UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

 

 

Commission File Number 000-17781

 

Symantec Corporation

(Exact name of the registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code:

(408) 517-8000

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer þ     Accelerated Filer o     Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

Shares of Symantec common stock, $0.01 par value per share, outstanding as of October 27, 2006: 938,017,595 shares.

 

SYMANTEC CORPORATION

 

FORM 10-Q

 

Quarterly Period Ended September 29, 2006

 

TABLE OF CONTENTS

 

 

 

The accompanying Notes to Condensed Consolidated Financial Statements are

an integral part of these financial statements.

 

 

The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of these financial statements.

 

 

The accompanying Notes to Condensed Consolidated Financial Statements are

an integral part of these financial statements.

 

Note 1.  Basis of Presentation

 

The condensed consolidated financial statements of Symantec Corporation as of September 30, 2006 and March 31, 2006 and for the three-month and six-month periods ended September 30, 2006 and 2005 are unaudited and have been prepared in accordance with the instructions for Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC, and, therefore, do not include all information and notes normally provided in audited financial statements. In the opinion of management, the condensed consolidated financial statements contain all adjustments, consisting only of normal recurring items, except as otherwise noted, necessary for the fair presentation of our financial position and results of operations for the interim periods. These condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2006. The results of operations for the three-month and six-month periods ended September 30, 2006 are not necessarily indicative of the results to be expected for the entire fiscal year. All significant intercompany accounts and transactions have been eliminated. Certain previously reported amounts have been reclassified to conform to the current presentation.

 

We have a 52/53-week fiscal accounting year. Accordingly, all references as of and for the periods ended September 30, 2006, March 31, 2006, and September 30, 2005 reflect amounts as of and for the periods ended September 29, 2006, March 31, 2006, and September 30, 2005, respectively. The three-month periods ended September 30, 2006 and 2005 each comprised 13 weeks of activity. The six-month periods ended September 30, 2006 and 2005 each comprised 26 weeks of activity.

 

Significant accounting policies

 

On April 1, 2006, we adopted a new policy related to stock-based compensation, as discussed more fully below. Other than this change, there have been no significant changes in our significant accounting policies during the six months ended September 30, 2006 as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2006.

 

Stock-based compensation

 

Prior to April 1, 2006, we accounted for stock-based compensation awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion, or APB, No. 25, Accounting for Stock Issued to Employees, and to non-employees using the fair value method in accordance with Statement of Financial Accounting Standards, or SFAS, No. 123, Accounting for Stock-Based Compensation. In addition, we applied applicable provisions of FASB Interpretation No., or FIN, 44, Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB No. 25.

 

Effective April 1, 2006, we adopted the provisions of SFAS No. 123R, Share-Based Payment, which replaced SFAS No. 123 and superseded APB No. 25 and related interpretations. Under SFAS No. 123R, we must measure the fair value of all stock-based awards, including stock options, restricted stock units, and employee stock purchase plan purchase rights on the date of grant and amortize the fair value of the award to compensation expense over the service period. We elected the modified prospective application method, under which prior periods are not revised for comparative purposes. The valuation provisions of SFAS No. 123R apply to new awards and to awards outstanding as of the effective date that are subsequently modified. For stock-based awards granted on or after April 1, 2006, we recognize stock-based compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period. Estimated compensation expense for stock-based awards that were outstanding and unvested as of the effective date will be recognized over the remaining service period under the pro forma provisions of SFAS No. 123.

 

SYMANTEC CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The adoption of SFAS No. 123R had a material effect on our consolidated financial position and results of operations. See Note 7 for further information regarding stock-based compensation expense and the assumptions used in estimating that expense.

 

Recent accounting pronouncements

 

In September 2006, the SEC issued Staff Accounting Bulletin, or SAB, No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current year’s financial statements are materially misstated. SAB No. 108 is effective for fiscal years ending on or after November 15, 2006. We are currently in the process of evaluating the impact of SAB No. 108 on our financial position and results of operations.

 

In September 2006, the Financial Accounting Standards Board, or FASB, issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 establishes a framework for measuring the fair value of assets and liabilities. This framework is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards which permit, or in some cases require, estimates of fair market value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. We are currently in the process of evaluating the impact of SFAS No. 157 on our financial position and results of operations.

 

In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. FIN 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation, and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently in the process of evaluating the impact of FIN 48 on our financial position and results of operations.

 

In addition, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, in February 2006 and FASB Staff Position FAS 143-1, Accounting for Electronic Equipment Waste Obligations, in June 2005. The potential effects of these pronouncements on our financial position and results of operations is discussed in Summary of Significant Accounting Policies in our Annual Report on Form 10-K for the fiscal year ended March 31, 2006.

 

SYMANTEC CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

The components of comprehensive income, net of tax, are as follows:

 

 

Accumulated other comprehensive income as of September 30, 2006 and 2005 consists primarily of foreign currency translation adjustments, net of taxes. Unrealized gains and losses on available-for-sale investments, net of taxes, were immaterial for all periods presented.

 

SYMANTEC CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Goodwill

 

Goodwill by segment is as follows:

 

 

During the six months ended September 30, 2006, we adjusted the goodwill from certain acquisitions for individually immaterial amounts primarily related to deferred taxes based on post-closing reviews.

 

Goodwill is tested for impairment on an annual basis during the March quarter, or earlier if indicators of impairment exist. During the June 2006 quarter, we reclassified our operating segments and the related goodwill as described in Note 12, and determined that there were no indicators of impairment of goodwill. We will also continue to test for impairment during the March quarter of each year, or earlier if indicators of impairment exist.

