Good afternoon. This is Cynthia Hiponia, Vice President of Investor Relations at Symantec and I

Transcription

1 Good afternoon. This is Cynthia Hiponia, Vice President of Investor Relations at Symantec and I am pleased to welcome you to our call to discuss our third quarter fiscal year 2018 earnings results. We ve posted the earnings materials and prepared remarks to our investor relations events webpage. Speakers on today s call are Greg Clark, Symantec s CEO, and Nick Noviello, 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. Please refer to the CFO commentary posted on the Investor Relations website for further definitions of our non-gaap metrics. 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. We believe our presentation of non-gaap financial measures, when taken together with corresponding GAAP financial measures, provides meaningful supplemental information regarding our operating performance for reasons discussed below. Our management team uses those non-gaap financial measures in assessing our operating results, as well as when planning, forecasting and annualizing future periods. We believe our non-gaap financial measures also facilitate comparisons of our performance to prior periods and that investors benefit from understanding of the non-gaap financial measures. Non-GAAP financial measures are supplemental and should not be considered a substitute for financial information presented in accordance with GAAP. 1

2 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, on our Annual Report on Form 10-K for the fiscal year ended March 31, And now, I'd like to introduce our CEO, Greg Clark. Thank you for joining us, and good afternoon. We are disappointed that we missed our total company revenue guidance for Q3 despite what we feel was an otherwise good quarter for our business. Our Consumer Digital Safety segment achieved the high end of our revenue guidance for the quarter. Our Enterprise segment, on the other hand, recognized less revenue than we forecast, despite selling and invoicing more business than we planned. This was due to an increasing mix shift towards our ratable, subscription and cloud-delivered products that reduced in-period revenue recognition. Most of my prepared remarks will focus on our Enterprise segment. As we ve discussed on prior calls, to grow our Enterprise business, since the combination of Symantec and Blue Coat, we have focused on building our Enterprise salesforce team, who in turn create the pipeline to grow the business. We had the right levels of capacity and selling activity from our Enterprise sales force in Q3, but we did not correctly forecast our perpetual product and license versus ratable mix, which resulted in lower in-period revenue and a larger 2

3 increase in our deferred revenue balance. Our customers are purchasing our ratable products much more frequently than we anticipated in our plans for FY18. We now expect this ratable, mix-shift trend to continue to a point where traditional license and appliance product sales become the exception in our business. As our cloud and subscription solutions have reached parity with our traditional appliance products, our customers are adopting our ratable solutions at an increasing pace due to their evolving buying preference for cloud and subscription form factors, and differentiation of our solutions. Our Enterprise strategy always embraced this shift in both our selling motion and product roadmaps, but the pace of this transition has far exceeded our expectations. We are winning the volume of business that we expected, as is represented by our implied billings growth, which is up 27% year-over-year for Enterprise in the third quarter, as adjusted for the divestiture of our Certificate Authority business. However, the shift towards a ratable revenue mix is a significant trend for us and will continue. As a result, we are reducing our Q4 and FY18 Enterprise revenue guidance to incorporate a higher ratable mix of our Enterprise business going forward and will be providing expectations for implied billings for Q4. Ultimately, this change in our enterprise revenue model results in greater visibility and more predictable cash flow generation. You can see strength in Q3 implied billings growth, deferred revenue and cash flow. We believe these become increasingly important financial metrics for us as we are now a more ratable business. 3

