength was offset by weakness in endpoint management, mail, and data center security. Non-GAAP operating margin for the Enterprise Security segment was 10%, which was in line with our expectations. We continue to carefully manage our investment in the business as we shift more resources to higher Enterprise Security growth opportunities. In the Consumer Security segment, revenue declined 8%, as expected, to $420 million. We delivered non-GAAP operating margin of 55%, up 357 basis points year over year. Our operating margin was higher, primarily as a result of continuing operational improvements in areas such as tech support and lower OEM royalty payments. We continue to expect Norton revenue decline in a range of 5% to 8% for FY16 and operating margin to return to our guided range of 52% to 54% as we invest in additional marketing initiatives to improve our growing online acquisition rate and our customer experience. Information Management revenue increased 2%, to $593 million. Non-GAAP operating margin for the IM segment increased by 489 basis points year over year, to 23%. Now, turning to cash flow and capital allocation. Cash flow from operating activities for the September quarter totaled $134 million. We made separation payments of $64 million and restructuring payments of $26 million during the September quarter. Capital expenditure was $71 million in Q2 and a total of $149 million in the first half of FY16. We returned $262 million to shareholders during the September quarter -- $102 million was in the form of cash dividends, and $160 million was used to repurchase 8 million shares at an average share price of $21.13. The expanded set of revenue and efficiency initiatives continues to improve our top line and optimize our cost structure for FY16. Let me provide an update on three of these initiatives. First, our license compliance initiative, which we put in place to ensure customers are current on their subscription and maintenance agreements, is on track to deliver a total revenue of $17 million for the security business FY16. Second, within the Symantec Security business, we've implemented a plan of action to upgrade customers to the latest version of all our products. This allows us to shift support and development spending to higher growth initiatives, but even more importantly, it allows our customers to take advantage of the technology improvements in our latest releases. Finally, we are in the planning phase of leveraging and optimizing our existing data center cloud strategy to improve the overall cost of our IT infrastructure. I'll update you more on the progress of this initiative in the coming quarters. Now, let me provide you with a high-level overview of Symantec Security's stand-alone financial profile for FY16. As a reminder, all growth rates are year over year and in constant currency. Our revenue, operating margin, and non-GAAP EPS guidance for the third and fourth quarter of FY16 represents stand-alone Symantec Security and do not include Veritas, formerly our Information Management segment. The impact from Veritas will be included in GAAP EPS as discontinued operations for the third quarter. We are lowering second-half FY16 revenue outlook. While our Enterprise Security sales pipeline is growing, it is not enough to compensate for Q1 shortfall. Similarly, we're adjusting our non-GAAP operating margin guidance. Selling the Veritas business will result in transaction service agreements -- TSAs -- and stranded costs, which are overhead expenses once shared with Veritas. These expenses include IT-related infrastructure and services, real estate litigation, and, to a lesser extent, headcount. On an annualized basis, we expect to have approximately $130 million in TSAs and stranded costs. Our TSA costs, which represent about a third of the total, will need to be in place over the next year as we support the Veritas business transition. While these TSAs are a headwind to our operating margin, Veritas will reimburse us for these costs in discontinued operations. Starting now and through FY17, we expect to take aggressive action to rightsize our cost structure by this amount. This will help us to move toward our 30% operating margin target. Moving on to our Q3 guidance for the stand-alone Symantec Security Company. Our December 2015 quarter guidance assumes an exchange rate of $1.13. We expect Symantec Security revenue for our third fiscal quarter to be between $890 million and $920 million. For our Consumer Security segment, we expect our revenue to decline year over year in the range of between 6% and 8%. We expect revenue for our Enterprise Security segment to grow 1/2% year over year. We expect non-GAAP operating margin to be between 25.5% and 27.5%. Excluding the impact from stranded costs and TSAs, operating margin guidance would have been 30% at the mid-point. We expect third fiscal quarter non-GAAP EPS in the range of $0.22 to $0.25, which assumes a share count of 665 million. Without the Veritas sale, we estimate that the Information Management business would have contributed an additional $0.23 per share to non-GAAP EPS. Moving on to our Q4 guidance for the stand-alone Symantec Security Company. Our March 2016 quarter guidance assumes an exchange rate of $1.13. We expect fourth fiscal quarter Symantec Security revenue to be between $885 million and $915 million. For our Consumer Security segment, we expect our revenue guidance to remain unchanged from a year-over-year decline in the range of between 5% and 8%. We expect revenue for our Enterprise Security segment to grow 1% year over year. We expect non-GAAP operating margin to be between 26.5% and 28.5%, resulting in an EPS in the range of $0.24 to $0.27. Excluding the impact from stranded costs and TSAs, our operating margin guidance would have been 30.3% at the mid-point. Our guidance assumes a share count of 653 million. In conclusion, our team has made a lot of progress in achieving operational separation, and I'm confident we're on the right track in moving our business forward. As we enter the next stage of our transformation, we are well positioned to return Symantec to growth through both organic and inorganic opportunities. And with that, I'll turn it over to Jon to begin taking your questions. -------------------------------------------------------------------------------- Jonathan Doros, Symantec Corporation - VP of IR [5] -------------------------------------------------------------------------------- Thank you, Thomas. Operator, will you please begin polling for questions? