SYMANTEC CORPORATION 2Q11 EARNINGS PREPARED REMARKS. Introduction Helyn Corcos, Vice President Investor Relations

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1 Introduction Helyn Corcos, Vice President Investor Relations Good afternoon, and thank you for joining our call to discuss fiscal second quarter 2011 financial results. With me today are Enrique Salem, Symantec s President and CEO and James Beer, Symantec s Executive Vice President and CFO. In a moment, I will turn the call over to Enrique. He will discuss how Symantec executed during the quarter, then James will provide highlights of our financial results as well as discuss our guidance assumptions as outlined in the press release. This will be followed by a question and answer session. Today s call is being recorded and will be available for replay on Symantec s investor relations website at A copy of today s press release and supplemental financial information are posted on our website. And, a copy of today s prepared remarks will be available on our investor relations website shortly after the call is completed. Before we begin, I d like to remind you that we will review our financial results focusing on year over year constant currency growth rates unless otherwise stated. Sequential growth rates are based on as reported results. For the September 2010 quarter, the actual weighted average exchange rate was $1.30 per Euro, and the end of period rate was $1.38 per Euro compared to our guided rate of $1.26 per Euro. For the September 2009 quarter, the actual weighted average rate was $1.44 per Euro, and the end of period rate was $1.46 per Euro. We ve included a summary of the year-over-year constant currency and actual growth rates in our press release tables and in our supplemental information. Some of the information discussed on this call, including our projections regarding revenue, operating results, deferred revenue, cash flow from operations, amortization of acquisitionrelated intangibles and stock-based compensation, for the coming quarter contain forwardlooking 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. Enrique Salem. Enrique Salem, President and CEO Thank you, Helyn, and good afternoon, everyone. 1

2 The team s solid execution during the September quarter resulted in better than expected results. Our performance was driven by strength in backup and archiving and continued growth in hosted services and data loss prevention. We closed a majority of the enterprise deals that slipped last quarter and finished the September quarter on a strong note. In addition, I m pleased with the better than expected results for PGP, GuardianEdge and the VeriSign security business. Now, let s take a closer look at some of the highlights from the quarter. Our Consumer business benefited from the strength of our ecommerce platform and our market leading products, Norton Internet Security and Norton 360. Our new ecommerce platform completed its first anniversary of operations and now serves 230 countries, in 18 languages and supports 24 currencies. Our ability to develop more targeted programs is benefiting renewals as well as our up-selling and cross-selling efforts. According to Internet Retailer, Symantec ranked No.1 in Software Online Sales and is one of the Top 5 Consumer Brands. Last month, we successfully launched the 2011 versions of Norton Internet Security and Norton AntiVirus which further improve consumers online safety without sacrificing performance. Consumers benefit from our innovative technologies, such as reputation based security, which harnesses results from over 100 million systems in over 200 countries to expose threats other security vendors miss. Features like Safe Web, Proactive PC Performance Alerts and integration with Norton Online Family further differentiate Norton from the competition. According to independent research results from PassMark, AV-Test, AV-Comparatives, and DennisLabs, Norton Internet Security is ranked #1 in Online Threat Detection and #1 in Overall Performance. In addition, PC Magazine awarded Norton Internet Security its Editor s Choice Award for the 4th consecutive year and Norton AntiVirus its Editor s Choice Award for the first time since Over the past two quarters the growth rate of Consumer revenue has declined as PC units have shifted towards low-end devices, which have lower conversion rates. Having said that, we expect growth rates to stabilize as we benefit from growth in overall PC unit shipments and our ongoing efforts to drive higher conversion rates. As part of these efforts, we are continuing to enhance the trial experience by improving the design and messaging of trial activation reminders. We are also working with our partners to further integrate the trial and purchase experience into the initial PC set-up. We remain focused on acquiring new customers through our multi-channel distribution network. I d like to highlight a few of our September quarter wins. We expanded our retail relationships with Costco, Best Buy and Boulanger, a French retailer, during the quarter. In addition, we won several ISP deals with partners such as United Online and Telmex. We also renewed our OEM relationship with Sony to ship Norton Internet Security in the Americas. We continue to build on the Norton value proposition through sales of Norton Online Backup which ships on 6 of the top 10 OEMs. In addition, we are reaching millions of consumers through free offerings such as Norton Online Family, Norton Security Scan, and Norton PC Checkup. Through these services we are up-selling our Norton security, backup and remote service offerings. 2

