M&A Announcement

Aug 8, 2019

After the tone, please state and spell your first and last name, then press the pound key. Recording completed. After the tone, please state and spell your company name, then press the pound key. Recording completed. After the tone, please state and spell your email address, then press the pound key. Recording completed. After the tone, please use your telephone keypad to enter your area code and phone number, then press the pound key. I'm sorry. You did not enter the correct number of digits. A correct response must be between 1 10 digits long. After the tone, please use your telephone keypad to enter your area code and phone number, then press the pound Good afternoon, ladies and gentlemen, and welcome to Broadcom's Symantec Enterprise Security Business Transaction Call. As a reminder, this call is being recorded. Currently, all participants are in a listen only mode. Following prepared remarks, we will begin a question and answer period. We will be limiting analysts to 1 question each to get to as many questions as possible. If you have additional questions, please queue up again. I would now like to introduce your host for today's call, Ms. Beatrice Resutto, Director, Investor Relations. Ms. Resutto, you may begin. Thank you, operator, and good afternoon, everyone. Joining me today are Hock Tan, President and CEO and Tom Krause, Chief Financial Officer of Broadcom. Also joining us is Art Gilliland, Executive Vice President and General Manager of Enterprise Security at Symantec. During the prepared comments section of this call, Hock, Tom and Art will be providing details regarding our acquisition of Symantec's Enterprise Security business that was announced earlier today. We will take questions after the end of our prepared remarks. Please refer to our press release issued today and our recent filings with the SEC for information on forward looking statements and the specific risk factors that could cause our actual results to differ materially from the forward looking statements made on this call. This conference call is being webcast live and a recording will be available via telephone playback for 1 week. It will also be archived Investors section of our website at broadcom.com. I'll now turn the call over to Hock. Good afternoon. Welcome, everyone. Today, Broadcom announced the acquisition of Symantec's enterprise security business, the number one player in cybersecurity software. This transaction not only expands Broadcom's infrastructure software footprint, It also strengthens our position as one of the world's leading infrastructure technology companies, both in hardware and software. We plan to incorporate the Symantec brand into the Broadcom portfolio, while Cementek's consumer business will remain separate and be rebranded. For the remainder of the call, we will refer to Cemente Enterprise Security as just Cemente. To now start off, I'd like to briefly summarize why we're so excited about this transaction. And I refer you to the deck of slides you may have on WebEx. Expiring cemented furthers our efforts to build one of the world's leading infrastructure technology platforms. It is the logical next step of Broadcom's infrastructure software strategy following our acquisitions of Brocade and CA and add $160,000,000,000 cybersecurity market to Broadcom's addressable market. Now by acquiring this number one cybersecurity franchise, we will gain a portfolio of mission critical security solutions, which are deeply embedded among our Global 2,000 customers. There will be meaningful cross selling opportunities with Brocade and CA Solutions, and we believe this acquisition will enable Broadcom to drive even greater levels of customer success. We expect Cementek to add more than $2,000,000,000 of sustainable run rate revenues with its leading franchises in cybersecurity. We also expect to achieve more than $1,000,000,000 in run rate cost synergies within 12 months post close. Importantly, this transaction also provides us with the opportunity to achieve our financial objective of double digit cash on cash returns. Turning on to Slide 5, the next slide over, you can see this acquisition is a continuation of Broadcom's strategy of successfully expanding the company's footprint and roadmap by constructing a portfolio with a history of innovation and technology leadership. Symantec represents another step in building the company's infrastructure software strategy that we created and build upon with our Brokaine and CA acquisitions. We've repeatedly, over the past several years, acquired strong franchise businesses with recurring cash flows and operational improvements potential that enable us to deliver strong cash on cash returns. Adding cementing enterprise security enables us to leverage existing sales channels, cross sell products and generate value from synergies. And we will intend to integrate rapidly Symantec onto the Broadcom platform and bring the same core customer relationships and efficiencies to the business as we have to the rest of the Broadcom portfolio. Turning on to Slide number 6. These acquisitions built upon our, as I said, acquisition earlier acquisitions of Brocade 2 years ago and CA last year to further establish Broadcom as one of the world's leading infrastructure technology companies across both hardware and software. And post the Cementech deal, you can see in this slide that approximately 29% of our revenue will now come from software solutions. Our software revenues are predominantly recurring and reduce volatility overall. In addition, software helps open our technology