4 For Q3, even with our Enterprise revenue shortfall, we performed well against our other financial metrics. Operating margin exceeded our guidance as we realized continued cost efficiencies. EPS benefitted from those cost efficiencies, as well as from U.S. tax reform. And, we generated strong cash flow from operations, which should benefit going forward from our strong business momentum, deferred revenue, and the drop off of costs associated with our restructuring initiatives. Turning to the market and how we are doing with our customers. Our cross-selling strategy is working. Symantec is increasingly closing larger deals with multi-product platform sales. Enterprise customers are designing us into their security architectures by adopting our Integrated Cyber Defense Platform. They are choosing our platform because it offers superior protection, cross-product integration, and lower overall cost-of-ownership. In particular, the proxy refresh opportunity in our installed base has allowed customers to bring us into their next-generation architecture, securing their adoption of cloud and cloud applications. In doing so, customers are increasingly choosing our cloud and virtual appliance proxies over our traditional appliance form factor. The integration of our network and endpoint products has been an enabler for our cross-sell strategy as customers look to leverage the integrations between our Enterprise products to consolidate vendors and enhance security posture. Increased adoption of our cloud proxy also makes it easier and more cost effective for the customer to deploy additional security from Symantec, such as multi-factor authentication, protection, protection for cloud applications as well as data loss prevention, without requiring the customer to deploy appliances. 4

5 This success is validating the long-term growth prospects for Symantec in our vast installed base. In our large Enterprise base, our new bookings are typically sold with 3-year license terms that are billed up-front to customers, similar to many of our other peers in the Enterprise sector. For our large Enterprise renewals business, we follow industry-standard practices with respect to discounting and contract terms, with firm policy and practice around extensions. Since the beginning of fiscal 2018, when we realigned our salesforce and simplified our Enterprise business, we have seen the number of deals over $1 million grow from 37 in the first quarter, to 47 in the second quarter, to more than 100 in the third quarter; a substantial increase from a year ago. We displaced competitors in the majority of these opportunities last quarter. A customer example of this: In the third quarter one of the world s largest construction companies, a long-time Symantec and Blue Coat customer, chose our Integrated Cyber Defense Platform based on our ability to combine existing solutions to extend security to their cloud infrastructure. Where we were previously securing all of their endpoint, DLP and network infrastructure, we refreshed their existing installed base for an additional three years and extended our presence with SEP 14.1, DLP, PGP, and Proxy. We won on our ability to integrate our solutions across the entire portfolio. This deal would not have been possible before the combination of Symantec and Blue Coat and a great majority of this transaction is ratable business. There are many more examples of our success in selling our Integrated Cyber Defense Platform within our Q3 cohort of deals over $1 million. 5

6 The strength of our Endpoint Protection solution is one area where our competitive advantages continue to widen; endpoint has become a growth driver in enabling us to bring customers additional capabilities through our Integrated Cyber Defense Platform. I am pleased to announce that last week, Symantec has also once again been positioned in the Leaders quadrant of the January 2018 Gartner Magic Quadrant for Endpoint Protection Platforms which we believe is further validation of our continued leadership in Endpoint. Symantec is positioned the furthest among all other vendors in the Leaders quadrant on both execution and vision. I encourage you to take a look at the new vendor positioning in this Magic Quadrant, which we believe illustrates how the market and key criteria for these endpoint products is evolving. To bring that leadership to another customer example: In the third quarter, a global Fortune 500 financial services company chose our Integrated Cyber Defense Platform, with endpoint being the primary driver of this deal. In this transaction, Symantec displaced 9 vendors across 22 product areas. And in addition to selecting our platform over several different point solutions, in many product areas the customer chose the cloud form factor of our solution. Another customer example of the vendor consolidation and ratable product adoption we are seeing involved one of the world s largest Fintech companies. They chose Symantec to consolidate their security vendor landscape, while gaining a stronger overall security posture. This customer eliminated 8 other security vendors across multiple product areas, reducing the risk, integration and sustainment expense required to stitch together a portfolio of point solutions, and realized new integrations across their security architecture. The customer 6