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you. (Operator Instructions) And we'll go first to with Raimo Lenschow, Barclays. -------------------------------------------------------------------------------- Raimo Lenschow, Barclays Capital - Analyst [2] -------------------------------------------------------------------------------- Hey, thanks for taking my question. My first main question is we've seen lots of moving parts in FY16. Is there any chance, without giving guidance, obviously, but to talk maybe qualitatively about FY17 because that will be probably the first clean year after the split? -------------------------------------------------------------------------------- Mike Brown, Symantec Corporation - President & CEO [3] -------------------------------------------------------------------------------- Right. Absolutely, Raimo. So if you think about the two components of the business, Consumer Security and Enterprise Security, our expectations for FY17 would be unchanged from what we talked about at Financial Analyst Day. In other words, to refresh everybody's memory, the decline that we're seeing in Norton should moderate in FY17, and the guidance we gave for FY17 is a decline of between 3% and 6%, an improvement of the range of 5% to 8% that we're operating within this year. The Consumer Security remains unchanged. So the change from the revenue standpoint for FY17 would really be around Enterprise Security. We're clearly pleased with the momentum that we're seeing in Enterprise Security, in particular, the recovery from the poor Q1 performance. So we could see that in some of the numbers that we talked about. We're seeing particular strengths in a couple of product areas today, DLP, end point, cybersecurity services. As I talk about in my prepared remarks, we have a host of new products, in fact, a dozen new products in Enterprise Security. However, it will take time for customers to integrate those and for those to be contributing materially to our financial results. So the guidance we gave a year ago for FY17 was that we would be in a range of 1% to 6% for revenue growth this year, FY16, and as you can see from the guidance that Thomas just provided, we'll be at the very low end of that range, closer to 1%. As we look forward to FY17, it would not be concertive to think that we'll grow at the rate we previously gave, which was 6% to 10%. So while it's too early to give specific guidance on what we would see for Enterprise Security, we'll do that as we get closer to the end of this FY16. I think we'd have to say that it's going to be somewhere in between where we gave for FY17 from our ending rate this year and the rate that we gave at financial analyst day. On the margin side, we have a lot of work to do, as Thomas mentioned, to reduce our cost structure, taking account of the TSAs and stranded costs as a result of the Veritas sale. In fact, if you take the guidance that Thomas gave and you add about 3 points, which would account for these costs, you can see we're operating very close, if not at the guidance we gave at Financial Analyst Day, which was a range for the security business of 30% to 31% operating margin. So we have a lot of confidence that we'll be able to get back to the earning potential of the business, which would be our target of 30% operating margin. But it will take us through FY17 to take out those costs and have that show through. -------------------------------------------------------------------------------- Raimo Lenschow, Barclays Capital - Analyst [4] -------------------------------------------------------------------------------- So a question for Thomas. So TSA costs, et cetera, they will all be done in FY17, so it's going to be a clean year on the cost side as well, or is there still some spillover? -------------------------------------------------------------------------------- Thomas Seifert, Symantec Corporation - EVP & CFO [5] -------------------------------------------------------------------------------- Well, it's a whole set of TSA agreements. It's not just one. But the majority of those agreements are going to expire within the coming year, within a year. That's true. -------------------------------------------------------------------------------- Mike Brown, Symantec Corporation - President & CEO [6] -------------------------------------------------------------------------------- Just to be clear, we won't be starting FY17 with those gone. That's just a few months away. It will take us that fiscal year to be able to reduce those costs. -------------------------------------------------------------------------------- Raimo Lenschow, Barclays Capital - Analyst [7] -------------------------------------------------------------------------------- Yes. That's what I meant. And then Thomas said it takes a year. Is it like the whole calendar year, or is it a fiscal year that you talk