and products to end users, not just original equipment manufacturers. Okay. Symantec is the number one cybersecurity software platform and comprises 3 key distinct market leading franchises. Turning on to Page Slide 7. First, it's endpoint security. Next, web proxy, which includes Symantec's Bluecore acquisition from 2016 as well as integrated cloud access security brokers and thirdly, data loss prevention, which, as you know, is part of data security and prevention. Endpoint and web proxy operate in stable markets, while data security and cloud access security benefit from reliable revenue streams in growing markets. These market leading franchises comprise the mission critical products with best in class renewal rates within our core G2000 customer base. As you know, the Global 2000 drives a substantial percentage of the $1,600,000,000,000 spent on enterprise IT every year. These enterprises have complex heterogeneous back ends across SaaS, public cloud, hybrid, private cloud, client server and mainframe environments that require a broad range of capabilities. Historically, they have often had to source products to meet their requirements from a wide variety of vendors, and these Global 2,000 customers are increasingly, however, demanding a more simplified vendor experience. Our focus, first with Brocade, then Sphere and now Symantec, has been to grow our wallet share with the Global 2,000 customer base. One example clearly of how we have been able to do this has been to offer a large global financial institution. We have announced it, Barclays Bank, a strategic portfolio license agreement, or BLA, as we call it, during a recent renewal. This enterprise wide access to our entire suite of infrastructure software will enable Barclays to implement a multiyear, cross organization initiative to streamline its IT operations while reducing complexity and cost in order to speed time to market for value added customer applications. It will also offer significant savings for them by reducing their need for multiple vendors. We have been successful in repeating this model with numerous G2000 core customers over the past 9 months since we closed CA. Let's turn now to Slide 8. Revenue Synergies Society review Cementa as a financially compelling opportunity to enhance business efficiency and drive margin improvement through rightsizing Cementec's cost structure. We have already created a go to market organization targeting the Global 2000 WeBokeh and CA. We will add the Cementek products to this platform. The Cementek customer footprint largely overlaps that of CA and Brocade, and that will allow us to generate substantial synergies in selling. As has always been our business model, we only focus our R and D on strengthening our franchises. Consistent with this, we intend to enhance our investment in endpoint security, web security and data loss prevention, while scaling down investment in other areas where the return on investment or ROI may not be as compelling. In corporate infrastructure, Broadcom has, over the years, built a very robust and efficient platform, scaling across IT, Facilities, Human Resource, Finance and Legal. We intend to migrate Symantec over to this platform. And as a result of all these actions, we project we can increase the existing $350,000,000 of stand alone EBITDA of Cementa Enterprise Business to roughly $1,300,000,000 pro form a EBITDA at the end stage. To now dive deeper into Symantec's enterprise security products, I'll hand the call over to Art. Art? Thank you, Hak, and thank you for inviting me to participate on the call. Hello, everyone. My name is Art Gilliland, and I'm Executive Vice President and General Manager of Symantec's Enterprise Security Business. My background is 20 years in the security industry, which has spanned across almost every security domain delivering software and services to the largest enterprises organizations in the world. I'll pick it up on Slide 9. Symantec was founded in 1982 and over the last 37 years has established itself as the number one leader in enterprise security reflected by its market share and product leadership across 5 Magic Quadrants. These leading product offerings have been sustained over decades in an industry that is changing constantly with Symantec's core enterprise portfolio improving continuously to better serve customers' evolving cybersecurity requirements. Symantec has not only maintained leadership in its core markets but has also claimed leadership in the emerging markets, which are most critical for its largest customers as they transition new services to the cloud. To that point, Symantec has continued to innovate across all of its core enterprise product lines. Moving to Slide 10. Symantec Endpoint Protection provides threat protection for common devices customers use to access information, including desktops, servers and mobile devices. Symantec endpoint protection incorporates advanced machine learning technology and supports our customers' transition to cloud based threat protection. Symantec's continued investment in R and D demonstrates our commitment to adapt to the rapidly changing landscapes required to maintain a sustained leadership position over the last 2 decades. Symantec's newest version of our endpoint security products has a re architected management console designed natively for cloud deployment. Now on to Slide 11. With the acquisition of Blue Coat, Symantec entered the web security market with a proven technology leadership position. Over the last decade, Symantec has maintained a strong market position as a core element to