Good afternoon and thank you for joining our call to discuss third quarter 2016 earnings results.

Transcription

1 Jonathan Doros Investor Relations Good afternoon and thank you for joining our call to discuss third quarter 2016 earnings results. By now, you should have had the opportunity to review our earnings release and supplemental information. We ve also posted a presentation and prepared remarks to our investor relations events webpage. Speakers on today s call are Mike Brown, Symantec s President and CEO, and 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 the change in sequential deferred revenue. 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. Mike Brown will be presenting at the Morgan Stanley Technology Conference on February 29th and attending the JMP Technology conference on March 1st in San Francisco. Thomas Seifert will be presenting at the Raymond James Institutional Investor Conference in Orlando on March 7th. We intend to announce our fourth quarter earnings on May 12th and will be hosting a financial analyst day on May 26th in New York City. Please note, non-gaap financial measures referenced during this call are reconciled to their comparable GAAP financial measure in the press release and supplemental materials posted on our website. 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 1

2 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 for the year ended April 3, In connection with Veritas sale we have provided seven quarters of recast GAAP and non-gaap income statements, third quarter and prior year end balance sheets, and GAAP cash flow statements for the trailing three quarters and fiscal year All non-gaap revenue and expenses excludes the impact of Veritas, however the continuing operations deferred revenue on the balance sheet and change in deferred revenue from the cash flow statement includes a portion of Veritas deferred revenue from Symantec and Veritas bundled contracts entered into prior to operational separation. The Veritas deferred revenue from those contracts will amortize into discontinued operations. As a result implied billings growth calculated from the change in deferred on the balance sheet or cash flow statement will not be representative of stand-alone Symantec s performance as it will include an impact from Veritas. This quarter and going forward we will disclose the amount of deferred revenue on the balance sheet that will represent stand-alone Symantec for calculating implied billings. And now, I'd like to introduce our CEO, Mike Brown. Go ahead Mike. 2

3 Michael Brown President and CEO Good afternoon. I am pleased to announce that Silver Lake Partners has made a $500 million strategic investment, which is a strong vote of confidence in both our transformation, as well as our future as the world leader in cybersecurity. Additionally, I am excited to have Ken Hao, Silver Lake Managing Partner, join our board, given his deep expertise in technology and track record of creating value. As you know we have been undergoing a three year transformation, which began in April At that time we laid out five priorities that we have since successfully executed against: 1. Managing our businesses with a portfolio approach, which included divesting Veritas and improving the profitability of our consumer business, while we invest for growth in enterprise security. 2. Within enterprise security, we have been investing for growth by reallocating R&D spending to high growth markets. 3. Improving our cost structure, where we have improved non-gaap operating margins to 28% this quarter. 4. Building a talented executive team, including new c-level leadership across most major functions. 5. Returning significant cash to shareholders with $2.1 billion in total share repurchases and dividends since April During this period, we also developed a well-articulated strategy for our security business, which we call unified security. This strategy leverages our key competitive differentiator-- the global scale and footprint of our large installed base, where we can correlate threats that our products and services see with Symantec s global intelligence network--the 8 trillion objects we monitor globally and in real-time. After completing the 3

4 divestiture of Veritas, we are a more focused company as the world s leader in cybersecurity. The second half of our transformation plan began last October and is focused on four priorities: delivering upon a product roadmap that leverages our Unified Security strategy, building our enterprise security pipeline and go-to-market capabilities, improving our cost structure further, and continuing to efficiently allocate capital. I ll now cover each one of these priorities starting with delivering upon a product roadmap that leverages our Unified Security strategy. On a daily basis, Chief Information Security Officers and security operations analysts are overwhelmed by the vast number of security alerts that make it difficult to pinpoint advanced threats attacking their IT environments. Moreover, attacks are constantly evolving and leveraging a variety of techniques. This leaves traditional point solution vendors that are only focused on a specific attack method at a disadvantage. Protecting against these advanced attacks involves a unified approach to security to guard against multiple attack methods and an understanding of global threats in real time. This is Symantec s strategy, which leverages our large installed base and competitive differentiation in using a big data approach to understand more about the threat landscape than any of our competitors. The first generation of products leveraging our Unified Security strategy are new and enhanced solutions in the areas of, advanced threat protection, data loss prevention, cyber security services, and applications that run on our unified security analytics platform. In total, we have launched six of the twelve new enterprise security products we outlined last year at our financial analyst day. We plan to release the remaining half 4

