Cynthia Hiponia - Vice President of Investor Relations Greg Clark - Chief Executive Officer, Director Nick Noviello - Chief Financial Officer, Executive Vice President

Brad Zelnick - Credit Suisse Saket Kalia - Barclays Capital Sarah Hindlian - Macquarie Melissa Franchi - Morgan Stanley Gabriela Borges - Goldman Sachs John DiFucci - Jefferies

Good day. My name is Ian and I will be your conference operator today. At this time, I would like to welcome everyone to the Symantec's fiscal third quarter 2018 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. In the interest of time and so we may get to everyone's question, we ask that you please limit yourself to one main question and one follow-up question. Thank you. I would now turn the call over to the Vice President of Investor Relations, Cynthia Hiponia. Ma'am?

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 have 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 would 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 this 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. 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, 2017. And now, I would 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 have discussed on prior calls, to grow our Enterprise business, since the combination of Symantec and Blue Coat, we have focused on building our Enterprise sales force team, who in turn create the pipeline to grow the business. We had the right level of capacity and selling activity from our Enterprise sales force in Q3, but we did not correctly forecast the perpetual product and license versus ratable mix, which resulted in lower in-period revenue and a larger increase in our deferred revenue balance. Our customers are purchasing our ratable products much more frequently than we anticipated in our plans in FY 2018. 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 solution at an increasing pace due to their evolving buying preference for cloud and subscription form factors and differentiation from our solutions. Our Enterprise strategy always embraced this shift in both our selling motion and our 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 FY 2018 Enterprise revenue guidance to incorporate a higher ratable mix for our Enterprise business going forward and we will be providing expectations for implied billings in Q4. Ultimately, this change in our enterprise revenue model results in a 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. For Q3, even with our Enterprise revenue shortfall, we performed well against other financial metrics. Operating margin exceeded our guidance as we realized continued cost efficiencies. EPS benefited 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 in costs associated with our restructuring initiatives. Turning to the market and how we are doing with 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 a 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 customers to deploy additional security from Symantec, such as multi-factor authentication, email protection, protection for cloud applications as well as data loss prevention, without requiring the customer to deploy appliances. 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 a three-year license term that are billed up-front to customers, similar to many of our other peers in other 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 sales force 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 the 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 Symantec Endpoint Protection 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. 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 nine 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 eight other security vendors across multiple product areas, reducing the risk, integration and sustainment expenses required to stitch together a portfolio of point solutions and realized new integrations across their security architecture. The customer concluded this would improve their security posture and increase their productivity. Where previously this customer had deployed two of our solutions, with our Integrated Cyber Defense Platform, the customer is now using nine solutions from Symantec, five 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 increased 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 would like to remind you that all references to financial metrics are non-GAAP, unless otherwise stated. Please note we have 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. 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. 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 $0.49, $0.03 above the high-end of our prior guidance range, impacted by higher operating margins and a favorable impact of just over $0.04 from 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 seven 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. 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 seven 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 six points year-over-year, as we continue to optimize the cost structure of the business. Turning to Consumer Digital Safety. 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: Direct customer count was 21.3 million at the end of the quarter, up slightly from Q2. Direct ARPU increased to $8.38 per month, up 4% from Q2. If you recall, we expect these direct customer statistics to represent approximately 90% of the revenue stream at any one point in time. 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 billion 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 million 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 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 million 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% to 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. Now moving to our updated fiscal year 2018 outlook. We now expect full year revenue guidance of $4.915 billion to $4.945 billion, down from our previously guided $5 billion to $5.1 billion, reflecting the transition in our Enterprise Security segment. Enterprise revenue of $2.585 billion 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. 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. And fiscal year 2018 cash flow from operations around the high-end of our previous guidance range of $800 million to $1 billion. Let me address our outlook for fiscal year 2019 and 2020. 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 mid single digits in fiscal year 2019. 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% to 22% range. 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 2019. 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 reasons 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. 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 we have worked so hard to create. With that, Nick and I are happy to take your questions. Operator?

[Operator Instructions]. Our first question is from the line of Brad Zelnick from Credit Suisse.