about? -------------------------------------------------------------------------------- Thomas Seifert, Symantec Corporation - EVP & CFO [8] -------------------------------------------------------------------------------- For the TSAs, it's pretty much a year. To take out the stranded costs, then, will take us until the end of the fiscal year. So TSAs, four quarters pretty much from finishing the transaction, closing the transaction, and then stranded costs really until the end of the FY17. -------------------------------------------------------------------------------- Raimo Lenschow, Barclays Capital - Analyst [9] -------------------------------------------------------------------------------- okay. Thank you. -------------------------------------------------------------------------------- Mike Brown, Symantec Corporation - President & CEO [10] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- We will go next to Walter Pritchard with Citi. -------------------------------------------------------------------------------- Walter Pritchard, Citigroup - Analyst [12] -------------------------------------------------------------------------------- Hi. One question for mike. Just on the new endpoint product, I know that product has been out in data early access. Can you help us understand -- give us some feedback there on what you're seeing in that product? How broad are you seeing interest in your customer base? And you released pricing, I think, last week or the week before. Can you talk about how much you think you'll actually be able to realize incrementally in accounts? It seemed like the pricing there was actually multiples of what you might be getting for AV, and usually, we've seen these add-ons maybe come at a fraction of what the AV is, not multiples. -------------------------------------------------------------------------------- Mike Brown, Symantec Corporation - President & CEO [13] -------------------------------------------------------------------------------- Sure, Walter. So we're very excited about the advanced threat protection solutions. As you know, it's three modules. It's network, e-mail, and endpoint. Network is available today. E-mail is also available, but our endpoint comes at the very end of the quarter. So we're in a controlled availability at this point, and general availability comes at the end of the quarter. The real power of these three solutions come when you work with all three together because the key differentiation here with Symantec's advanced threat protection is that we're able to operate across these three multiple control points and then prioritize for the SOC analysts what are the threats that they should be worried about, which really improves the signal-to-noise ratio. You don't have to worry about threats that have already been remediated by our endpoint, as an example. We're also allowing SOC analysts to remediate, either quarantine or eliminate threats, with one click from a single console across those multiple control points. This is a huge productivity improvement for SOC analysts. The other key benefits, obviously, are from a cost standpoint, these capabilities are available in a virtual appliance as opposed to a physical appliance that costs hundreds of thousands of dollars, and we're correlating that threat information you're seeing in your local environment across your enterprise with what we're seeing globally. So you get advanced notice of whatever is happening in your industry, as an example, from around the globe. So really key advantages, and that's why the pricing is a multiple of what we're seeing today with our set products. The customer reaction has been enthusiastic, as you'd imagine, given those productivity benefits that I talked about because one of the big expenses when security staffs are maintaining their environment or protecting their environment is, of course, the labor cost. It's not the cost of the technology that we're providing. So if we can make those folks more productive, we've saved a whole lot of money. So the reaction that we've seen, even from the controlled availability of the other modules that are available and what the beta has shown us from endpoints is that this is going to be one of our most successful products. So already in use in beta at a number of customers that are global, financial institutions, healthcare, really across the board. So we're pretty enthused. But it is early. Obviously, without having a product in general availability, it would be too soon to start predicting what does that mean financially for us. And as I mentioned when I talked about FY17 guidance, it's going to take -- you pick the number -- six to nine months for customers to really do their own testing, integrate this, and start buying in a sufficient quantity that would affect the financials. -------------------------------------------------------------------------------- Walter Pritchard, Citigroup - Analyst [14] -------------------------------------------------------------------------------- And then just, Mike, one other product question. You mentioned in the script, and I think it's the first time we've heard you say it, that you were upgrading your customers for free to the latest version on the Enterprise side. We've seen other companies do that. Microsoft is doing it with Win 10. Adobe and others doing subscription-like offerings that are keeping customers on the current version. The question on your end would be, are you foregoing a material amount of revenue by doing that upgrade for free, and how did you think about that versus the benefits of lower support costs and having everybody consuming your latest and greatest? -------------------------------------------------------------------------------- Mike