3 Beyond the PC, we are positioned to take advantage of protecting consumers through our Norton Everywhere initiative. Norton Everywhere extends trust to new devices and consumer applications spanning across mobile, smart devices, and embedded services. The June beta releases of Norton Mobile Security and Norton DNS have received a positive response with over 300,000 users to date. Partner interest around the globe for these offerings has also been encouraging. You can expect us to leverage our technologies and collaborate with industry leaders to take advantage of Internet connected devices beyond the PC. Now, I ll turn to our enterprise business. As the fiscal year for the US federal government came to a close, we posted double digit Public Sector bookings growth driven by strength across all product lines in both the civilian and defense agencies. Our commitment to government standards across the portfolio, along with products such as DLP and Enterprise Vault, helped drive our performance. With increased regulatory requirements, our recent acquisition of GuardianEdge has also resonated well in the Public Sector. Storage Management performed in line with our expectations. Our Storage Foundation and Cluster Server products help organizations capitalize on advanced storage technologies, such as thin provisioning and solid state drives, while continuing to reduce costs and get better ROI from their hardware infrastructure. For example, Symantec s storage management products helped Vodafone decrease their annual hardware and ongoing maintenance costs, and realize a three- to four-fold reduction in the company s Microsoft Exchange data store. Our value proposition continues to remain strong given our software s ability to work in heterogeneous environments. Over the last few quarters, a decline in OEM revenues from Sun/Oracle has put pressure on this part of the business. Having said that, we are committed to selling our products on all platforms, as well as, focusing on long term growth opportunities such as virtualization, private clouds, and storage optimization. Our storage business remains important as we further integrate our security and storage technologies to create unique offerings, such as Data Insight, which helps customers manage growth in unstructured data in ways that our competitors cannot match. We remain focused on strengthening our relationships and product footprint in our top accounts. Some of our new storage management initiatives are centered around helping customers virtualize applications and databases. Earlier this quarter, we launched Application High Availability (a.k.a. AppHA) and VirtualStore which were jointly developed with VMware. AppHA helps organizations virtualize their business critical applications with confidence and VirtualStore provides high-performance, low-cost storage for desktop and server virtualization deployments. These new products along with our recently launched FileStore and Data Insight offerings represent long term growth opportunities for our storage business. Now, moving on to our backup and archiving business. NetBackup, the #1 backup solution for the enterprise, posted mid single digit revenue growth driven by strong demand for deduplication and virtual machine protection. Through integrated deduplication, we help customers control information growth, eliminate redundant data at the 3

4 source, and optimize storage resources more efficiently than first generation deduplication solutions. NetBackup 7 won the Best of VMworld 2010 Gold Award in the business continuity and data protection category for its market leading and unique virtual machine protection capabilities. Additionally, we started shipping NetBackup deduplication appliances and the response from customers has been very positive. As information continues to grow at unprecedented rates, our capacity based pricing model positions us to take advantage of this trend. We are seeing strong customer adoption of this new model, as over 23% of license bookings for NetBackup were on the capacity based model. We will update you on customer adoption of this new pricing model once a year. In the mid market, Backup Exec generated its second consecutive quarter of double digit bookings growth. Our customers and partners benefit from an unmatched, comprehensive solution that simplifies data management through integrated deduplication, archiving and virtual machine protection. Backup Exec now protects more than 40,000 VMware hosts and an estimated 1 million VMware guests. Business Solutions magazine named Backup Exec the best Channel Product for 2010 due to its ease of installation, richness of features and reliability. Our market leading archiving product, Enterprise Vault, posted double digit revenue growth. Our performance was driven by strength in e-discovery bookings, the US federal government vertical, and execution across all geographies. Last month, we released Enterprise Vault 9 which includes support for Exchange 2010, hosted Exchange, SharePoint 2010 and enhanced discovery features. Moving on to Enterprise Security. Our hosted services business realized another quarter of double digit bookings growth driven by the rapid adoption of our SaaS based security solutions. We are beating the competition worldwide and realizing growth across all regions. By leveraging the Symantec sales force we are extending our customer and geographic reach. We won a competitive contract with Internet Solutions, a leading South African ISP, to provide hosted messaging security services to over 225,000 users. We are also seeing a positive response to our new hosted endpoint protection service launched in May. This offering provides comprehensive security for desktops, laptops and servers as a hosted service, without the need to install additional hardware or management software. Our leading DLP security product continues to be a growth driver for our enterprise security business, posting another quarter of double digit bookings growth. Both Vontu and Message Labs are examples of acquisitions that we ve been able to effectively integrate and grow consistently in highly competitive markets. We continue to use DLP to capture mindshare with CISOs and cross-sell our security portfolio. As a result, we are seeing increased interest in our security suites which include our endpoint protection and mail security products. Recently, independent research from PassMark ranked Symantec Endpoint Protection #1 in overall performance for both the enterprise and SMB markets, beating our nearest competitors. As expected, encryption is a complementary sale to 4