 

Acquired product rights

 

Acquired product rights subject to amortization are as follows:

 

 

 

During the three-month periods ended September 30, 2006 and 2005, amortization expense for acquired product rights was $85 million and $129 million, respectively. During the six-month periods ended September 30, 2006 and 2005, amortization expense for acquired product rights was $173 million and $140 million, respectively. Amortization of acquired product rights is included in Cost of revenues in the Condensed Consolidated Statements

 

SYMANTEC CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

of Operations. Amortization expense for acquired product rights, based upon our existing acquired product rights and their current useful lives as of September 30, 2006, is estimated to be as follows:

 

 

Other intangible assets

 

Other intangible assets subject to amortization are as follows:

 

 

 

During the three-month periods ended September 30, 2006 and 2005, amortization expense for other intangible assets was $50 million and $48 million, respectively. During the six-month periods ended September 30, 2006 and 2005, amortization expense for other intangible assets was $101 million and $50 million, respectively. Amortization of other intangible assets is included in Operating expenses in the Condensed Consolidated Statements of Operations. Amortization expense for other intangible assets, based upon our existing other intangible assets and their current useful lives as of September 30, 2006, is estimated to be as follows:

 

 

SYMANTEC CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Convertible senior notes

 

In June 2006, we issued $1.1 billion principal amount of 0.75% Convertible Senior Notes due June 15, 2011, or the 0.75% Notes, and $1.0 billion principal amount of 1.00% Convertible Senior Notes due June 15, 2013, or the 1.00% Notes, to initial purchasers in a private offering for resale to qualified institutional buyers pursuant to SEC Rule 144A. We refer to the 0.75% Notes and the 1.00% Notes collectively as the Senior Notes. We received proceeds of $2.1 billion from the Senior Notes and incurred net transaction costs of approximately $32 million, which were allocated proportionately to the 0.75% Notes and the 1.00% Notes. The transaction costs were primarily recorded in Other long-term assets and are being amortized to interest expense using the effective interest method over five years for the 0.75% Notes and seven years for the 1.00% Notes. The 0.75% Notes and 1.00% Notes were each issued at par and bear interest at 0.75% and 1.00% per annum, respectively. Interest is payable semiannually in arrears on June 15 and December 15, beginning December 15, 2006.

 

Each $1,000 of principal of the Senior Notes will initially be convertible into 52.2951 shares of Symantec common stock, which is the equivalent of $19.12 per share, subject to adjustment upon the occurrence of specified events set forth under the terms of the Senior Notes. Upon conversion, we would pay the holder the cash value of the applicable number of shares of Symantec common stock, up to the principal amount of the note. Amounts in excess of the principal amount, if any, may be paid in cash or in stock at our option. Holders who convert their Senior Notes in connection with a change in control of Symantec may be entitled to a “make whole” premium in the form of an increase in the conversion rate. In addition, upon a change in control, the holders of the Senior Notes may require us to repurchase for cash all or any portion of their Senior Notes for 100% of the principal amount. As of September 30, 2006, none of the conditions allowing holders of the Senior Notes to convert had been met.

 

Concurrently with the issuance of the Senior Notes, we entered into note hedge transactions with affiliates of certain of the initial purchasers whereby we have the option to purchase up to 110 million shares of our common stock at a price of $19.12 per share. The options as to 58 million shares expire on June 15, 2011 and the options as to 52 million shares expire on June 15, 2013. The options must be settled in net shares. The cost of the note hedge transactions to us was approximately $592 million. In addition, we sold warrants to affiliates of certain of the initial purchasers whereby they have the option to purchase up to 110 million shares of our common stock at a price of $27.3175 per share. The warrants expire on various dates from July 2011 through August 2013 and must be settled in net shares. We received approximately $326 million in cash proceeds from the sale of these warrants.

 

The cost incurred in connection with the note hedge transactions, net of the related tax benefit and the proceeds from the sale of the warrants, is included as a net reduction in Capital in excess of par value in the accompanying Condensed Consolidated Balance Sheets as of September 30, 2006, in accordance with the guidance in Emerging Issues Task Force Issue, or EITF, No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.

 

In accordance with SFAS No. 128, Earnings per Share, the Senior Notes will have no impact on diluted earnings per share, or EPS, until the price of our common stock exceeds the conversion price of $19.12 per share because the principal amount of the Senior Notes will be settled in cash upon conversion. Prior to conversion we will include the effect of the additional shares that may be issued if our common stock price exceeds $19.12 per share, using the treasury stock method. As a result, for the first $1.00 by which the price of our common stock exceeds $19.12 per share there would be dilution of approximately 5.4 million shares. As the share price continues to increase, additional dilution would occur at a declining rate such that a price of $27.3175 per share would yield cumulative dilution of approximately 32.9 million shares. If our common stock exceeds $27.3175 per share we will also include the effect of the additional potential shares that may be issued related to the warrants using the treasury stock method. The Senior Notes along with the warrants have a combined dilutive effect such that for the first $1.00 by which the price exceeds $27.3175 per share there would be cumulative dilution of approximately 39.5 million

 

SYMANTEC CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

shares prior to conversion. As the share price continues to increase, additional dilution would occur but at a declining rate.

 

Prior to conversion, the note hedge transactions are not considered for purposes of the EPS calculation as their effect would be anti-dilutive. Upon conversion, the note hedge will serve to neutralize the dilutive effect of the Senior Notes when the stock price is above $19.12 per share. For example, if upon conversion the price of our common stock was $28.3175 per share, the cumulative effect of approximately 39.5 million shares in the example above would be reduced to approximately 3.9 million shares.

 

The preceding calculations assume that the average price of our common stock exceeds the respective conversion prices during the period for which EPS is calculated and exclude any potential adjustments to the conversion ratio provided under the terms of the Senior Notes.