Brown, Symantec Corporation - President & CEO [15] -------------------------------------------------------------------------------- So Walter, I'm not sure that I did say that. We're enthused about customers moving to more current versions of the product. What we do offer for free is working with customers to make sure they've turned on all the features of our products. For example, SEP today is, in my view, by far the best protection you can have on the endpoint, and I think that's why we're the leader in the market, and it's because we have so many protection engines in place beyond what you get from AV, which I know a lot of folks in the market like to say that's the only engine that we have. There's five or six engines in our set product today, including things like file reputation, intrusion prevention, behavioral analysis, to understand what files are really doing. So we want to make sure that our customers have all those engines turned on. And when they do, we're blocking more threats than anyone else, and we have proof of that in third-party testing. So, again, I'm not sure what I said that made you think we were doing a wholesale upgrade of all our Enterprise price customers, but we are trying to make sure that SEP customers, as an example, have turned all the features on of the product they've bought. -------------------------------------------------------------------------------- Walter Pritchard, Citigroup - Analyst [16] -------------------------------------------------------------------------------- Okay. Thanks for the clarification. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- We'll go next to Daniel Ives with FBR. -------------------------------------------------------------------------------- Daniel Ives, FBR & Co. - Analyst [18] -------------------------------------------------------------------------------- Thanks. In terms of M&A, how should we think about timing verse opportunity? Is it just looking for the right situation, or do you feel like there's, from a timing perspective, more urgency to get fuel in the tank in terms of the right acquisition? That would be my first question. -------------------------------------------------------------------------------- Mike Brown, Symantec Corporation - President & CEO [19] -------------------------------------------------------------------------------- Okay. Well, Dan, I think as we've said, we believe M&A is a key part of the strategy, but let's look back at what we've done so far this fiscal year, and even go back to last year. We've made two acquisitions, so we're being highly selective in terms of looking at these targets. One was a [Norris] acquisition, which was getting a select group of data scientists who can really help us accelerate the unified security analytics platform that we're building. As we talked about earlier in my prepared remarks, we're getting the first application, something called Risk Insight, that will be available, basically, in the second half of FY16. And then more recently, Blackfin, which was complementary technology to add to cybersecurity services, specifically in the simulation services area. So we have already begun the looking for what are the complimentary targets out there? They need to be tightly aligned with a strategy. One of the things that I could be critical about our past the is that perhaps we haven't gone after acquisitions that were tightly aligned with articulated strategy. And then as we've also talk about in the past, we're really going to be able to bring value if we look for a complimentary technology where we can use our distribution capability to grow that dramatically. Perhaps the most successful example of that was our DLP business, which today is a flagship in the industry in terms of its performance. So I would say we're not in a hurry. I can't remember the words you used, but, no, we're not in a hurry. There's a lot of opportunity out there, but we need to be very selective. It's not lost on us that most of these companies are trading in a multiple of revenue, and obviously, our multiple of revenue is quite low. So we're going to be very selective about choosing the right targets that fit with the strategy, that we can grow dramatically, and that have the appropriate risk-adjusted return for shareholders. -------------------------------------------------------------------------------- Daniel Ives, FBR & Co. - Analyst [20] -------------------------------------------------------------------------------- And just a quick followup. Just given the head scratcher last night from a competitor, are you seeing less threats on the Enterprise given improving US-china relations? Just got to ask it. -------------------------------------------------------------------------------- Mike Brown, Symantec Corporation - President & CEO [21] -------------------------------------------------------------------------------- No. We are seeing the threat landscape continue to be quite scary. Threats are clearly on the rise. And certainly, if you look at where most of the threats are coming from, it's criminal activity with a greed motivation. So I'm not sure if your question is really around state-sponsored activity, but that is a very small fraction of the total threat landscape. -------------------------------------------------------------------------------- Daniel Ives, FBR & Co. - Analyst [22] -------------------------------------------------------------------------------- great. Thanks. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- We'll go next to Brad Zelnick with Jefferies. -------------------------------------------------------------------------------- Brad Zelnick, Jefferies & Co. - Analyst [24] -------------------------------------------------------------------------------- Great. Thanks so much. My first question for Thomas is on billings, which were actually stronger than we'd modeled and seasonally better than you typically see in a Q2. But as we look forward ex-Veritas, can you help us with what to expect in terms of the seasonality and what the business looks like without Veritas baked in? And are you going to provide a pro forma balance sheet for us so we can model this out? -------------------------------------------------------------------------------- Thomas Seifert, Symantec Corporation - EVP & CFO [25] -------------------------------------------------------------------------------- Yes, to the last question. As we (inaudible), we'll adjust and clean up our historical numbers, so those numbers will be available soon after the transaction closes. And we do not expect our billings behavior from a seasonality perspective to materially change past the separation. -------------------------------------------------------------------------------- Brad Zelnick, Jefferies & Co. - Analyst [26] -------------------------------------------------------------------------------- Thanks for clarifying. And just following up on Walter's question, I think it, Thomas, was actually in your prepared remarks where you say that the Company has implemented a plan of action to upgrade customers to the latest version of all of our products. Is there -- I'm hoping you can tell us a little bit more about what that means. But is there -- if it's any different than what Mike had already said, but is there a risk that gives customers a reason to maybe go to market and reconsider competitors if there's some type of forced upgrade? -------------------------------------------------------------------------------- Thomas Seifert, Symantec Corporation - EVP & CFO [27] -------------------------------------------------------------------------------- It's not a forced upgrade, but it's really convincing customers that there is a benefit moving to our latest version. And in my remarks, it was less from our -- do this for free? We don't. But if we have from an R&D and technical support cost structure, if we have less versions to support, this, of course, frees up resources that you can redeploy towards high-gross opportunities in the Enterprise Securities segment, and that is the primary motivation behind driving this initiative on our side. So there's a customer benefit, and from us, the benefit is really that we can get cleaner in our setup and continue to optimize our investment opportunities as we have done over the last 12 months. -------------------------------------------------------------------------------- Brad Zelnick, Jefferies & Co. - Analyst [28] -------------------------------------------------------------------------------- Maybe -- -------------------------------------------------------------------------------- Mike Brown, Symantec Corporation - President & CEO [29] -------------------------------------------------------------------------------- I'm sorry. -------------------------------------------------------------------------------- Brad Zelnick, Jefferies & Co. - Analyst [30] -------------------------------------------------------------------------------- Maybe -- -------------------------------------------------------------------------------- Mike Brown, Symantec Corporation - President & CEO [31] -------------------------------------------------------------------------------- Just a couple more points on that. I think I did mention in my remarks that we have 370,000 Enterprise customers, so you can imagine with the breadth of the product line and that many Enterprise customers how many different versions that we're supporting. And, of course, what we've found as we look across that customer base is that because it's sometimes cumbersome to upgrade to new versions, companies can be reluctant to do that. And what we all know is that the threat landscape, as I mentioned a minute ago, is evermore complex, and we need to have customers migrating to more recent versions and making sure all the features are turned on on the products, or they really are not protected in the way the products are intended. Or as I like to say it, you locked the front door, but you left the windows open. So it's a conscious effort on our part to make sure that customers are protected. Now that benefits them, but from a business model standpoint, as Thomas referred to, that also gives us a more efficient business model. -------------------------------------------------------------------------------- Brad Zelnick, Jefferies & Co. - Analyst [32] -------------------------------------------------------------------------------- Thanks, Mike, and thanks, Thomas. -------------------------------------------------------------------------------- Mike Brown, Symantec Corporation - President & CEO [33] -------------------------------------------------------------------------------- You bet. -------------------------------------------------------------------------------- Operator [34] -------------------------------------------------------------------------------- We'll go next to Michael Turits with Raymond James. -------------------------------------------------------------------------------- Michael Turits, Raymond James & Associates, Inc. - Analyst [35] -------------------------------------------------------------------------------- Hey, guys, just a clarification on the longer-term margin outlook. So should I understand that FY17, let's call it pro forma ex the TSA and stranded costs, would be 30%? And then how are you feeling about it for FY18? -------------------------------------------------------------------------------- Thomas