5 our DLP solutions. ECI Telecommunications, a global network infrastructure provider in Israel, signed a multi-year deal which includes our encryption and DLP products. The PGP and GuardianEdge acquisitions exceeded our expectations in the September quarter. The team has done an outstanding job of integrating sales and operations. We are now positioned as a leader in the 2010 Gartner Magic Quadrant for Mobile Data Protection, receiving the highest rating in the Vision category. When we acquired PGP and GuardianEdge we outlined several near-term goals. First, use the acquired technologies to enhance our ability to make data protection more intelligent. Second, utilize the broad Symantec distribution network to grow these businesses. And third, integrate PGP s encryption management platform into the Symantec Protection Center. Let me give you an update on where we are today. Earlier this month we announced the integration of our removable storage encryption offering with data loss prevention. By integrating encryption and DLP capabilities, customers can utilize central policies to automate the identification of sensitive content and intelligently drive encryption. We also announced the integration of Intel s Anti-Theft Technology into PGP Whole Disk Encryption. With this release, customers will be able to use Symantec s PGP technology to remotely disable a lost or stolen notebook and reactivate it if the system is recovered. To take advantage of Symantec s distribution strength, we introduced our new encryption solutions to our partners and are working on program initiatives that encourage them to sell these offerings. We also integrated the encryption sales group into our specialist team. The sales team quickly started cross selling our encryption solutions with DLP and other security products into various customer segments and verticals, such as public sector and financial services, with particular strength in the Americas. Lastly, we combined the engineering teams to work closely on the integration of PGP s encryption management platform with Symantec s Protection Center. We are on schedule to launch the integrated console by the middle of next year. On August 9th we closed the acquisition of the VeriSign security business and our results exceeded our expectations. The SSL certificate installed base grew 16% year over year as we realized growth in both the premium and low-end segments. During 2009, the macroeconomic environment was a headwind for the SSL business. However, we have seen the business improve, generating its third consecutive quarter of year-over-year bookings growth. The addition of unique features such as daily malware scans and seal-in-search are driving VeriSign SSL sales and renewals higher. Seal-in-search is a feature that differentiates VeriSign SSL customers by including the VeriSign Trust Seal in online search results. We are utilizing our GeoTrust and Thawte SSL offerings to aggressively go after the price sensitive segments of the market and gain share. The VeriSign authentication assets are critical to achieving our vision of securing and managing information and identities. As a result, we have the following near-term goals. One, leverage the Symantec sales force to expand the adoption of user authentication. Two, cross-sell these technologies into the installed base. And three, make our consumer and enterprise products more identity aware. To leverage the Symantec distribution network, user authentication services are already being sold by the combined sales force and the response from customers has been very positive. The VeriSign telesales team is already cross-selling Symantec Critical Systems 5