Thank you very much and good afternoon guys. Greg, it's great to hear the platform strategy is working and those customer examples you have shared and I appreciate you are selling a lot more product that's cloud and virtual. Where do we stand today against the $1 billion proxy refresh opportunity? And how much of it is left as we look out into next year?

Yes. Hi Brad. Thanks for the question. So what we are seeing in that proxy refresh, as I mentioned in my prepared remarks, is that we are getting a lot of that business coming in a cloud form factor, people buying that cloud version of our proxy. And in addition to that, we are seeing a strong uptick of our proxy customers really going after protecting the cloud applications with our CASB and the cloud form factor on top of the proxy stack. What that means is, we are hitting the right number of dollars in that refresh but it's coming in the cloud delivered form factor and also in a software defined networking element which is our virtual appliance, the ProxySG. So customers are picking those choices more than they used to which means we are selling less appliances, but we are in a good place with the proxy refresh and we believe that our conversion rates in the proxy refresh are strong like they were last time and our customers that purchase that from us are very happy that we have extended the value proposition of the on-premise story from four years ago to the cloud generation. And so to answer your question, we believe that proxy refresh is in good shape. But the mix has shifted to ratable form factor.

Very helpful Greg. And just one for Nick. Nick, I am already being asked this. Just it's difficult for us to reconcile the strong enterprise billings growth with your revenue outlook. Can you give us a sense of duration on these subscription deals and how billings duration compares year-over-year or perhaps an annualized look at the business, which is how I imagine you are looking at it internally?

Sure. And Brad, thanks for the question when we are doing all of that work. So expect first of all, we are giving you the set of implied billings numbers. It's important for you to understand this is the first quarter of being able to give you a set of data here on Enterprise that allows comparability period-to-period. In terms of the overall number of 27%, that obviously in going to have in it a radical shift and it's also going to have in it some contract duration side as we cross-sell and bring these things together. You can expect to hear more from us about both of those items and more from us about how contract duration is changing period-to-period. Suffice to say, overall, we have done a good amount of work internally. We believe that overall we are supporting the overall growth rate of Enterprise that we expect over time, which is a high single, low double-digit timeframe. So more to come on that topic. Over time, we will obviously give you much more on our Q4 earnings call and into next year, but we put out a set of numbers that you can understand what implied billings are comprised of, how we calculated it and we will give more to you go-forward.

And just to add one piece of that, Brad. We know that you need contract length. We are going to give more for you in Q4 on that. But we do have very strict adherence to standard terms for new business around contract length and also for renewal business around contract length. We also have aligned our sales commission plans with these terms. So we have incentives to keep that in the right place and we are doing work on these topics and expect to have more commentary for you following the Q4 actuals as we move into 2019. I think it's important to note that Q3 marks the second quarter of us selling our Integrated Cyber Defense package which is the integration between a lot of the Symantec elements and Blue Coat elements. So we have a couple of quarters of actuals that we are happy with how our sales force has been behaving against that standard terms.

And our next question is from the line of Saket Kalia from Barclays Capital.

Hi guys. Thanks for taking my questions here. First maybe for you, Greg. I think most of us get the increase in mix of subscription and the impact to rev rec. But just to make sure we address the headline lowering on Enterprise revenue, can you comment at all on whether you saw a change in win rates in any part of the Enterprise business?

I think there is a lot of products in our Enterprise business and I think it's important just to focus on couple of those elements. We are seeing a really strong uptake in the initial release of our EDR capabilities and what we call SEP 14.1. That is the SEP 14.1 with our ATP package, that is going well in our endpoint install base. And we are also seeing a very strong uptake of the DLP attachment to our CloudStack which is very, very good business for us. We have a big DLP installed base and that is very strong market force that's happening, especially in the limelight of compliance issues in GDPR. Outside of that, I think we are selling an Integrated Cyber Defense package. It is a bundle of components. And I tried to talk about in the examples in my prepared remarks that when we do go in and sell a set of those products that we are seeing a larger proportion of the ratable form factor of those. A comment on that, I think is helpful in terms of understanding what's doing well. When we offer a customer an appliance form factor or a very powerful virtual appliance form factor, we are seeing more propensity to purchase the more flexible deployment model that you get from the software defined side. And in addition to that, because we have such a good growth in the cloud area, we are seeing things like our cloud DLP carrying good work. So it's more mix shift and we are very happy with the total level of selling volume in Q3. We sold what we thought we were going to sell and probably the major product lines that our growth prospects were on fed well in that. And as you can see, it's hard on the conference call to talk about each separate product line, because there are quite a few very elaborate set of elements to our Integrated Cyber Defense. Hopefully that's helpful.