7 concluded this would improve their security posture and increase their productivity. Where previously this customer had deployed 2 of our solutions, with our Integrated Cyber Defense Platform, the customer is now using 9 solutions from Symantec, 5 of which are cloud solutions. Now let me now turn to our Consumer Digital Safety business, which had a strong quarter. Recall that only eighteen months ago this business was in decline, with decreasing retention rates and ARPU. Today, our Consumer Digital Safety business has been transformed. Revenue in the third quarter was at the high end of our guidance range, with an organic growth rate of 4% year-over-year, in constant currency. We experienced 53% operating margins and an increase in ARPU. In summary, We are pleased with the volume of business across our Enterprise and Consumer segments, with continued strong adoption of our Integrated Cyber Defense Platform in our Enterprise business and the solid performance of our Consumer Digital Safety business. We recognize that we underestimated the timing of the shift in our Enterprise business towards a higher ratable revenue mix and have reflected this change in our guidance. Nick will discuss our financial results in more detail and provide our outlook. Nick? Thank you, Greg and good afternoon, everyone. I'd like to remind everyone that all references to financial metrics are non-gaap, unless otherwise stated. Please note we ve posted information on implied billings and deferred revenue, as well as other tables in our supplemental materials and CFO commentary to our investor relations website. 7

8 As Greg discussed in his comments, we acknowledge that we did not anticipate the speed at which the mix of our ratable versus product business in Enterprise would shift. In light of this, we have now built into our Q4 and fiscal year 2018 outlook the impact of an ongoing, and accelerated shift to ratable business in our Enterprise segment and its impact to in-period revenue. We will now be reporting implied billings quarterly, in addition to deferred revenue, which provides additional visibility into the growth of the Enterprise business as it becomes more ratable. Let me now review our financial results for Q3 in more detail. Our third quarter revenue was $1.234 billion. This was comprised of Consumer Digital Safety revenue at the high end of our prior revenue guidance range, and Enterprise Security revenue below the low end of our prior revenue guidance range. Looking at organic revenue growth in constant currency, adjusted for acquisitions and divestitures: Total company year-over-year revenue growth was 2%. Year-over-year revenue growth was comprised of Consumer Digital Safety segment revenue growth of 4%, and an Enterprise Security segment decline of 1%. At the same time, year-over-year deferred revenue, adjusted for acquisitions and divestitures, was up 5% in our Consumer Digital Safety segment, and up 23% in our Enterprise Security segment. As we indicated last quarter, we look at the combination of in-quarter recognized revenue and deferred revenue as a strong indicator of the health of our business segments. 8

9 Third quarter revenue came in lower than expected primarily due to the mix of product and ratable business in our Enterprise segment. As we discussed a quarter ago, our pipeline of business coming into Q3 was significantly larger than our prior forecasts, and was made up of increasingly large, cross-sell opportunities. The trend towards ratable business we saw in the second quarter was built into our Q3 guidance; however, that trend accelerated in the third quarter, faster than we forecasted. Ultimately, the transactions we closed, some of which Greg referenced, are proof our Enterprise strategy is working. You can see the strength of our business in implied billings growth, deferred revenue and cash flow. Operating margin for the third quarter was 38%, above the high end of our prior guidance range of 36% to 37%. The higher operating margin was the result of continued cost and operating efficiencies, including the completion of the net cost reduction and synergy programs we discussed last quarter, across the business. Now turning to tax. As a result of recent tax reform, we reduced our estimated effective tax rate from 29.5% to 26.8% for fiscal 2018, and in Q3, trued up our year-to-date effective tax rate accordingly. This resulted in a Q3 rate of approximately 22.5%. On a GAAP basis, our tax provision for Q3 includes a provisional benefit of approximately $1.6 billion from adjustments to previous deferred tax liabilities related to foreign earnings, and re-measurement of U.S. deferred income taxes. This was partially offset by a liability of approximately $800 million for the one-time transition tax. Fully diluted earnings per share was 49 cents, $0.03 above the high-end of our prior guidance range, impacted by higher operating margins and a favorable impact of just over 4 cents from 9