our customers' infrastructure. Symantec Web Security is extremely well positioned in the market given its strong established Blue Coat franchise. Blue Coat provides existing customers a great way to implement a hybrid on premise cloudwebproxy architecture or go completely to the cloud when they are ready. Looking at Slide 12. Symantec has played an instrumental role in creating and leading the market for data loss prevention. Symantec has been an industry leader in data loss prevention for over a decade and has continued its innovation in this product line to maintain its market leadership position. Given the increased importance of data privacy globally and the threat of information theft, Symantec is well positioned to continue to strengthen its already strong market share and innovation leadership position. Turning to Slide 13. While Symantec has made long standing leadership positions in well established areas where we have chosen to compete, Symantec has also innovated to capture leadership positions in critical markets that are important to our largest customers as they migrate and innovate new solutions in the cloud. Symantec is also a leader in emerging cloud security market and provides a next generation CASB technology that is on par with the best in the industry and enables companies and employees to utilize hundreds of third party SaaS applications. And now moving on to Slide 14. As I have shared in each of our major product categories, Symantec has maintained a long standing leadership position in the face of an array of established and emerging competitors. Symantec has successfully maintained its product offering, but also because of its strong brand and customer relationships. These help Symantec produce an integrated best in class suite of solutions. The proposed acquisition by Broadcom further enhances the security portfolio by bringing market leading identity security and management solutions. The exciting part for our customers is that when you put together the combined solutions, we'll offer enhanced protection, reduced management complexity and an overall lower total cost of ownership across their security spend. The safety and security that Symantec provides its customers is of paramount importance, and we are committed to maintaining those very high standards. Now I'd like to turn it over to Tom who will discuss the details of this transaction. Tom? Thank you, Art. Before I talk about the deal, I'd like to briefly mention our guidance. As you may have seen in the press release, we reaffirmed our revenue outlook for fiscal year 2019 and continue to expect to achieve $22,500,000,000 of revenues, including $17,500,000,000 from semiconductor solutions and $5,000,000,000 from infrastructure software. As we discussed on our last earnings call, our revised fiscal 2019 revenue guidance reflected an anticipated continuation of trade tension and the resulting impact on the demand environment. We do not see this dynamic changing in the near term. That being said, we have not seen any further deterioration in our business since our last call. So with that, let's move on to a summary of the transaction as you'll see on Slide 15. We will acquire the assets of Symantec's Enterprise Security Business for $10,700,000,000 in cash on a cash free and debt free basis. In connection with this transaction, we are adjusting our capital allocation. Our dividend policy of distributing approximately 50% of prior year free cash flow to our shareholders will remain unchanged. As a result, given our annual guidance, we continue to expect to deliver, subject to Board approval, a double digit dividend increase at the end of the year. I would note, this is largely the result of the contribution that the CA acquisition is making to our free cash flow in fiscal 'nineteen. With our excess cash flow beyond the dividend, however, we now intend to shift our focus to rapidly paying down debt as opposed to stock repurchases. As we've said many times before, the investment grade market is critical to our strategy, and we fully intend to maintain our investment grade credit rating. Now as it relates to this deal, we expect Symantec to contribute more than $2,000,000,000 of sustainable incremental run rate revenues and approximately 1,300,000,000 of pro form a EBITDA, including synergies, after executing our revenue optimization strategy. We anticipate achieving more than $1,000,000,000 in run rate cost synergies 12 months post close, primarily from sales, marketing and G and A functions, while focusing R and D and support efforts on the highest ROI opportunities. The acquisition is subject to antitrust approvals in the U. S, EU and Japan and other custom closing conditions. We expect the transaction to close in the Q1 of fiscal 2020, which starts November 4, 2019. There is no regulatory approval required in China, and Symantec does not require a shareholder vote on their side. Now turning to Slide 16. Symantec as the leading security brand aligns with what we look for in our acquisitions: stable and growing markets, established leadership products that are mission critical to customers, a long operating history, selling into similar customers and an opportunity to right size costs and generate significant sustainable cash flows. 