Yes. Absolutely. Maybe from a follow-up, maybe for you, Nick. First of all, thank you for the billings numbers in Enterprise. Can you talk about what percentage of those billings are now coming in ratably versus historical? And then also looking forward, where did that mix could sort of top out?

Sure. Good question. So I think, first of all, thinking about Q3, okay. When we came into Q3, we planned a set of business. We talked about a set of business that was moving more ratable in Q2. And we looked at pipeline. We applied that ratable by the end of Q2 into our guidance for Q3. Just for context, the ratable mix of business moved five point between our forecast for Q3 and the end result, okay. So that's a good size chunk. Our ratable business is now over 80%. So that's on the bookings billing side as it comes in. So think about that as over 80%. So it's substantial. But we also built into Q4, we built not only that but an increasing ratable mix into our overall revenue guide. So we are trying to be thoughtful about this not only in terms of the acceleration from Q2 through to Q3, but also being conscious that this is a selling motion and as Greg indicated this is working out very well with customers and we are going to move in this direction.

And our next question is from the line of Sarah Hindlian from Macquarie.

All right. Great. Thank you very much. A couple of questions for you guys. I would love to hear about how the DigiCert's JV is progressing? What's going on over there? And how you are thinking about that going forward to start with? And then I have a couple other follow-ups as well.

Okay. Hi Sarah. So let me start with the DigiCert side of the fence and I am sure Greg might add some comments to this as well. So we obviously closed the transaction in the quarter. You will see in the math here that we have about $35 million of revenue inside the Enterprise segment from the business before it transitioned across. We are in the servicing of TSA world now. We are in the area where TSAs are starting to come off. We have got more planned over time. So going well operationally. Obviously, they are working on the business on their front as well. And Greg maybe has some comments on that. We do not have built into this guidance anything in terms of the equity interest. We are new in the industry. We don't have any numbers yet. So it's impossible to build it in. We would be watching that and then as we exit the fiscal year, we will give you a perspective on how we are going to build the equity interest into the numbers and what you should be thinking about.

And I think, Sarah, the transition from an operations point of view of the team and the infrastructure and stuff over to DigiCert and then getting going into the market, that's in great hands over there. They are excellent as to what they do and the cornerstone of the Symantec team is there and they are continuing to meet their deliverables. We are a customer of it and we have seen nothing wrong. So we think that's going well in the market. The 900 pound gorilla of stricter authorities now and I think they have a good future ahead.

Okay. Thank you Greg. And just one to more follow-up with you on, we have got a couple of quarters of LifeLock under the belt now and you obviously have some benefits from the Equifax data breach. But I would love to hear about how the go-to-market is going? And what customer retention and reception is around the bundled identity and endpoint protection suite together?

Yes. I think I would say, I would praise internal team on the LifeLock/Norton integration work. That has going extremely well. And we did have a very good quarter, as you can see in our results. And I think we are expecting to see another great result in Q4. But just in general, that package is extremely valued by the consumer community. We saw, as reported in our remarks, a slight increase in subscribers and if you go back 18 months ago and have a look at what was happening in the business at that point in time, that was different. And we are seeing really promising conversion rates at renewal, between when we present the bundled offering to either side of the cohort whether it be the LifeLock side or the Norton side. So we do think that we are going to see a stable business there going forward.

Okay. Great. Thank you both very much.

And our next question is from the line of Keith Weiss from Morgan Stanley.