 

Convertible subordinated notes

 

In connection with the acquisition of Veritas Software Corporation on July 2, 2005, we assumed the Veritas 0.25% convertible subordinated notes, or the 0.25% Notes. On August 1, 2006, at the option of the holders, we repurchased $510 million of the 0.25% Notes at a price equal to the principal amount, plus accrued and unpaid interest. On August 28, 2006, at our election, we repurchased the remaining $10 million of the 0.25% Notes at a price equal to the principal amount plus accrued and unpaid interest.

 

Line of credit

 

In July 2006, we entered into a five-year $1 billion senior unsecured revolving credit facility that expires in July 2011. Borrowings under the facility will bear interest, at our option, at either a rate equal to the bank’s base rate or a rate equal to LIBOR plus a margin based on our leverage ratio, as defined in the credit facility agreement. In connection with the credit facility, we must maintain certain covenants, including a specified ratio of debt to EBITDA (earnings before interest, taxes, depreciation, and amortization), as well as various other non-financial covenants. At September 30, 2006, we were in compliance with all covenants. We have made no borrowings under the credit facility through September 30, 2006.

 

 

Stock repurchases

 

We have operated stock repurchase programs since 2001. On January 31, 2006, we announced that the Board, through one of its committees, authorized the repurchase of $1 billion of Symantec common stock, without a scheduled expiration date. At the beginning of fiscal 2007, $846 million of this authorization remained available for future repurchases. In addition to the January authorization, on June 5, 2006, the Board of Directors authorized the repurchase of $1.5 billion of Symantec common stock, which was announced on June 12, 2006 in connection with the announcement of our offering of the Senior Notes.

 

During the six-month period ended September 30, 2006, we repurchased 110 million shares of our common stock at prices ranging from $15.61 to $21.09 per share for an aggregate amount of $1.9 billion. During the six-month period ended September 30, 2005, we repurchased 84 million shares at prices ranging from $18.33 to $22.51 per share for an aggregate amount of $1.8 billion. As of September 30, 2006, an aggregate of $479 million remained authorized for future repurchases under our authorized stock repurchase programs. We have entered into Rule 10b5-1 trading plans intended to facilitate stock repurchases of $195 million through the end of fiscal 2007, and we intend to use the remaining amount of the authorizations to make stock repurchases opportunistically.

 

SYMANTEC CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Effective April 1, 2006, we adopted the provisions of SFAS No. 123R. See Note 1 for a description of our adoption of SFAS No. 123R. We currently have in effect certain stock purchase plans, stock award plans, and equity incentive plans, as described in detail in Note 11 of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended March 31, 2006. There have been no material changes to any such plans, except with regard to our 2004 Equity Incentive Plan, or 2004 Plan, which was amended and restated by our stockholders on September 13, 2006, as described below.

 

2004 Equity Incentive Plan

 

Under the 2004 Plan, our Board of Directors, or a committee of the Board of Directors, may grant incentive and nonqualified stock options, stock appreciation rights, restricted stock units (RSUs), or restricted stock awards to employees, officers, directors, consultants, independent contractors, and advisors to us, or to any parent, subsidiary, or affiliate of ours. The purpose of the 2004 Plan is to attract, retain, and motivate eligible persons whose present and potential contributions are important to our success by offering them an opportunity to participate in our future performance through equity awards of stock options and stock bonuses. Under the terms of the 2004 Plan, the exercise price of stock options may not be less than 100% of the fair market value on the date of grant. Options generally vest over a four-year period and have a maximum term of seven years.

 

We have reserved 70.3 million shares for issuance under the 2004 Plan. These shares include 18.0 million shares originally reserved for issuance under the 2004 Plan upon its adoption by our stockholders in September 2004, 9.5 million shares that were transferred to the 2004 Plan from the 1996 Equity Incentive Plan, or 1996 Plan, upon the expiration of the 1996 Plan in March 2006, and 40.0 million shares that were approved for issuance on the amendment and restatement of the 2004 Plan at our 2006 annual meeting of stockholders. In addition to the shares currently reserved under the 2004 Plan, any shares reacquired by us from options outstanding under the 1996 Plan upon its expiration will also be added to the 2004 Plan reserve. As of September 30, 2006, 53.1 million shares remain available for future grant under the 2004 Plan.

 

At our 2006 annual meeting of stockholders, our stockholders approved the amendment and restatement of the 2004 Plan, which included the following key changes: 1) an increase of 40.0 million in the number of shares reserved for issuance under the 2004 Plan; 2) modification of the share pool available under the 2004 Plan to reflect a ratio-based pool, where the grant of each full-value award, such as a share of restricted stock or an RSU decreases the pool by two shares; and 3) a change in the form of equity grants to our non-employee directors from stock options to a fixed dollar amount of RSUs.

 

Acceleration of stock option vesting

 

On March 30, 2006, we accelerated the vesting of certain stock options with exercise prices equal to or greater than $27.00 per share that were outstanding on that date. We did not accelerate the vesting of any stock options held by our executive officers or directors. The vesting of options to purchase approximately 6.7 million shares of common stock, or approximately 14% of our outstanding unvested options, was accelerated. The weighted average exercise price of the stock options for which vesting was accelerated was $28.73. We accelerated the vesting of the options to reduce future stock-based compensation expense that we would otherwise be required to recognize in our results of operations after adoption of SFAS No. 123R. Because of system constraints, it is not practicable for us to estimate the amount by which the acceleration of vesting will reduce our future stock-based compensation expense. The acceleration of the vesting of these options did not result in a charge to expense in fiscal 2006.