5 within the next two quarters and have an additional set of new products in the pipeline for the second half of fiscal The first three of these are newly released Advanced Threat Protection (ATP) solutions, which harness threat telemetry from the major control points of endpoint, , and network to not only detect, correlate, and prioritize, but also remediate threats. The solution does this all from one console, without adding an additional endpoint agent. Key differentiators of Symantec s ATP approach are a cloud-based expandable sandboxing capability that works without expensive on premise hardware, as well as the ability to correlate threats across the control points within an enterprise and against Symantec s global real-time intelligence network. In recent independent third-party testing from Miercom and Dennis Technology Labs, Symantec Advanced Threat Protection received the highest scores across all test categories against vendors including FireEye, Cisco, Palo Alto Networks, and Fortinet meaning we stop more attacks and block more threats with fewer false positives than any of our competitors. Our ATP solutions build upon a key core offering, Symantec s Endpoint Protection (or SEP) which is our largest product line within enterprise security and which is delivering next generation endpoint protection today. Many competitors are delivering only a subset of endpoint protection techniques. As a result, customers would be required to install numerous agents on their endpoints to match the same level of protection that we deliver with SEP. This slows performance at the endpoint and is cumbersome to manage. Symantec Endpoint Protection (SEP), already combines multiple advanced protection engines across intrusion prevention, whitelisting, behavior-based machine learning, signature-less detection of malware and suspicious activity, automation, application control, clustering, and remediation, all deployed from one agent. This layered 5

6 approach which includes multiple protection engines goes far beyond anti-virus in delivering next generation capability, which is already being delivered to our more than 300,000 endpoint customers protecting over 110M endpoints in enterprises. This is the installed base for which we are targeting our ATP solutions. In our cybersecurity services offerings, Symantec is also delivering Unified Security capabilities to customers through our managed security offerings. This service monitors Symantec solutions as well as 3 rd -party security products to correlate threats against Symantec s global real-time intelligence network. In many cases, our managed security service operates side by side an existing customer s SOC to act as complementary protection capability or layered defense against attackers. Symantec has been named a leader 12 times in the Gartner Magic Quadrant for Managed Security Services. Finally, we will also deliver unified security capability through new applications that will sit on top of our analytics platform and leverage the vast threat data we see globally and in real-time. Risk Insight, which benchmarks an enterprise s security posture against peers, is the first in a series of applications we plan to build on top of this platform. The solution is currently running in beta at a large financial services company and will become generally available this quarter. We are excited about this wave of innovation at Symantec, which is resulting in the most robust organically developed product cycle in our history. Now onto the second of our four priorities, which is building enterprise security pipeline by improving our go-to-market capabilities. Building robust pipeline incorporates strong brand recognition, a robust channel program, lead generation, and focused sales plays. 6

7 To educate the channel on our next generation security portfolio and product roadmap, we conducted partner conferences across our three major geographies and special training sessions, which included meeting with over 1,000 partners. During the quarter we saw early momentum from the global system integrators and now are focusing to further enable our VARs, distributors, service providers, and cloud providers. Additionally we have launched a set of focused field sales plays aimed at driving new product sales in our installed base as well as replacing competition. For example, our ATP cross sell campaign has identified over 3,000 accounts that have a SEP installation, which represent over tens of millions of control points. Within those accounts, we have identified a subset that are immediate candidates for our ATP solution over the next five quarters as they have an upcoming endpoint or renewal. We are already seeing positive results despite ATP only being generally availability for just over 30 days. As of February 1 st we had: Nearly 1,200 customers that have attended an ATP webinar or engaged with a Symantec expert, Over 350 customers actively evaluating our ATP solutions, And dozens of initial wins One of the most notable wins was with a U.S. food manufacturer and existing SEP and customer who purchased our full ATP endpoint, , and gateway solution to monitor over 10,000 control points. This customer reviewed competitive offerings and selected Symantec given our integrated suite, single console, and no need to deploy a new endpoint agent. 7