6 Protection. And, we plan to launch VeriSign s authentication products integrated with the Symantec Protection Center as well as launch integrated seal-in-search into Norton Safe Web by the end of the fiscal year. I am pleased with the progress we are making in integrating all three of our recent acquisitions and the team s focus on our key priorities. I'll now turn over the call to James to provide the financial details for the quarter. James Beer, EVP & CFO Thank you Enrique and good afternoon everyone. I am pleased to report that Symantec posted better than expected second quarter results in each of our key financial metrics. Our performance was driven by strength in our backup and archiving, hosted security services and data loss prevention businesses. In addition, our three acquisitions exceeded our expectations. We prudently managed our expenses and generated another quarter of strong cash flows. GAAP revenue of $1.48 billion increased 2% in constant currency terms versus the September 2009 period. The Content, subscription, and maintenance line accounted for 86% of our revenue, of which approximately 40 percentage points came from our consumer, SaaS and authentication solutions. These offerings are solely subscription based and represent a significant portion of our new business growth. However, this new business is not included in our license revenue line. The US dollar strengthened 10% against the Euro as compared to the year ago period, decreasing our international revenue as measured in US dollars. As a result, foreign currency movements negatively impacted revenue growth by 2 percentage points year-over-year. Net income of $266 million resulted in fully diluted non-gaap earnings per share of 34. Excluding the purchase accounting related deferred revenue write down of $49 million from our three recent acquisitions, EPS would have increased by 4 cents to 38 compared to 36 in the September 2009 quarter. As a reminder, with the acquisition of VeriSign s security business, we now own the majority of VeriSign Japan. The consolidated revenue and expenses for VSJ are included in our income statement, with an adjustment below the net income line to account for the income attributable to the non-controlling minority interest. Looking at our geographic results, international revenue of $741 million increased 3% year-overyear and accounted for 50% of total GAAP revenue. Revenue was flat in the EMEA region while the Americas and Asia Pacific Japan regions increased year-over-year by 3% and 5% respectively. It s interesting to note that the euro and the yen moved in opposite directions with respect to the U.S. dollar during the quarter. This has been reflected in our currency adjusted growth rates for the EMEA and APJ regions. Now, I d like to move on to GAAP revenue and GAAP operating margin by segment. 6

7 The Consumer business generated revenue of $468 million. We reduced Consumer revenue by approximately $10 million due to a one-time charge resulting from certain consumers not receiving their subscription entitlements on a timely basis. Excluding this item, consumer revenue increased 3% year-over-year as reported and 5% year-over-year after adjusting for foreign exchange. Our Consumer segment GAAP operating margin was 45%, as compared to 47% in the September 2009 quarter. The margin decline was driven by the one-time charge. We remain focused on up-selling consumers to our premium suites. Norton 360 continued to generate double-digit revenue growth versus the reported results in the year ago period, and accounted for 39% of total consumer revenue. Turning now to our enterprise business, we generated a total of 320 transactions valued at more than $300,000 each, up 15% year-over-year. 59 of these transactions generated more than $1 million, down 16% year-over-year. Of our deals valued at more than $300,000, 74% included more than one of our products and 42% of our deals over $1 million included sales from both our security and storage segments, emphasizing our ability to cross-sell our broad product portfolio. The Storage and Server Management segment generated revenue of $557 million and increased 1% as compared to the September 2009 quarter. Revenue from our backup and archiving business increased 8% year-over-year. We continue to see strong demand for our award winning backup and archiving solutions which generated double digit bookings growth in the September quarter. Revenue from our storage management business declined 8% year-over-year. OEM royalty declines from Sun/Oracle represented approximately one third of the year-over-year decline. Our Storage and Server Management segment GAAP operating margin was 49%, flat as compared to the September 2009 quarter, as we remain focused on managing expenses in this highly profitable segment. The Security and Compliance segment generated revenue of $363 million, up 7% year-over-year. This is the fourth consecutive quarter of double-digit revenue growth for both our DLP and SaaS solutions. Total revenue for our three recently acquired businesses was $33 million compared to our expectations of $26 million. Specifically, PGP and GuardianEdge exceeded expectations, posting revenue of $15 million. The VeriSign security acquisition also performed better than expected, generating revenue of $18 million. The combined EPS dilution from these acquisitions was 3 cents, which was one penny less dilutive than our expectation of 4 cents. Our Security and Compliance segment GAAP operating margin was 16%, as compared to 26% in the September 2009 quarter, primarily driven by increased expenses from our three acquisitions. Excluding the deferred revenue write-down, the Security and Compliance operating margin would have totaled 26%. Our Services business generated revenue of $92 million, a decrease of 9% as compared to the September 2009 quarter. Our Services segment GAAP operating margin was 9%, as compared to 13% in the September 2009 quarter. We remain focused on supporting our partner-led consulting program which is driving a commensurate reduction in low margin consulting revenue. 7