Seifert, Symantec Corporation - EVP & CFO [36] -------------------------------------------------------------------------------- Well, you know, we'll provide update on '18 as we get closer. -------------------------------------------------------------------------------- Michael Turits, Raymond James & Associates, Inc. - Analyst [37] -------------------------------------------------------------------------------- Can you give me FY20 while you're at it, actually? (laughter) -------------------------------------------------------------------------------- Thomas Seifert, Symantec Corporation - EVP & CFO [38] -------------------------------------------------------------------------------- I think we find the right balance in terms of trade off, getting the business to grow and delivering the profitability that we need. We think that 30% is the right target on our compensated for stranded costs and TSAs in FY17. And we're excited about the momentum we see on the top line from a business momentum perspective that allows us to grow moving forward of costs, that this will have scaling impacts and benefits, but it's too early to call that in a specific number. -------------------------------------------------------------------------------- Michael Turits, Raymond James & Associates, Inc. - Analyst [39] -------------------------------------------------------------------------------- Okay. Thanks. And then, Mike, just a continuation of the question regarding the industry in general. You said that you're not seeing a reduction in attacks. I assume that's both commercial and state sponsored. And what about the question that was on last night's call from a competitor regarding what they thought was a slowing in spending from elevated rates to something less elevated? Are you seeing that slowing in spending in the industry? -------------------------------------------------------------------------------- Mike Brown, Symantec Corporation - President & CEO [40] -------------------------------------------------------------------------------- We're not. Now, we have a much broader product line than I think the competitor you might be referring to. And we're just entering -- if you think about -- if your question really is related to FireEye's comments, they're clearly focused on advanced threat protection. That's a market we don't even have exposure to yet in any material way. And, of course, the other area of competitive overlap for us is services with Mandiant, which is so successful in the service arena. Our incident response business is newer than theirs. We're at capacity. We're trying to grow that as fast as we can, but obviously, they have a much larger position in incident response than we do. We don't overlap as much, so my comments really are related to our business, and obviously, I don't see what they're seeing. -------------------------------------------------------------------------------- Michael Turits, Raymond James & Associates, Inc. - Analyst [41] -------------------------------------------------------------------------------- Yes. I just was wondering if it's possible to make these observations from the general tone of the industry, whether or not you thought that there was some change in the nature of spending from a level of urgency to something less? -------------------------------------------------------------------------------- Mike Brown, Symantec Corporation - President & CEO [42] -------------------------------------------------------------------------------- We're not seeing it. Symantec, we analyze 10 trillion security incidents a year, so the scale of what we're seeing only continues to increase. -------------------------------------------------------------------------------- Michael Turits, Raymond James & Associates, Inc. - Analyst [43] -------------------------------------------------------------------------------- Thanks, Mike. Thanks, Thomas. -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- We'll go next to Matt Hedberg with RBC Capital Markets. -------------------------------------------------------------------------------- Matt Hedberg, RBC Capital Markets - Analyst [45] -------------------------------------------------------------------------------- Yes, thanks, guys, for taking my questions. I wanted to circle back on the Consumer business. In your prepared remarks, I know you guys mentioned the migration to cloud-based subscription. Sounds like it should be done by next summer. And given the context of Norton falling, I think you said between 5% and 8% this fiscal year, once this migration is complete, is that really what gives you the confidence that this business can reaccelerate? And once it does, maybe remind us about what the margin structure of that business looks like. -------------------------------------------------------------------------------- Mike Brown, Symantec Corporation - President & CEO [46] -------------------------------------------------------------------------------- Sure. Well, I think there's a number of factors at play here. So, one is, of course, the move to a subscription model. The other is our primary means of acquiring customers, which shifted from OEM and retail to online. So we talked about that being up 8% year over year. We added 600,000 new customers for Norton this past quarter. So about half of our business now is online customers, and those tend to be the stickiest because they've made the positive decision to go with the best. I think we've been awarded the PC Editor's Choice Award 37 times at this point. So they're making a positive choice to go with a premium offering for security, and we find that those customers have a larger lifetime value, 30% more