David Gennarelli, Director, Investor Relations Good Afternoon And
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Q2 Fiscal 2005 Transcript David Gennarelli, Director, Investor Relations Good afternoon and thank you for joining us. With me today are John Thompson, Chairman of the Board, and CEO of Symantec and Greg Myers, Senior Vice President of Finance and CFO. In a moment, I will turn the call over to Greg. He will discuss our financial results for the fiscal second quarter, which ended October 1, 2004. He will also review the raised guidance for the December quarter and fiscal 2005 as outlined in the press release. John will then discuss highlights of our performance. This will be followed by a Q&A session. Today’s call is being recorded and will be available for replay on Symantec’s investor relations home page at symantec.com/invest. In addition to today’s press releases, a copy of our prepared remarks and supplemental financial information is also available on the IR website. Before we begin, I would like to remind everyone that some of the information discussed on this call, particularly our revenue and operating model targets for the coming quarter and fiscal year, contain forward-looking statements that involve risks and uncertainty. These statements are based on current expectations. Actual results may differ materially from those set forth in such statements. Additional information concerning factors that may cause actual results to differ is contained in the risk factor section of the Company’s previously filed form 10-Q. Lastly, 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 comparable GAAP results, which can be found in the press release and on the IR website. And now I would like to introduce our CFO, Greg Myers. Greg Myers – Chief Financial Officer Thanks Dave. Good afternoon everyone and thank you for joining us for today’s earnings release. I am very pleased to provide you with the financial details for the September quarter, the second quarter of our fiscal year 2005. Net revenue for our Sep-04 quarter was $618m and grew 44% above the Sep-03 quarter’s revenue of $429m. This quarter’s GAAP earnings per share of 38¢ compared favorably to our GAAP earnings per share of 24¢ for the quarter ended Sep-03. Page 1 Symantec Q2 Fiscal 2005 Transcript Non-GAAP earnings per share, which excludes pre-tax charges of $17m from the amortization of acquisition related intangibles, deferred compensation amortization, and restructuring costs, was 41¢ for the Sep-04 quarter. This was 52% higher than the Sep-03 quarter’s non-GAAP earnings per share of 27¢. Revenue by segment in the Sep-04 quarter was as follows: Consumer revenue was $315m and grew 63% over the Sep-03 quarter. The quarter’s growth as compared to last September was driven primarily by: The continued growth in the threat environment, despite a lack of high profile threats during the quarter. A favorable currency effect driven by the strength of the Euro against the dollar. Continued growth in electronic distribution across our e-storefront, subscription renewal business and OEMs subscriptions. Enterprise security revenue of $225m grew by 27% over the Sep-03 quarter. Symantec’s Enterprise Administration revenue of $66m grew 36% more than the same quarter last year. It should be noted that revenues from the acquisition of Power Quest and ONTC contributed $19m to this segments performance. Excluding revenue from our recent acquisitions the segment declined 4%. Service revenues of $11m for the quarter grew 22% over the Sep-03 quarter. International revenues of $321m accounted for 52% of revenue and grew 51% over the Sep-03 quarter. U.S. revenue was at $297m. Regional revenues were as follows: Americas had revenue of $332m and grew 38%. The EMEA region produced $201m and grew 52%. Our Japan-Asia Pacific region had revenue of $85m grew 52% over the Sep- 03 quarter. This quarter’s revenue growth was 44%. Assuming constant currency from the Sep-03 quarter the effect on revenue was a favorable $22m. The growth rate for the quarter, assuming no change in currency rates from the Sep-03 quarter would have been 39%. The overall benefit to net income from currency was $11m. Non-GAAP gross margin, which excludes deal related intangibles, was 84.5%. This was just below the 84.9% in the Sep-03 quarter. In general, higher OEM royalties and an increase in the revenue mix from our lower margin consumer products were the most notable contributors to the slightly lower gross margin percentage. Page 2 Symantec Q2 Fiscal 2005 Transcript Non-GAAP operating expenses, which exclude all acquisition related intangibles, deferred compensation charges, restructuring charges and IPR&D costs, were $313m for the Sep-04 quarter. As a percent of revenue