 

SYMANTEC CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Valuation of stock-based awards

 

The fair value of each stock option granted under our equity incentive plans is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

 

The expected life of options is based on an analysis of our historical experience of employee exercise and post-vesting termination behavior considered in relation to the contractual life of the option. Expected volatility is based on the average of the historical volatility for the period commensurate with the expected life of the option and the implied volatility of traded options. The risk free interest rate is equal to the U.S. Treasury constant maturity rates for the period equal to the expected life. We do not currently pay cash dividends on our common stock and do not anticipate doing so in the foreseeable future. Accordingly, our expected dividend yield is zero. The fair value of each RSU is equal to the market value of Symantec’s common stock on the date of grant. The fair value of each ESPP purchase right is equal to the 15% discount on shares purchased. We estimate forfeitures of options, RSUs, and ESPP purchase rights at the time of grant based on historical experience and record compensation expense only for those awards that are expected to vest.

 

Stock-based compensation expense

 

Stock-based compensation is classified in the Condensed Consolidated Statements of Operations in the same expense line items as cash compensation. The following table sets forth the total stock-based compensation expense recognized in our Condensed Consolidated Statements of Operations for the three- and six-month periods ended September 30, 2006 and 2005.

 

 

As a result of adopting SFAS No. 123R, Net income per share — basic and Net income per share — diluted are each $0.04 lower for the three months ended September 30, 2006 and are each $0.06 lower for the six months ended September 30, 2006 than if we had continued to account for stock-based compensation in accordance with APB No. 25.

 

SYMANTEC CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of September 30, 2006, total unrecognized compensation cost related to unvested stock options and RSUs was $210 million and $33 million, respectively, which is expected to be recognized over the remaining weighted average vesting periods of 2.9 years for stock options and 3.1 years for RSUs.

 

Prior to the adoption of SFAS No. 123R, we provided the pro forma information regarding net income and net income per share required by SFAS No. 123. This information was required to be determined as if we had accounted for our employee stock options, including shares issued under our ESPP, granted subsequent to March 31, 1995 under the fair value method of SFAS No. 123. We generally did not recognize stock-based compensation expense in our Condensed Consolidated Statements of Operations for option grants to our employees for the periods prior to our adoption of SFAS No. 123R because the exercise price of options granted was equal to the fair market value of the underlying common stock on the date of grant. Prior to April 1, 2006, stock-based compensation expense resulted primarily from stock options and RSUs assumed in acquisitions and restricted stock granted to executives. The following table illustrates the effect on net income and net income per share as if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation using the Black-Scholes option-pricing model for the three- and six-month periods ended September 30, 2005:

 

 

 

 

Prior to the adoption of SFAS No. 123R, we presented Deferred stock-based compensation as a separate component of Stockholders’ Equity. In accordance with the provisions of SFAS No. 123R, on April 1, 2006, we reversed the balance in Deferred stock-based compensation to Capital in excess of par value in the Condensed Consolidated Balance Sheet.

 

Prior to the adoption of SFAS No. 123R, we presented all tax benefits for deductions related to stock options as operating cash flows in our Condensed Consolidated Statements of Cash Flows. SFAS No. 123R requires cash flows resulting from the tax benefits for tax deductions in excess of the compensation expense recorded for exercised options to be classified as financing cash flows. Accordingly, we classified $6 million of such excess tax benefits as financing cash flows rather than operating cash flows in our Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2006.

 

We have calculated the tax benefit related to stock options in accordance with the guidance provided in SFAS No. 123R. However, we are continuing to evaluate the “short-cut” method allowed by FSP FAS 123R-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards. We will make a final determination of the method that we will use no later than March 31, 2007. If we ultimately determine that we will

 

SYMANTEC CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

use the “short-cut” method, all post-adoption amounts related to income tax benefits from stock options would be reclassified in our Condensed Consolidated Statements of Cash Flows from operating activities to financing activities.

 

Award activity

 

The following table summarizes stock option activity for the six months ended September 30, 2006.

 

 

 

 

The weighted-average fair value per share of options granted during the six months ended September 30, 2006 and 2005 was $4.81 and $8.49, respectively. The total intrinsic value of options exercised during the six months ended September 30, 2006 and 2005 was $62 million and $77 million, respectively.

 

The following table summarizes RSU activity for the six months ended September 30, 2006.

 

 

The weighted-average fair value per share of RSUs granted during the six months ended September 30, 2006 was $16.41. There were no RSUs granted during the six months ended September 30, 2005. The total fair value of RSUs that vested during the six months ended September 30, 2006 and 2005 was $470,000 and $4 million, respectively.

 

SYMANTEC CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

As of September 30, 2006, we had a restructuring reserve of $27 million, of which $19 million was included in Other accrued expenses in the Condensed Consolidated Balance Sheets and $8 million was included in Other long-term liabilities in the Condensed Consolidated Balance Sheets. The restructuring reserve consists of $6 million related to a restructuring reserve assumed from Veritas in connection with the acquisition, $10 million related to restructuring reserves established in the six months ended September 30, 2006, and $11 million related to restructuring reserves established in fiscal 2006. Restructuring reserves established in fiscal 2006 include $6 million related to our 2006 restructuring plan, an immaterial amount related to restructuring costs as a result of the Veritas acquisition, and $5 million related to restructuring costs as a result of our other acquisitions.

 

Restructuring expense

 

During the six months ended September 30, 2006, we recorded $19 million of restructuring costs. These restructuring costs are related to executive severance and to severance, associated benefits, and outplacement services for the termination of 323 redundant employees located in the United States, Europe, and Asia Pacific. The restructuring costs also included an immaterial amount related to excess facilities that we vacated in the United States, Europe, and Asia Pacific. During the six months ended September 30, 2006, we paid $9 million related to this reserve. We expect the remainder of the costs to be paid by the end of fiscal 2008.