Hi. Thanks. This is Melissa Franchi, calling in for Keith. Thanks for taking my question. I just wanted to dig into, again, the transition to ratable. I am just trying to understand what's driving the meaningful inflection over the past few quarters to ratable? Is it largely customer preference? Or are you doing anything internally to either inciting your sales force or the customer base to move to more subscriptions? And then the follow-up to that is just over what time period do you think this transition will be fully complete?

Okay. So thanks for the question, Melissa. And let me start up on the first part. So what we are offering when we go into a customer is, don't think of it as we are showing up with a bunch of Blue Coat products and then a bunch of Symantec products. We are showing up with an integrated product suite. So we have really done the work to integrate the important elements of our proxy stack with the key pieces of the Symantec portfolio. And to give you an example, if we want to take care of the PII compliance in cloud applications for Enterprise customers, which is a very strong market right now. We come to the customer with an offering that says you can put that in on-premise proxies. Or you we can put that in our cloud proxies. And it's integrated with the DLP. We have a cloud DLP module and you can get it integrated with our multifactor authenticator which is our VIP product. And when we show up with those things integrated and ready to go, what were seeing is, our customers are picking the cloud form factor of that and the virtual appliance form factor that way more often than we thought they were going to. We thought we might see in some that even in the more regulated industries we are seeing the cloud adoption faster than we thought. And when we looked at what's in the bill of materials in the pipelines and we see the big elements of that in there, that is what is getting us to advise the community that we see this as a long-term trend and we are taking down that we are increasing the ratable software percentage in the business in their long-term models to accommodate for that. But it really is customer choice and the fact that we have integrated product sets together in a way that is very compelling. And when you see that, you don't have to buy an appliance and deploy it and you don't have to go and do a bunch of work and you turn it on just like you do it at software delivered as a service, it is winning in the market. And that is where we think is long-term trend value proposition strong and we think, as I mentioned in my prepared remarks, we are a service delivered software company.

And so Melissa maybe -- yes, sorry, go ahead.

No, no. You go ahead.

I was going to indicate that, so in my prepared remarks, we talked about the transition. So we are in the transition and you might have heard a few minutes ago I indicated that our percentage or proportion of ratable businesses is up over 80% as we plan for this and we gave a guidance for this fourth quarter. Obviously as we then think about the revenue side of the fence, we roll through a period of time where we are transitioning off of a product sale in quarter that has heavy in-quarter revenue contribution to that ratable business. And we think that is the transition that is through fiscal 2019 and I talked about in the prepared remarks that we really think we will see the revenue growth side of that in the back or as we exit fiscal year 2019, back to that mid to high. And that supports going from there the high single to low double topline of the Enterprise that we look at on our medium term as in a FY 2020 type of forecast.

Okay.

Melissa, when we get to the fourth quarter announcement, we will print another quarter and we will be able to give you some really good indications of how we think that's going to go.

Okay. Great. Just one quick follow-up for Nick. As I just to revisit the guidance at the Analyst Day for operating margins, I think you guided to over 30% operating margins in the Enterprise business in FY 2019, FY 2020. Does that still hold true just given the increased mix to ratable or any other factors?

So that's a good question. And one of the things that we have to be thoughtful about is obviously the transition and what does that mean in terms of topline revenue. And regardless of the very good cost management we have in place here, our topline revenue that is impacted by in-quarter versus ratable is going to have some implications to operating margin. The other thing to think about and the other thing that we are being thoughtful about is the implications of tax reform. And in my prepared remarks, I indicated that we have a substantial reduction in our ETR to we are estimating right now in the 21%, 22% range. So we need to look at that as well in terms of potential for reinvestment in certain areas of the business as we go. The final thing I would probably have you just keep in mind is that, back at Financial Analyst Day, we had, let's say, security and PKI in the numbers. So we had updated that Enterprise operating margin perspective between then and now. But suffice to say there is a couple of things to keep in mind there if I net it all out, you should keep in mind overall we have done a lot of work here on cost side in terms of cost optimization. We have achieved all of our targets on the cost side of the fence. That is part of the perspective that Greg bring into the firm. So you should expect that we are very focused on that. However, we will look at the tax reform as one opportunity to look at some of that for reinvestment as others certainly are talking about.