relative to a customer that comes in through OEM or retail. So that's what we're excited about in terms of driving some improved numbers for this business and getting back to a top line that's flat, if not growing. The market for paid consumer security is growing at low single digits. There's no reason why this business, once it's transformed, all subscription, primarily acquisition of online customers, can't get to that level. And as I've mentioned previously, we're looking at ways to leverage the Norton brand to get into some new areas. I've talked about Internet of Things as an example. More and more consumer devices in the home exposed to security threats. So we're looking at some ways to drive the business to grow faster that will be separate from the offerings that are available today. So it's that combination of things that gives us confidence that this business should continue to improve not just next year, but in the foreseeable future. And then the margin structure, we've said that our margin target is 52% to 54%. We've been a little bit better than that recently, 57% in the first quarter, this quarter 55%. We do expect to operate in that more normalized range, and part of the reason we're saying that is because we are making some investments in the business, improving the customer experience, investing in that acquisition channel, getting more customers online, and then, obviously, some investment going to what can we do in new areas to leverage the Norton brand, as I mentioned. So that will drive the margin a little bit lower than what we've seen in the last two quarters as we look further out. -------------------------------------------------------------------------------- Matt Hedberg, RBC Capital Markets - Analyst [47] -------------------------------------------------------------------------------- That's great. And then maybe, Thomas, looks like the Americas, I believe was your lowest growing GO in this region. I think EMEA was a little closer to flat. Can you give us a sense from a geographic perspective how we should think about performance in the second half of this fiscal year? -------------------------------------------------------------------------------- Thomas Seifert, Symantec Corporation - EVP & CFO [48] -------------------------------------------------------------------------------- Yes. So when you're talking of the Americas, it's a mixture of regions. I think it's fair to say that our US-based business did well. Our federal business was in that region that did very well, and EMEA met our expectations. We think moving forward there in the second half, that Europe could pick up a little bit in terms of overall contribution to our results, and APJ is probably going to stay where it is. And we are just looking at the pipeline until the momentum develops to see that the domestic business is continuing with the strengths we have seen in the second quarter. -------------------------------------------------------------------------------- Mike Brown, Symantec Corporation - President & CEO [49] -------------------------------------------------------------------------------- In fact, I'll add to that. In the Americas in particular, for Enterprise Security, new business activity, we saw the strongest year-over-year growth in the last 10 quarters. So we wish we saw that consistently across the globe, but in Americas, particularly strong. -------------------------------------------------------------------------------- Matt Hedberg, RBC Capital Markets - Analyst [50] -------------------------------------------------------------------------------- Very helpful. Thanks, Mike. -------------------------------------------------------------------------------- Operator [51] -------------------------------------------------------------------------------- We'll go next to Keith Weiss with Morgan Stanley. -------------------------------------------------------------------------------- Keith Weiss, Morgan Stanley - Analyst [52] -------------------------------------------------------------------------------- Thank you for taking the question, guys. I wanted to follow and (inaudible) get an opportunity to drill down a little bit more into that Consumer side of the equation. This is as much of a clarification as anything. When you talk about the 600,000 new subscribers to Norton, is that only on the online side of the business? And can you give us a sense of what's the growth rate in the overall base and help us understand the equation between overall units versus ASPs and what's causing the declines of that business today, and how that -- which side of the equation is likely to recover and get you back to flat growth on a going-forward basis? -------------------------------------------------------------------------------- Mike Brown, Symantec Corporation - President & CEO [53] -------------------------------------------------------------------------------- Sure, Keith. So we're in a transition, and because the business is ratable, we're talking about customers rolling off a download model into a subscription model, that's why it's taking so long for this transition. That's compounded by the change in how we're acquiring customers moving from primarily OEM and retail into primarily online. So that's the dynamic that you're looking at. The 600,000 customers that we added were exclusively online acquisitions. So obviously, that's being offset by continued declines in retail and OEM. But, of course, as we start to get the millions of customers -- as we talked about before, we protect 65 million consumer endpoints out there. So as we begin to reach the second half here of that migration to the subscription service, the numbers begin to look better, and