 

In fiscal 2006, we recorded $25 million of restructuring costs, of which $5 million was recorded in the six months ended September 30, 2005. The fiscal 2006 restructuring costs included $18 million related to severance, associated benefits, and outplacement services and $7 million related to excess facilities. These restructuring costs reflect the termination of 446 redundant employees located in the United States, Europe, and Asia Pacific and the consolidation of certain facilities in Europe and Asia Pacific. At March 31, 2006, $9 million remained related to this reserve. During the six months ended September 30, 2006, we paid $3 million related to this reserve. We expect the remainder of the costs, the majority of which relate to restructured facilities, to be paid by the end of fiscal 2018.

 

Amounts related to restructuring expense are included in Restructuring in the Condensed Consolidated Statements of Operations.

 

Acquisition-related restructuring

 

In connection with the Veritas acquisition, we assumed a restructuring reserve of $53 million related to the 2002 Veritas facilities restructuring plan. At March 31, 2006, $9 million remained related to this reserve. During the six months ended September 30, 2006, we paid $4 million related to this reserve and increased this reserve by an immaterial amount as we determined that the costs related to certain facilities would be greater than originally accrued. The remaining reserve amount of $6 million will be paid over the remaining lease terms, ending at various dates through 2022. The majority of costs are currently scheduled to be paid by the end of fiscal 2011.

 

In connection with the Veritas acquisition, we recorded $7 million of restructuring costs, of which $2 million related to excess facilities costs and $5 million related to severance, associated benefits, and outplacement services. These restructuring costs reflect the termination of redundant employees and the consolidation of certain facilities as a result of the Veritas acquisition. At March 31, 2006, $3 million remained related to this reserve. During the six months ended September 30, 2006, we paid an immaterial amount related to this reserve and reduced this reserve by an immaterial amount as we determined that the costs related to certain facilities would be less than originally accrued. We expect the remainder of the costs to be paid by the end of fiscal 2007.

 

In connection with our other acquisitions in fiscal 2006, we recorded $12 million of restructuring costs, of which $8 million related to severance, associated benefits, and outplacement services and $4 million related to excess facilities costs. These restructuring costs reflect the termination of redundant employees and the consolidation of certain facilities as a result of our other acquisitions. At March 31, 2006, $9 million remained related to

 

SYMANTEC CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

this reserve. During the six months ended September 30, 2006, we paid $4 million related to this reserve. We expect the remainder of the costs to be paid by the end of fiscal 2012.

 

Amounts related to acquisition-related restructuring are reflected in the purchase price allocation of the applicable acquisition.

 

 

The components of net income (loss) per share are as follows:

 

 

The following potential common shares were excluded from the computation of diluted net income (loss) per share as their effect would have been anti-dilutive:

 

 

 

 

SYMANTEC CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the three- and six-month periods ended September 30, 2006, the effect of the convertible Senior Notes and the warrants were excluded because, as discussed in Note 5, they have no impact on diluted net income per share until our average stock price for the applicable period reaches $19.12 per share and $27.3175 per share, respectively.

 

 

The effective tax rate was approximately 31% and 35% for the three- and six-month periods ended September 30, 2006, respectively, compared to (11)% and 281% for the comparable periods in 2005. Absent the tax effect of non-recurring items, we have provided for income taxes at an estimated annualized effective tax rate of 35% for the fiscal year 2006, compared to a 33% rate for fiscal year 2005. Both periods’ tax rates are favorably impacted by the benefit of low-taxed foreign earnings, offset by state income taxes. In addition, the fiscal 2006 tax rate reflects non-deductible stock based compensation resulting from the adoption of SFAS No. 123R. The tax rates for the 2005 periods reflect the non-deductibility of the IPR&D charge of $284 million recorded in the quarter ended September 30, 2005.

 

In the September 2006 quarter, an $8 million tax benefit was recorded for the final Internal Revenue Service, or IRS, audit settlement of Symantec’s fiscal years 2003 and 2004. The tax expense for the June 2006 quarter includes an accrual of approximately $6 million for penalty risks associated with the late filing of Veritas’ final pre-acquisition tax return. The June 2005 quarter’s tax expense has been reduced by a $20 million tax benefit related to technical corrections to the American Jobs Creation Act of 2004 with respect to the treatment of foreign taxes paid on the earnings repatriated under the Act.

 

On September 5, 2006, we executed a closing agreement with the IRS with respect to the audit of Symantec’s fiscal years 2003 and 2004 federal income tax returns. The closing agreement represents the final assessment by the IRS of additional tax for these fiscal years of approximately $35 million including interest. Based on the final settlement, a tax benefit of $8 million is reflected in the current quarter.

 

On June 26, 2006, we filed a petition with the U.S. Tax Court to protest a Notice of Deficiency from the IRS claiming that we owe $867 million, excluding penalties and interest, for the 2000 and 2001 tax years based on an audit of Veritas, which we acquired in July, 2005. On August 30, 2006, the IRS answered our petition and the case has been docketed for trial in U.S. Tax Court. See Note 11 for further discussion.

 

In connection with the note hedge transactions discussed in Note 5, we established a deferred tax asset of approximately $232 million to account for the book-tax basis difference in the convertible notes resulting from note hedge transactions. The deferred tax asset has been accounted for as an increase to Capital in excess of par value.