And our next question is from the line of Gabriela Borges from Goldman Sachs.

Great. Good afternoon. Thanks for taking my question. My first question is for Nick. I wanted to revisit the pricing scenarios that you put forth at the Analyst Day where we looked at the appliance dollars with maintenance and we looked at the subscription model dollars over time. Could you just remind us when do you breakeven versus the old model of selling on the subscription side? And are there scenarios where the virtual form factors are expanding these cases that you can address at existing customers or perhaps moving down market at all?

Yes. So good question. So in that Financial Analyst Day, we were talking about up to a four year type of breakeven term. And we are looking at those form factors at the time knowing that in Q4, we had announced that we had completed the technological side of the fence as equaling the capability, whether it be VA or cloud or physical. I would say and one of the things that Greg talked about in his prepared remarks, is that the opportunity with the integration of products has really created a nice cross-sell on motion here and that is certainly one of the reasons in one of the areas that's accelerating this move towards ratable.

I think to answer your down market question on some of the new offerings we have, we did some announcements in the quarter that, I think, are really powerful. We announced a product in AWS. We announce a product in Azure. We announced a product in the Google Cloud. And we also have a SEP cloud product which is being represented by Tier 1 telecom companies that was also announced. That is bringing very powerful technology to a midmarket and even small market where you can get the power of the Symantec Endpoint Protection for cloud managed and that is a route that is definitely enhanced by some of those new products. Over time, we do hope to rebuild our prior dominance in the small because we have some very, very strong product there. And some of our competitors didn't fare well in the malware crisis amongst those kind of companies that really don't have an IT staff. We also have made good progress with some of the managed security service providers. We announced a very good deal with Airtel in India bringing that product set into the top few thousand customers in India with them. So I think the ability for us to deliver in cloud does open up easier routes to deployment and near customer segments.

That's helpful. And Greg, as a follow-up, you mentioned a couple of big examples during your prepared remarks on cross-sell deals. I am curios, when you look collectively across the over 9,000 direct accounts that you have as a company, where you think the biggest patterns emerge on cross-sell? It sounds like a lot of it is proxy and DLP. Are there other areas or other product lines that you think are cross-selling particularly well?

So I think we have got really strong traction with the proxy stack, CASB, DLP, multifactor auth and then upselling that into ability to process email. That is a great set of stuff where you have got to go get four vendors today and you can get one and it's a real crisis on cloud compliance right now and that's in that, top cohort. That's great. That is a really strong piece of business for us. And some of the examples we can see were like that. The other area which is great is, we are having in a pretty good time right now picking up the other adjacencies to the endpoint market. And the reason why, we won the Gartner Magic Quadrant this year on both the vision and executions not just because we are big and we can do a lot. We actually got there on ability to deliver a feature set that's relevant right now. We are now able with one agent to go in and take down all of the EDR pieces as well as the deception and then we can come back and then cross-sell our DLP endpoint in there as well. And later on as we talked about when we announced the Symantec Blue Coat merger, we will be delivering a very strong integration of that endpoint without proxy stack as well. We think that's the on ramp to the cloud for the future. And that's a really nice place for us as we have got in that cross-sell. We have got a number of angles that fit that sort of top 10,000 accounts and we have a sales force. And I think the number one thing that gave me a lot of conviction about Q3 was, could our sales force sell it. And the answer to that is, our sales force did sell it and you can see it in those billings numbers. And for those of you that as Sarah said, let's talked about the term, we know and we are going get you that data.

And our next question is from the line of John DiFucci from Jefferies. I am sorry. Your line is open.

Can you me okay?

Hi John. Yes, you can go ahead.