8 Another example of a new go-to-market offering is how we re helping customers securely transition to Office 365, by leveraging our recently launched bundle that includes DLP for cloud, user authentication, and our.cloud solution. Our Office 365 solution provides customers a cloud based solution that secures inbound and outbound data for our customers as they transition those workloads and associated administration to the cloud. With cloud-based workloads, it s even more important to ensure an authorized user is accessing the information, its encrypted traffic and that data that shouldn t leave a customer s environment, doesn t leave. Symantec s bundle combines these security capabilities for customers. We are currently in discussions with many existing and prospective customers who plan to migrate tens of thousands of users to Office365. Some will be brand new wins for us and others will be an up-sell opportunity. Our third priority is continuing to improve our cost structure now that the divestiture of Veritas is complete. We re announcing today a target of $400M in cost reductions to be achieved over the next two years. Specifically, over the next 18 months, we plan to eliminate $130 million of TSAs and stranded costs resulting from the sale of Veritas, of which there are large opportunities in the areas of IT infrastructure and real estate. Beyond the impact of TSAs and stranded costs, we believe we can achieve further reductions across the company. The majority of these incremental savings will benefit us in fiscal 2018 and beyond. As result, we expect to reach a 30% operating margin as we enter fiscal

9 Now our fourth priority, capital allocation. Our management team and board believe proper capital allocation is key to maximizing long-term shareholder value and we have demonstrated this with a consistent track record of returning capital through dividends and share buy backs. We continue that consistent track record with our announcement today that we will return $5 billion in additional capital to shareholders by the end of March 2017, through a special dividend and share repurchases bringing our total capital return in connection with the Veritas transaction to $5.5 billion. Next, I d like to provide an overview of Q3 results Enterprise security revenue increased 1% year-over-year the third consecutive quarter of revenue growth, driven by 15% growth from Information Protection. Specifically DLP again grew double-digits. We are witnessing a resurgence in DLP demand across industries beyond the traditional verticals of financial services and health care that we sold into, as more organizations realize they need to secure their intellectual property. We are the best positioned company to capitalize on this opportunity, which is further demonstrated by our market share, which is twice the size of closest competition and our recognition as a leader in Gartner s January 2016 Data Loss Prevention Magic Quadrant. Moving to our Consumer security business, revenues here declined 6%, which was at the better end of our down 6-8% expectations and an improvement from Q2. During the quarter we signed an agreement with a large Indian telco to provide paid mobile security services to their customers. This is significant as monetizing the mobile opportunity is still in its infancy, when compared with traditional form factors. We believe mobile security sold through partners will be one of the levers to return the consumer 9

10 business to growth over the long-term. As Thomas will describe in more detail, we are on track to convert our entire customer base to a subscription service and acquire more new customers directly online. Further, as we execute against our broader consumer product roadmap, we will expand the Norton offering to address broader personal privacy and home IoT security opportunities. In summary, I believe we are well positioned for acceleration in fiscal Our consumer business will see moderating declines while remaining extremely profitable at >50% operating margins. We expect our enterprise security business to continue to grow in FY17 based on the strengthening product portfolio and building pipeline. Finally, we have a focused organization to execute against our priorities. Now, I ll turn it over to Thomas to provide a review of our third quarter financial results and guidance. 10

11 Thomas Seifert EVP and CFO Thank you Mike and good afternoon, Third quarter total revenue was $909 million, a decline of 2% year-over-year and was above the mid-point of our guided range on a constant currency basis. In Q3, approximately 88% is recurring in nature, 5% is perpetual, and 7% is from services. Over time we expect recurring revenue to become a larger portion of overall revenue, as more products are sold as a subscription. Deferred revenue was $2.5 billion, which includes $396 million deferred from Veritas. Implied billings excluding Veritas were $865 million. The U.S. dollar appreciated against most major currencies compared to the year-ago period, which created a headwind of approximately $40 million to third quarter revenue on a year-over-year basis. Non-GAAP operating margin for the third quarter was 27.9%, and exceeded our guidance range. Excluding the impact from TSA costs non-gaap operating margin would have been approximately 30%, which is in-line with our margin target. Non-GAAP net income of $172 million resulted in fully diluted earnings per share of 26, above the high-end of our guidance. Let me now provide further detail of our revenue performance by product area. Enterprise Security revenue was up 1% year-over-year. Enterprise Security operating margins were 5%. To note, Enterprise Security carries a higher burden of stranded costs. 11