 

 

On March 29, 2006, we received a Notice of Deficiency from the IRS claiming that we owe additional taxes, plus interest and penalties, for the 2000 and 2001 tax years based on an audit of Veritas. The incremental tax liability asserted by the IRS is $867 million, excluding penalties and interest. We do not agree with the IRS position and on June 26, 2006, we filed a petition with the U.S. Tax Court protesting the IRS claim for such additional taxes. On August 30, 2006, the IRS answered our petition and this matter has been docketed for trial in U.S. Tax Court. We strongly believe the IRS’ position with regard to this matter is inconsistent with applicable tax laws and existing Treasury regulations, and that our previously reported income tax provision for the years in question is appropriate.

 

Prior to our acquisition of Veritas, Veritas had been in discussions with the staff of the SEC regarding the SEC’s review of the matters discussed in Note 14 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2006, and, based on communications with the staff, Veritas expected these discussions to result in a settlement with the SEC in which we would be required to pay a $30 million penalty. We would be unable to deduct the $30 million penalty for income tax purposes, be reimbursed or indemnified for such payment through insurance or any other source, or use the payment to setoff or reduce any award of compensatory damages to plaintiffs in related securities litigation. Final settlement with the SEC is subject

 

SYMANTEC CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

to agreement on final terms and documentation, approval by our board of directors, and approval by the SEC Commissioners. In the March quarter of 2005, Veritas recorded a charge of $30 million in its consolidated statement of operations, and a corresponding accrual in its balance sheet. As of the filing of this Quarterly Report, the terms of the final settlement are still under consideration by the SEC Commissioners, and have not been approved. As part of our accounting for the acquisition of Veritas, we recorded the accrual of $30 million in Other accrued expenses in the Condensed Consolidated Balance Sheets. We intend to cooperate with the SEC in its investigation and review of the foregoing matters.

 

We are also involved in a number of other judicial and administrative proceedings, including those described in Note 14 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2006, and others that are incidental to our business. Although adverse decisions (or settlements) may occur in one or more of the cases, it is not possible to estimate the possible loss or losses from each of these cases. The final resolution of these lawsuits, individually or in the aggregate, is not expected to have a material adverse affect on our financial condition or results of operations.

 

 

In the June 2006 quarter, we consolidated our Enterprise Security, Data Protection, and Storage and Server Management segments into two segments — the Security and Data Management segment and the Data Center Management segment. Amounts for the three and six months ended September 30, 2005 have been reclassified to conform to our current presentation.

 

Our operating segments are significant strategic business units that offer different products and services, distinguished by customer needs. As of September 30, 2006, we had five operating segments:

 

 

The accounting policies of the segments are the same as those described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2006. There are no intersegment sales. Our chief operating decision maker evaluates performance based on direct profit or loss from operations before income taxes not including nonrecurring gains and losses, foreign exchange gains and losses, and miscellaneous other income and expenses. The majority of our assets and liabilities are not discretely identified by segment. The depreciation and amortization of our property,

 

SYMANTEC CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

equipment, and leasehold improvements are allocated based on headcount, unless specifically identified by segment.

 

 

 

On November 3, 2006, we entered into an agreement to acquire Company-i Limited, a UK-based professional services firm that specializes in addressing key challenges associated with operating and managing a data center in the financial services industry, for an estimated purchase price, excluding acquisition related costs, of $25 million plus potential additional payments of up to $11 million if certain conditions are met. We believe this acquisition will further our capability to help clients manage their information technology risk and cost, particularly in the data center. The acquisition is expected to close in the third quarter of fiscal 2007, subject to the satisfaction of closing conditions.

 

Forward-Looking Statements and Factors That May Affect Future Results

 

The discussion below contains forward-looking statements, which are subject to safe harbors under the Securities Act of 1933 and the Securities Exchange Act of 1934. The words “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” and similar expressions identify forward-looking statements. In addition, statements that refer to projections of our future financial performance, anticipated growth and trends in our businesses and in our industries, the anticipated impacts of acquisitions, and other characterizations of future events or circumstances are forward-looking statements. These statements are only predictions, based on our current expectations about future events and may not prove to be accurate. We do not undertake any obligation to update these forward-looking statements to reflect events occurring or circumstances arising after the date of this report. These forward-looking statements involve risks and uncertainties, and our actual results, performance, or achievements could differ materially from those expressed or implied by the forward-looking statements on the basis of several factors, including those that we discuss in Risk Factors, set forth in Part II, Item 1A of this Quarterly Report and in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended March 31, 2006. We encourage you to read these sections carefully.

 

OVERVIEW

 

We are the world leader in providing infrastructure software to protect individuals and enterprises from a variety of risks. We provide consumers, home offices, and small businesses with Internet security and personal computer, or PC, problem-solving products; we provide small and medium-sized businesses with software to provision, backup, secure, and remotely access their PCs and servers; we provide enterprise and large enterprise customers with security, storage and server management, data protection, and application performance management solutions; and we provide a full range of consulting and educational services to enterprises of all sizes. In addition, we continually work to enhance the features and functionality of our existing products, extend our product leadership, and create innovative solutions for our customers to address the rapidly changing threat environment. Founded in 1982, we have operations in over 40 countries worldwide.

 

We have a 52/53-week fiscal accounting year. Accordingly, all references as of and for the periods ended September 30, 2006, March 31, 2006, and September 30, 2005 reflect amounts as of and for the periods ended September 29, 2006, March 31, 2006, and September 30, 2005, respectively. The three-month periods ended September 30, 2006 and 2005 each comprised 13 weeks of activity. The six-month periods ended September 30, 2006 and 2005 each comprised 26 weeks of activity.

 

On July 2, 2005, we completed the acquisition of Veritas Software Corporation, or Veritas, a leading provider of software and services to enable storage and backup, whereby Veritas became a wholly owned subsidiary of Symantec in a transaction accounted for using the purchase method. The results of Veritas’ operations have been included in our results of operations beginning on July 2, 2005, and have had a significant impact on our revenues, cost of revenues, and operating expenses since the date of acquisition.