this quarter’s operating expense was 50.7%, comparing quite favorably to the 55.2% recorded last September. In part, the improved spending as a percent of revenue has come from the scale associated with higher than expected revenue growth and lower than anticipated growth in headcount. Headcount at the end of the September quarter was 5,873 employees. This total includes 481 employees from acquired companies over the past three quarters. Headcount growth from the Sep-03 quarter excluding employees from our recent acquisitions was 16%. Non-GAAP net income, which excludes all acquisition related intangibles, deferred compensation charges, restructuring charges and IPR&D costs, was $146m. This compared favorably to our Sep-03 quarter’s non-GAAP net income of $91m. Our balance sheet continues to illustrate Symantec’s overall financial strength. Cash and short-term investments, net of $60m in stock re-purchase activity and a $28m outlay for the acquisition of Turn Tide ended the quarter at $2,545m. Cash flow from operating activities was about $235m. The company’s net accounts receivable balance at the end of the Sep-04 quarter was $328m, $103m higher than last September. Days Sales Outstanding were 48 days as we exited the Sep-04 quarter, the same as the Sep-03 quarter. Deferred revenue at the end of the Sep-04 quarter was $1,153m, up $434m or 60% from last September. Given this deferred base $420m or 64% of our expected Dec-04 revenue will come from the balance sheet. Now, I’d like to spend a moment discussing our expectations for the upcoming Dec-04 quarter and update our guidance for our fiscal year 2005. As in previous guidance statements it should be noted that our outlook assumes no significant changes in the current economic or competitive climates over the next six months as compared to the business climate we are currently experiencing as we exit the quarter. It should also be noted that December quarters in the past have been seasonally strong quarters when compared to the prior September quarter. We have assumed that this trend will continue. Finally, it should be noted that there are a number of forward-looking statements in today’s guidance. In order to clearly understand the risks involved it is recommended that each investor review the risks factors outlined in our latest form 10Q filing. As such, for the December 2004 quarter our guidance is as follows: Revenue is estimated between $645m and $665m. GAAP EPS at the mid-point of the revenue guidance is forecasted at 41¢. Page 3 Symantec Q2 Fiscal 2005 Transcript Non-GAAP earnings per share at the mid-point of the revenue guidance for the Dec-04 quarter excluding expenses related to the amortization of acquisition related intangibles and deferred compensation charges of approximately $14m, is forecasted to be 43¢. It should also be noted that Symantec expects to call its convertible debt in early November. This activity will have no effect on our stated non-GAAP EPS guidance and assuming a 100% conversion rate this activity would have no effect on our stated GAAP EPS guidance. For our fiscal year ending on April 1st of 2005 we are revising our guidance to reflect the strength we experienced in the Sep-04 quarter. As such our guidance is as follows: Revenue is estimated at $2,495m. This is 33% above our FY-04 results and is $90m higher than our previous guidance of $2,405m. This increase is being driven by the inclusion of revenue our previously announced acquisitions and by the strength of our consumer releases in the September quarter. Forecasted growth by segment for the full year is as follows: Enterprise Security 24% growth Consumer Security 44% growth Enterprise Administration 25% growth Services 19% growth Deferred revenue is expected to be between $1,300m and $1,350m. GAAP earnings per share are forecasted at $1.54. Non-GAAP earnings per share for the fiscal year ending Mar-05, excluding the amortization of acquisition related intangibles, deferred compensation charges restructuring charges, and IPR&D costs of $56m, is forecasted at $1.64 per share. This is up 39% over FY-04 and is well above the previous guidance of $1.57. Now, I would like to hand the call over to John to give you additional details on the quarter. John W. Thompson, Chairman and CEO Thanks Greg. As you heard, this marks another quarter of strong financial performance, underpinned by great execution in all of our major business segments and geographies. Before I go into details on the quarter, I thought I would make a few comments about the current threat environment. We recently issued our sixth Internet Security Threat Report, which provided an analysis of trends in Internet attacks, vulnerabilities and malicious code activity during the first half of this year.