8 Turning now to total company margins. Non-GAAP gross margin was 85.2% for the September 2010 quarter, down 50 basis points from the year ago period. Cost of goods sold increased as this line item now includes credit card fees driven by our new ecommerce store and also reflects our increased investment in offshore technical support centers. Our non-gaap operating margin of 25.1% was down 300 basis points year-over-year. Excluding the effect of the acquired deferred revenue write-down, our operating margin for the September quarter would have been 27.5%. Cash flow from operating activities for the September quarter totaled $310 million, up 37% yearover-year as reported. The strength was primarily driven by improvements in working capital and lower tax payments. During the last twelve months, we generated strong cash flow from operations, totaling $1.74 billion. We exited the September quarter with $2.26 billion in cash, cash equivalents and short-term investments, with approximately 50% of our cash balance in the U.S. During the quarter, we raised $1.1 billion from the issuance of two tranches of investment grade senior unsecured notes. A total of $350 million of 2.75% notes will mature in September 2015 and $750 million of 4.2% notes will mature in September Shortly after issuing these notes, we repaid $500 million of our convertible senior notes due in June $600 million of these convertible notes remain outstanding. Separately, we renewed our $1 billion revolving line of credit during September, extending its term for another four years. During the quarter, we spent $1.28 billion to acquire VeriSign s security business. In addition, we spent $225 million to repurchase approximately 17 million shares at an average price of $ We have $322 million remaining on our current board authorized share repurchase plan. GAAP deferred revenue at the end of September 2010 was $3.1 billion, up 7% year-over-year, which exceeded our expectations and reflected in part, strong quarter-end execution by our enterprise sales team. GUIDANCE: Now, I d like to spend a few minutes discussing our guidance for the December 2010 quarter. We are assuming an exchange rate of $1.35 per Euro for the December 2010 quarter versus the $1.48 per Euro that we experienced during the December 2009 quarter equivalent to approximately a 10% currency headwind. Also, the end of period rate for the December 2009 quarter was $1.43 per Euro versus our $1.35 per Euro assumption equivalent to approximately a 6% currency headwind. Our guidance assumes a common stock equivalents total for the quarter of approximately 780 million shares and an effective tax rate, before consideration of any loss from our joint venture, of 27%. Thus, for the December 2010 quarter, we expect GAAP revenue to be in the range of $1.57 to $1.59 billion, as compared to revenue of $1.55 billion during the December 2009 quarter. We are expecting PGP and GuardianEdge to contribute $18 million and the VeriSign security business to contribute $38 million to our December quarter revenue. These acquisition related assumptions are already included in our revenue guidance. We expect year-over-year revenue 8

9 growth to be up 2% to 3% on an as reported basis, and up 3% to 4% on a constant currency basis. GAAP earnings per share are estimated to be between 23 and 24 as compared to 37 cents in the year ago period. Non-GAAP earnings per share are estimated to be between 32 and 33, as compared to 40 in the year ago period. We expect four-and-a-half cents of dilution as a result of our three new acquisitions. Specifically, we expect VeriSign to dilute EPS by 4 and PGP and GuardianEdge together to dilute EPS by half a penny in the December quarter. In addition, our December quarter EPS guidance includes approximately a penny of dilution as a result of the recent senior note issuance and credit facility replacement, which is not currently fully reflected in consensus estimates for the December and March quarters. Including $65 million of deferred revenue write-down amortization for the December quarter, non-gaap earnings per share would increase by 6 and would be between 38 and 39. We expect GAAP deferred revenue to be between $3.19 and $3.22 billion, compared to $3.05 billion at the end of December We expect deferred revenue to be up 5% to 6% on both an as reported and constant currency basis. We expect approximately 68% or $1.08 billion of our December quarter revenue to come from the balance sheet. In closing, we will continue to focus on integrating our recent acquisitions, managing costs, and generating strong cash flows while we reallocate resources into the growth areas of our company. And now, I ll turn it back to Helyn so that we can take some of your questions. Hand over to Helyn for Q&A Thanks. Operator will you please begin polling for questions. While the operator is polling for questions, I d like to update you on a few upcoming events. We will be presenting at several conferences this quarter. In addition, we will be reporting our fiscal third quarter results on January 26th. For a complete list of all of our investor related events, please visit our events calendar on the IR website. Operator, we are ready for the first question. Return to Enrique Salem for Final Remarks In conclusion, we re pleased with our execution during the September quarter. In particular, we were pleased with the strength of our backup and archiving, SaaS and DLP businesses and the progress we have made in integrating our acquisitions. I m optimistic about our prospects for the December quarter. Thanks for joining us this afternoon. I look forward to speaking with you again soon. Thank you Please direct all questions to investor relations at