 

Our Business

 

In the June 2006 quarter, we consolidated our Enterprise Security, Data Protection, and Storage and Server Management segments into two segments — the Security and Data Management segment and the Data Center Management segment. Amounts for the three- and six-month periods ended September 30, 2005 have been reclassified to conform to our current presentation.

 

Our operating segments are significant strategic business units that offer different products and services, distinguished by customer needs. As of September 30, 2006, we had five operating segments, descriptions of which are provided in Note 12 of Notes to Condensed Consolidated Financial Statements.

 

Our net income was $123 million and $218 million, respectively, for the three and six months ended September 30, 2006 as compared to our net loss of $251 million and $53 million, respectively, for the three and six months ended September 30, 2005. The net loss in the 2005 periods was driven largely by the write-off of

$284 million of acquired in-process research and development, or IPR&D, as a result of the Veritas acquisition, for which there is no comparable charge in the 2006 periods. The increased profitability in the 2006 periods is also the result of revenue growth partially offset by stock-based compensation expense related to our adoption of Statement of Financial Accounting Standards, or SFAS, No. 123R, Share-Based Payment, effective April 1, 2006. In addition, the six months ended September 30, 2006 includes amortization of acquired product rights and other intangible assets resulting from our acquisition of Veritas for the full period while the comparable 2005 period includes this amortization only for the three months subsequent to the acquisition date of July 2, 2005. As of September 30, 2006, employee headcount had increased by approximately 14% from the September 2005 quarter end.

 

The three- and six-month periods ended September 30, 2006 delivered global revenue growth across all of our operating segments and geographic regions, as compared to the comparable prior year periods. For the six-month period, the overall growth is primarily attributable to our acquisition of Veritas. In both periods, growth is due to the continued growth in the use of the Internet and an increase in awareness and sophistication of threats around the world to the safety and integrity of a company’s data, both from Internet-related sources and from other factors such as systems failures. Strength in most major foreign currencies favorably impacted our international revenue growth by $21 million and $19 million, respectively, during the three- and six-month periods ended September 30, 2006 as compared to the same periods in 2005.

 

Critical Accounting Estimates

 

On April 1, 2006, we adopted a new policy related to stock-based compensation pursuant to our adoption of SFAS No. 123R, as more fully described below. Other than this change, there have been no significant changes in our critical accounting estimates during the six months ended September 30, 2006 as compared to the critical accounting estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2006.

 

Stock-based compensation

 

Effective April 1, 2006, we adopted the provisions of, and accounted for stock-based compensation in accordance with, SFAS No. 123R. Under SFAS No. 123R, we must measure the fair value of all stock-based awards, including stock options, restricted stock units, or RSUs, and purchase rights under our employee stock purchase plan, or ESPP, on the date of grant and amortize the fair value of the award over the requisite service period. We elected the modified prospective application method, under which prior periods are not revised for comparative purposes. The valuation provisions of SFAS No. 123R apply to new awards and to awards that were outstanding as of the effective date and are subsequently modified. For stock-based awards granted on or after April 1, 2006, we will amortize stock-based compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period. Estimated compensation expense for awards that were outstanding as of the effective date will be recognized over the remaining service period using the compensation costs estimated for the SFAS No. 123 pro forma disclosures.

 

We currently use the Black-Scholes option-pricing model to determine the fair value of stock options. The determination of the fair value of stock-based awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate, and expected dividends.

 

We estimate the expected life of options granted based on an analysis of our historical experience of employee exercise and post-vesting termination behavior considered in relation to the contractual life of the option. Expected volatility is based on the average of historical volatility for the period commensurate with the expected life of the option and the implied volatility of traded options. The risk free interest rate is equal to the U.S. Treasury constant maturity rates for the period equal to the expected life. We do not currently pay cash dividends on our common stock and do not anticipate doing so in the foreseeable future. Accordingly, our expected dividend yield is zero. We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We estimate forfeitures of options, RSUs, and ESPP purchase rights at the time of grant based on historical experience and record compensation expense only for those awards that are

expected to vest. All stock-based awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.

 

If factors change and we employ different assumptions for estimating stock-based compensation expense in future periods or if we decide to use a different valuation model, the amount of such expense recorded in future periods may differ significantly from what we have recorded in the current period.

 

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics not present in our option grants. Existing valuation models, including the Black-Scholes and lattice binomial models, may not provide reliable measures of the fair values of our stock-based compensation. Consequently, there is a risk that our estimates of the fair values of our stock-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration, early termination, or forfeiture of those stock-based payments in the future. Certain stock-based payments, such as employee stock options, may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from these instruments that is significantly higher than the fair values originally estimated on the grant date and reported in our financial statements.

 

The guidance in SFAS No. 123R is relatively new. The application of these principles may be subject to further interpretation and refinement over time. There are significant differences among valuation models, and there is a possibility that we will adopt different valuation models in the future. This may result in a lack of consistency in future periods and materially affect the fair value estimate of stock-based payments. It may also result in a lack of comparability with other companies that use different models, methods, and assumptions.

 

Stock-based compensation expense related to employee stock options, RSUs, and employee stock purchases recognized under SFAS No. 123R for the three and six months ended September 30, 2006 was $46 million and $83 million, respectively.

 

See Note 7 of Notes to Condensed Consolidated Financial Statements for further information regarding SFAS No. 123R disclosures.