10 the effective tax rate true up. Excluding the in-quarter tax rate benefit, we achieved EPS near the high end of our guidance range, enabled by effective cost management across the business. Fully diluted shares outstanding was lower by 7 million shares at 667 million as compared to our prior Q3 guidance of 674 million, primarily due to less dilution from our convertible notes driven by our lower share price. Please see the dilution tables posted to our investor relations website where you can see the impact to diluted share count from the convertible notes at various stock prices. Cash flow from operating activities during the quarter was $294 million, and capex was $33 million. During the quarter, we prepaid $630 million of principal on our senior term loans. We have reduced our gross debt from approximately $8.3 billion at the beginning of the fiscal year to $5.7 billion at the end of the third quarter. $1.75 billion of this balance is convertible notes. At the end of the third quarter, we had $2.5 billion in cash and short-term investments on the balance sheet. $1.6 billion of that was held by our foreign subsidiaries, just over $1 billion of which we have identified as available for repatriation in the near term. As a result of tax reform we would not expect to incur additional U.S. tax liability on that repatriation. We are considering our go-forward capital allocation strategy in light of tax reform and expect to update you on our next quarter s earnings conference call. As a reminder, we have $800 million remaining under our current share repurchase authorization from our Board of Directors. Now let s discuss in more detail our Q3 operating segment performance. 10

11 First, Enterprise Security. Our Enterprise Security segment revenue was $639 million, reflecting an organic decline of 1% year-over-year in constant currency. As you know, we completed the sale of the WSS and PKI solutions to Digicert at the end of October. Financial results related to these solutions for the month of October were as expected, and are included as part of the overall Enterprise Security segment in Q3. Adjusted deferred revenue was up $316 million, or 23% year-over-year, $88 million of which is short term and $228 million of which is long term. Implied billings was up 27% year-over-year, excluding any impact from divestitures. Please note, consistent with our disclosure around deferred revenue, we are now providing 7 quarters of implied billings historical data in the Q3 Supplemental Information posted to our IR website. We believe implied billings growth is an important measure of the growth of our Enterprise business as we transition to a more ratable product mix. After taking into account the shift to more ratable business, and increased contract duration for new business consistent with our cross-sell strategy, we believe our implied billings growth supports high single-digit to low double-digit Enterprise revenue growth over time. And, as you will hear in my guidance comments, we are anticipating continued double-digit implied billings growth in the fourth quarter. Finally, Enterprise Security segment operating margin was 23%, up over 6 points year-overyear, as we continue to optimize the cost structure of the business. Turning to Consumer Digital Safety. 11

12 Our Consumer Digital Safety segment revenue was $595 million and reflected organic growth of 4% year-over-year in constant currency. Moving to our Consumer metrics, which are defined in the CFO commentary: o Direct customer count was 21.3 million at the end of the quarter, up slightly from Q2. o Direct ARPU increased to $8.38 per month, up 4% from Q2. o If you recall, we expect these direct customer statistics to represent approximately 90% of the revenue stream at any one point in time. o Partner revenue was $59 million. Finally, Consumer Digital Safety operating margin was 53%. Sequentially this is a five-point increase in operating margin and is in part related to marketing spending we pulled ahead into Q2, timing of investments and other efficiencies. Moving to our fourth quarter outlook. As I indicated, we are building the accelerating ratable mix shift in our Enterprise segment into our outlook and are lowering our guidance to reflect this transition. We now expect: Fourth quarter revenue guidance of $1.175 to $1.205 billion. This represents an organic growth rate of 1.5% year-over-year at the mid-point in constant currency. Enterprise revenue of $575 to $595 million, down 4% year-over-year in organic revenue in constant currency at the mid-point due to the ratable shift in business mix. This is down 12