12 Within Enterprise Security: Threat protection was down 4%. Within threat protection, endpoint protection grew in the low single digits. Offsetting this growth was continued weakness in our endpoint management solution, which will soon be refreshed with our new unified endpoint management platform available this quarter. Information Protection revenue grew 15%, driven by both Data Loss Prevention (DLP) and User Authentication, with both up double digits year-over-year. During the quarter, we closed over two dozen new DLP deals greater than $300k, including one of the largest healthcare systems in the nation, where we beat out the competition to replace a legacy installation with our market leading DLP solution. Cyber Security Services (CSS) was flat year-over-year. During the quarter we opened a Singapore SOC, which should further accelerate our expansion internationally. We are seeing positive underlying trends in CSS from both secular and execution standpoint and expect that business to improve its revenue growth performance in fiscal year Website security grew 3%. We continue to be the de facto standard for enterprise level customers to secure their websites, which is a stable and profitable business. Beyond the enterprise, we see the demand for encryption and authentication accelerating as security and privacy imperatives intensify and applications, like ecommerce, grow among businesses of all sizes, which we believe represents at least 40 million additional websites worldwide of opportunity for our solutions. Now, onto the Norton Consumer Security segment. Third quarter Consumer Security revenue was down 6% and operating margins were 56%. However, we are seeing improvement in the underlying fundamentals of the 12

13 consumer business performance, which gives us confidence that revenue performance will continue to improve. From a business modeling standpoint, we evaluate the Consumer Security business based on four primary factors: 1) customer satisfaction 2) subscriber renewal rates 3) new subscriber growth and 4) pricing. For competitive reasons, we do not quantify those metrics externally, but believe it would be helpful to directionally describe our performance. First, customer satisfaction. We track our progress through Net Promoter Score, which is one of the highest in our industry and expect that metric to trend higher. Second, renewal rates. We have completed the transition to subscription globally. This quarter we have reached the one-year anniversary of subscription transition in the U.S. and will reach the one-year anniversary in Europe at the end of fiscal 2Q. Customers on subscription renew at significantly higher rate than those not in subscription. We expect renewal rates to continue to improve over the medium term as we transition more customers to subscription and the acquisition mix continues moving toward digital channels. Third, new customer acquisition. We are focusing on acquiring more customers on-line and through ISPs as those channels have proven higher life-time values. During the quarter, new subscriptions from on-line again grew 8% year-over-year, and represent approximately half of new acquisitions. Lastly, we expect pricing to remain healthy, as we deliver increased value to our customers in the form of next generation consumer endpoint protection. 13

14 Given the steady improvement in both renewal rates and new customer additions, we believe we are exiting the trough of the consumer business declines. Turning to cash flow, cash flow from continuing operating activities for the December quarter totaled $153 million and includes $56 million in outflows related to separation costs. Capital expenditures were $114 million in Q3. We expect capital expenditures for Q4 to be approximately $50 to $60 million. Now turning to capital return. As we mentioned previously, we would update our capital return plan post the completion of the Veritas sale. We will now be returning $5.5 billion, which includes the $500 million of a stock buyback that we executed in Q3 and an additional capital return of $5 billion. The $5 billion will be executed through a $4 per share special dividend, which will amount to $2.7 billion and a $2.3 billion share repurchase program to be completed by March The record date for the special dividend payable to shareholders will be close of business on March 8, 2016 and the dividend will be payable on March 22nd. Once we complete the special dividend we will initiate our stock repurchase program. We expect to execute approximately $900 million of share repurchases during the Q4. After the completion of the capital return, we will have returned more cash to shareholders than the net cash proceeds from the sale of Veritas. Lastly, we are adjusting our ongoing quarterly dividend to 7.5 cents a share starting in the first quarter of fiscal This adjustment reflects our lower domestic free cash 14

15 flows post Veritas sale, but still represents a significant payout ratio on domestically generated free cash flow. We are committed to increasing this dividend as free cash flow grows over time. Now turning to guidance. Our constant currency Q4 revenue guidance of down 4% to flat, is slightly higher than our previous guidance. We now expect non-gaap operating margin to be 26.0% to 28.0% down slightly from our previous guidance, due to a negative impact from currency. We expect non-gaap EPS of 24 cents to 27 cents in-line with our previous guidance, as a lower tax rate offsets the decrease in operating margin expectations. We will provide fiscal 2017 guidance when we report our Q4 results in May. In conclusion, we are seeing the underlying fundamentals of the business improve and are well positioned to execute on the second half of our transformation. Now I will turn the call back over to Jon. 15