 

RESULTS OF OPERATIONS

 

Total Net Revenues

 

 

We were required under purchase accounting rules to reduce the amount of Veritas’ deferred revenue that we recorded in connection with our acquisition of Veritas to an amount equal to the fair value of our contractual obligation related to that deferred revenue. A majority of the increase in revenue related to storage and availability products and services in the three months ended September 30, 2006 and a portion of the increase in such revenue in the six months ended September 30, 2006 is due to the fact that the amount of revenue recognized in the comparable 2005 periods was lower as a result of the purchase accounting adjustment relating to deferred revenue for those storage and availability products and services that were obtained through our acquisition of Veritas. Unless otherwise specified, “storage and availability products and services” include products and services obtained through our acquisition of Veritas, and complementary products and services obtained or developed subsequent to such acquisition.

 

Net revenues increased during the three months ended September 30, 2006 as compared to the three months ended September 30, 2005 due to increased revenues from our enterprise products and consumer products of $162 million and $44 million, respectively. The enterprise product increases were due substantially to the effect of

the purchase accounting adjustment discussed above. In addition, our focus on security and availability functionality and services and the continuing growth in demand for our consumer products also contributed to the increase. The segment discussions that follow further describe the revenue increases.

 

During the six-month period ended September 30, 2006, net revenues increased as compared to the comparable period last year primarily due to the inclusion of the storage and availability products and services that were obtained through our acquisition of Veritas for the full six months in the 2006 period compared to three months in the 2005 period. These products and services contributed $513 million of net revenues in the June 2006 quarter for which there was no comparable revenue in the June 2005 quarter. The remainder of the revenue increase in the six months ended September 30, 2006 as compared to the comparable period of the prior year is due to increases in our enterprise products revenue and consumer products revenue of $185 million and $67 million, respectively, including the impact of the purchase accounting adjustment discussed above.

 

We plan to combine the buying programs for all of our enterprise offerings in the December 2006 quarter. Prior to this time, our storage and availability products and services have been sold under Veritas’ pre-merger buying programs. Due to this combination, our vendor-specific objective evidence, or VSOE, methodology will change for these products and services to conform to the VSOE methodology we use for our security products. We expect that this will result in increased revenue deferrals. In addition, the combination of the buying programs will also cause certain amounts of revenue that would otherwise be classified as Licenses revenue to be classified as Content, subscriptions, and maintenance revenue.

 

Content, subscriptions, and maintenance revenues

 

 

Content, subscriptions, and maintenance revenue includes arrangements for software maintenance and technical support for our products, content and subscription services primarily related to our security products, revenue from arrangements where VSOE of the fair value of undelivered elements does not exist, and managed security services. These arrangements are generally offered to our customers over a specified period of time and we recognize the related revenue ratably over the maintenance, subscription, or service period. Beginning with the release of our 2006 consumer products that include content updates in the December 2005 quarter, we recognize revenue related to these products ratably. As a result, this revenue has been classified as Content, subscriptions, and maintenance beginning in the December 2005 quarter. In addition, as noted above, we plan to combine the buying programs for all of our enterprise offerings in the December 2006 quarter, which will impact VSOE methodology and classification of license revenue, as discussed above under “Total Net Revenues.”

 

Content, subscriptions, and maintenance revenue also includes professional services revenue, which consists primarily of the fees we earn related to consulting and educational services. We generally recognize revenue from our professional services as the services are performed or upon written acceptance from customers, if applicable, assuming all other conditions for revenue recognition have been met.

 

Content, subscriptions, and maintenance revenue related to sales of storage and availability products and services acquired through the Veritas acquisition contributed $139 million in increased revenues in the three months ended September 30, 2006 as compared to the three months ended September 30, 2005. The majority of the increase was due to the fact that the amount of revenue recognized in the comparable 2005 period was lower as a result of the purchase accounting adjustment discussed under “Total Net Revenues” above. In addition, Content, subscriptions, and maintenance revenue increased in the September 2006 quarter as compared to the comparable period last year due to increases of $53 million and $32 million in revenue related to our consumer products and enterprise products,

respectively, due to growth in the use of the Internet, and an increased awareness and sophistication of security threats.

 

During the six-month period ended September 30, 2006, Content, subscriptions, and maintenance revenues increased as compared to the comparable period last year primarily due to the inclusion of the storage and availability products and services that were obtained through our acquisition of Veritas for the full six months in the 2006 period compared to three months in the 2005 period. These products and services contributed $246 million of Content, subscriptions, and maintenance revenues in the June 2006 quarter for which there was no comparable revenue in the June 2005 quarter. In addition, in the six months ended September 30, 2006, Content, subscriptions, and maintenance revenue related to our enterprise products increased $223 million, primarily due to increased awareness of information security threats. Revenue related to our consumer products increased $99 million as compared to the 2005 period due primarily to growth in Norton Internet Security products and online revenues.

 

Licenses revenues

 

 

As a result of increases in pricing for our 2006 consumer products that include content updates, which were released in the December 2005 quarter, we recognize revenue related to these products ratably as Content, subscriptions, and maintenance revenues. Because of these increases in pricing, Licenses revenue decreased in the September 2006 quarter as compared to the comparable period last year.

 

During the six-month period ended September 30, 2006, Licenses revenues increased as compared to the comparable period last year primarily due to the inclusion of the storage and availability products that were obtained through our acquisition of Veritas for the full six months in the 2006 period compared to three months in the 2005 period. These products contributed $268 million of Licenses revenues in the June 2006 quarter for which there was no comparable revenue in the June 2005 quarter. The ratable recognition of revenue related to our 2006 consumer products that include content updates resulted in a decrease in Licenses revenue of $32 million in the six months ended September 30, 2006 as compared to the comparable period last year. In addition, a $38 million decrease in license revenue from our enterprise products partially offset the overall increase in Licenses revenue.

 

Net revenues by segment

 

Consumer Products segment