13 sequentially from Q3 due to the WSS/PKI divestiture, which contributed over $30 million to segment revenue in Q3, as well as increased ratable business mix. As Greg indicated, our pipeline and expectations for business we will close in Q4 are higher than in Q3, but we are forecasting a higher ratable mix of business as well. Ultimately, we expect, excluding any impact from divestitures, double-digit implied billings growth year-over-year in Q4, evidencing the growth of our business and supporting our medium-term growth outlook. Consumer Digital Safety revenue of $600 to $610 million, representing an organic growth rate in constant currency of 6% year-over-year at the mid-point. Consolidated operating margins of 33% - 34%. An effective tax rate of 26.8%. And EPS of $0.37 to $0.41 on an underlying share count of 680 million fully diluted shares. Moving to our updated fiscal year 2018 Outlook. We now expect: Full year revenue guidance of $4.915 to $4.945 billion, down from our previously guided $5.00 to $5.10 billion, reflecting the transition in our Enterprise Security segment. Enterprise revenue of $2.585 to $2.605 billion. This represents a decline of 2% in the organic growth rate in constant currency at the mid-point. Consumer Digital Safety revenue of $2.330 billion to $2.340 billion, representing an organic growth rate in constant currency of roughly 3% year over year. 13

14 Consolidated operating margins for fiscal year 2018 of approximately 34% compared to previous guidance of 35% to 36%. EPS for fiscal year 2018 of $1.60 to $1.64, compared to previous guidance of $1.66 to $1.76. Fully diluted shares of 669 million. Fiscal year 2018 cash flow from operations around the high-end of our previous guidance range of $800 million to $1.0 billion. Let me address our outlook for fiscal year 2019 and We believe that in fiscal year 2019 our financial model will be in transition as we evolve to a company with a higher mix of ratable revenue in our Enterprise Security segment. We continue to expect that our Consumer Digital Safety segment will grow organically in the low-to-midsingle digits in fiscal year We expect that as we exit fiscal year 2019, our Enterprise Security segment revenue growth will be in the mid- to- high single digits, with high visibility, and growing from there. During this model transition, implied billings growth will be an important measure of the trajectory of our Enterprise Security segment. And during the transition, expect disciplined management of costs and investments across the business, and strong cash flow. Our medium-term outlook, beyond fiscal year 2019, is intact, with mid-to-high single-digit revenue growth and EPS growth in the low teens. We continue to expect Consumer Digital Safety organic revenue growth in the low-to-mid-single digits, and Enterprise Security segment organic revenue growth in the high single-to-low double digits. We expect our effective tax rate will benefit from the tax reform bill, and are currently estimating a rate in the 21-22% range. 14

15 We expect to further hone our effective tax rate estimate over the next few months, and we will consider reinvesting part of the savings from a lower effective tax rate, as early as fiscal year We will provide our full financial outlook and specific guidance for fiscal 2019 on our fourth quarter earnings call. Let me now turn the call back over to Greg for some closing remarks. Thank you Nick. I am told I am a pretty optimistic person. In spite of our third quarter revenue miss, I have never been more excited about the opportunity ahead of Symantec. Our strategy, technology and value propositions are resonating with customers, and we are executing well on our growth drivers. We are largely a service-delivered software company now. We are winning in the marketplace as customers design us into their future security architecture. We are disappointed that we did not accurately forecast the speed of the ratable mix shift in our Enterprise segment, but this transition is a long-term benefit for our business and we have good reason for optimism about our future growth prospects. In Enterprise, our pipeline of business continues to grow. As we head into fiscal 2019, we expect to deploy even more sales capacity into the field. Our Integrated Cyber Defense Platform is resonating with customers who don t want to stitch together a portfolio of point solutions. And our cloud solutions are leading the way. Our Enterprise business remains healthy with implied billing growth up 27%, and deferred revenue up 23% year-over-year in the third quarter, adjusted for acquisitions and divestitures. 15

16 Our Enterprise growth strategy is intact driven by the TAM we operate in, the cross-sell and upsell opportunity we have by nature of our large installed base, and the sales capacity we have in the field. These drivers are expected to provide momentum to continue to support our medium-term Enterprise revenue growth outlook. Our Consumer Digital Safety has transformed into a growing business with future growth opportunities in cross-selling and international expansion. We have now set guidance at levels that reflect the Enterprise segment financial model transition, which will provide us with higher revenue visibility going forward, and this entire management team and Symantec employees are focused on delivering the growth potential that we have worked so hard to create. With that, Nick and I are happy to take your questions. Operator? 16