Hi Greg and Nick, both. I guess this questions is for both of you. So just one second. Sorry. We sort of get the mix shift and we really appreciate all the data you gave us. So we will get through that. We will go through that. It will take a little bit of time. But I guess I had two questions regarding that. I guess the first one is one that I keep getting emails from people on and I think it's a fair question. You gave guidance for this quarter a full month into the quarter. So given, at least my understanding of how deals close, especially with the Enterprise, it's just a little surprising that this would surprise you given when we gave guidance at that point that the quarter would shift that quickly in the last two months the quarter. So if you can just talk a little bit about that? And then secondly, if you have a customer who has been a proxy appliance user and he decides to go to cloud-based solutions or any sort of moving from anything to sort of a subscription, especially though when you have an appliance, what do you have to consider, if he is doing his job, consider alternative solutions at that point since he is making a change anyway? And I guess, how do you manage that risk?

So let me take the last question first, John and I will pass it back over to Nick to give you some insights. So every time there is a set of proxies that come up for refresh and these dates are published on a website, everything that are on the planet tries to come in there and get those. Last time this happened, same thing, they even built webpages for it. So it's a competitive situation. And that's just the way it is. But switching it out is a little more difficult than just going to get a new one. There is policies in there that you have got to go change and all that kind of things. What we have done with the Blue Coat proxy data, is we have virtual appliances that are ratable that if you put them on the right underlying hardware platform with the right network stuff that was built for virtual machines, they are capacity comparable to a ProxySG piece of hardware. So those do move from hardware to virtual because it's easier for people to deal with than in their big VMware installations and things like that. Then we get the reason why people would buy more capacity. Often it is the roaming users and the roaming users are being picked up by the cloud form factor more often than not. And when they add the ability to take care of cloud applications through things like CASB, they actually prefer that that runs in an Amazon kind of instantiation. So we do see what would be the traditional upsell in a refresh being ratable in a pretty strong way. And then the last Blue Coat refresh, we picked up a lot of the other adjacencies at the time which were like the malware analyzers and the decryptors and that kind of stuff. The adjacencies in this refresh are the CASBs and the roaming user pieces which are all cloud based. So again, it is competitive. I think the other thing when people rely on channel checks to see how much the box movers are moving boxes, box move is not as relevant anymore as they used to be in this because there is SLAs and MSAs. And so the routes to some of the stuff is different than it was a few years ago, okay.

Yes. That's pretty helpful.

That will be in the fourth quarter.

Let me talk to you about that real quick. So John, you will recall, in our last quarter call we indicated that it's coming when we had a bigger pipeline. Coming into Q3, we had a bigger pipeline and we applied all the knowledge we had from Q2, i.e. ratable shift, linearity, et cetera, to that pipeline to come up with our numbers in our guidance range. And obviously there is a lot of detail that goes on and a lot of work that goes on around that. However, we also had back-end loaded quarters. And with back-end loaded quarters and what we indicated on that call last time, larger transactions, those can move from a product license based transaction to a ratable transaction. And when they do, that's going to impact. So we had an acceleration of that ratable mix and that acceleration happened in the end of the quarter and that's the net impact we have here. So we apply all of our logic to this and it accelerated in the quarter and that's what I was describing on a few of those other questions. We are trying to, obviously be thoughtful about that as we go forward. And there is really two things we are doing. Number one is, even more work scrutiny et cetera on the pipe and on the transaction that we are looking at for quarter what we know, what size those transaction are, et cetera. But in addition, we have not only taken just where the ratable got to, we are increasing that and we are increasing our expectations on ratable business because obviously we don't like being in a place where the forecast doesn't work out either. So we have made some additional changes to the go-forward.

Guys, we really take full responsibility and apologize for not getting that right. We have talked about mix on the conference calls a number of times while we have been in transformation of Symantec. We talked about when we mixed lots of line items together on the same purchase order, it hurts what would be the in-period pieces of that. If you put a discount on it, it gets cut back into the maintenance pieces. We talked about the fact that we got it wrong and we saw more cloud and we did not expect to see the volumes that happened and that is definitely something that we are seriously doing better on now.

And at this time I am showing we have no further questions. Presenters, I turn it back to you for closing remarks.

Great. Thank you everyone for joining us this afternoon. And we look forward to updating you again on our next call.

Ladies and gentlemen, this does conclude Symantec's fiscal third quarter 2018 earnings call. We thank you greatly for your participation. You may now disconnect. Presenters, please hold the line.