what we're really excited about is when we get through that complete transition, which we talked about summer of 2016, it'll be very interesting to see, obviously, what the year-over-year comparisons look like then, but we have to wait a while to get to that point. And by that point, the business should be primarily customers that we've acquired online. -------------------------------------------------------------------------------- Keith Weiss, Morgan Stanley - Analyst [54] -------------------------------------------------------------------------------- Got it. -------------------------------------------------------------------------------- Mike Brown, Symantec Corporation - President & CEO [55] -------------------------------------------------------------------------------- And maybe obvious to everyone is the fact that why do we feel that way? It's because retail customers tend to be shopping for the lowest price. They're doing that comparison. And OEM customers don't necessarily renew at all. So you pay those fees up front. A year later, that customer may not renew with you at all. You've played that placement fee; you get no value for that. That's why we're so excited about this transition. -------------------------------------------------------------------------------- Keith Weiss, Morgan Stanley - Analyst [56] -------------------------------------------------------------------------------- Got it. And then one element of the consumer business that you guys haven't talked about, obviously, in conference calls is the mobile side of the equation. Are you still seeing traction with (inaudible) people using that mobile side of the equation, and is that helping ASPs to any extent? -------------------------------------------------------------------------------- Mike Brown, Symantec Corporation - President & CEO [57] -------------------------------------------------------------------------------- Not helping ASP because we're providing that for free today. I wish we had a way to monetize that, but today we're providing mobile protection either for iOS or Android for free. You can download that Norton Mobile at those app stores. There may be a way in the future to monetize that. We don't have an idea for that today. There have been tens of millions of downloads of Norton Mobile. So obviously, it helps us with brand recognition of top-quality consumer protection. We get benefit because we're incorporating that threat telemetry of what those mobile endpoints are seeing in our massive database, our intelligence network, but monetization is something that we'll have to wait for a later day there. -------------------------------------------------------------------------------- Keith Weiss, Morgan Stanley - Analyst [58] -------------------------------------------------------------------------------- Got it. If I could sneak one last one in on the channel program. You guys talked about a new channel program that you put into place. We've heard excitement from your channel partners about this new program, and maybe it refreshed emphasis on the channel. But you also recently lost your Head of Distribution, who people looked at as a real channel champion, and there was some -- in the Trader Rag some concern that might upset the momentum in the rollout of this channel program. How do we garner confidence that you guys are going to be able to sustain the momentum, sustain the focus of your channel partners through this leadership transition on distribution? -------------------------------------------------------------------------------- Mike Brown, Symantec Corporation - President & CEO [59] -------------------------------------------------------------------------------- So I think you're referring to our Head of Worldwide Sales. He didn't leave; he was terminated for cause. Now, the good news is we have a pretty deep bench of folks with experience with the channel. Symantec has always been a channel company. We've been a channel company for 30 years. But I think those partners who have worked with us for a long time know that our commitment is unwavering there. And it's great that we've now introduced Secure One, our new channel program, which now, for the first time, can be focused on security partners. To be honest, our channel was previously more geared towards our Veritas business, some of the larger deals that were storage deals versus security, though it gives us a chance to work with those partners who are focused on security. And now we've got incentives in place so that as they get really trained on our products or certified, there's better economics or incentives for them. So I think we've got the right focus on getting those folks who are specialized in security and the right incentives so they can make more money by investing with us over time. -------------------------------------------------------------------------------- Operator [60] -------------------------------------------------------------------------------- And ladies and gentlemen, that does conclude the Q&A session of today's call. I'd like to turn it back over to our speakers for any comments and closing remarks. -------------------------------------------------------------------------------- Mike Brown, Symantec Corporation - President & CEO [61] -------------------------------------------------------------------------------- Thank you for being with us. -------------------------------------------------------------------------------- Operator [62] -------------------------------------------------------------------------------- And this does conclude today's conference, everyone. We thank you for your participation. You may now disconnect.
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