1st, Symantec operates in an established cybersecurity market projected to grow approximately $161,000,000,000 2nd, Symantec holds a leadership position in each of its markets and is ranked the number 1 digital safety brand globally. Symantec's products are established and mission critical to customers with 99% of the top 500 customers, having an average tenure of over 3 years. Further, those enterprise customers are global leaders in nearly every key vertical and represent 86% of the Fortune 500. Symantec has a long operating history, founded in 1982 and has a strong IP portfolio. Symantec is also a financially compelling opportunity with more than $2,000,000,000 of sustainable run rate revenue and clear line of sight to achieving approximately $1,300,000,000 of pro form a EBITDA pro synergies. You can see on Slide 17 that since we started our diversification strategy in November 2016 with the acquisition of Brocade, our total shareholder return is over 2x ahead of the S and P 500 and approximately 50% ahead of the NASDAQ in the same period. Out of the top tech players shown here, Broadcom is proud to be among the leaders in total shareholder return as we execute our diversification strategy. In that time, Broadcom has returned approximately $19,000,000,000 to shareholders, about $12,000,000,000 of which was through share buybacks and eliminations and about $7,000,000,000 of which was through dividends. We believe we hold the necessary expertise to provide significant benefit to Symantec and continue our track record of building shareholder value over the long term. With that, I'll ask the operator to open the call to Q and A. Operator? Your first question comes from Harlan Sur with JPMorgan. Good afternoon and congratulations on the acquisition. When I think about these security related capabilities that Symantec brings to customers, endpoint protection, web, cloud security, these types of software applications are going to require higher and higher levels of performance, not only from the hardware, but also from the soft from the silicon as well, especially as more of these things move to the cloud. So actually here, there actually does appear to be some synergies with the semiconductor franchise. I know that the Broadcom team is already working with some of your cloud customers on silicon that accelerates security applications via your SmartNIC processors, custom ASIC capabilities. So, does this acquisition potentially enhance your semiconductor business in security and broaden your IP portfolio within your standard product or ASIC semiconductor franchises? Well, thanks for your kind words at the beginning. And you do hit it right on too, which is part of the reason a large part of the reason why we have pivoted after being very, very strong in hard semiconductors for many, many years into software solutions as well. As I said before, what you're saying is hardware and software in IT technology becoming more and more interchangeable. Solutions of pure custom design, hard coding everything in silicon has started to shift towards a situation where you actually make a trade off. And the trade off is towards merchant silicon and merchant silicon that you can program to enable a lot more functionality, easier scale up of data centers, especially in cloud that we are directly engaging, not just with cloud guys, by the way, we've also large scale enterprises. And hence, I will keep I keep emphasizing in this entire process, and I did that with Brocade, I did that with CA acquisition. I'm doing it now, which is we are very focused in our go to market, in our product development plans on the largest enterprises in the world. So as I call them collectively, the G2000. So probably maybe slightly less in number than that, but it is. And if you look at our pattern, as I said in the slides, we keep increasing the footprint they already have in infrastructure software, that is Brocade, CA Mainframe, CA Enterprise, distributed software and now Symantec Security Solutions. These are all embedded solutions, embedded software, very much in the core of the IT networks of this G2000. So super increase and it enables and facilitates as we start to engage with end users on our technology of networking in their own networks. Basically, we're reaching out to end users, and these all these solutions we are acquiring and adding on to our portfolio has made it very much easier. And we are you're right, 100%. We are now very, very engaged in the largest enterprises just as we are very engaged with the hypercloud guys on networking and security, not just for networking, but for endpoints as well. Your next question comes from Vivek Arya with Bank of America Merrill Lynch. Thanks for taking my question. Hauke, in the past, when you acquired Brocade and CA, from the outside, it seemed like there were limited kind of technologies if you were getting into well established, some would say more mature technologies. But in this case, with Symantec Enterprise Security, you are getting to more of a growth industry. There is perhaps more competition, maybe more technology risk. Could you address that perception? Thank you. Thank you for that question. Yes, please do so. I'll open it up in my simple minded way of thinking, and I'll invite Art to chip in and get me out of trouble when I go in the wrong place. It's very simple. See, in the largest enterprises in the world, and we're engaged very closely with them now from CA, Brocade and particularly more so. These are the biggest spenders of IT. They are the largest scale of IT infrastructure within their company. And when you look at it, you can almost put it to as one CIO there of 1 of the biggest financial institutions tell me, what people may not fairly pretty much get out there in the public is that 80% of our IT spend is on core building blocks infrastructure that runs our operation, that runs our business, 80%. And those are very, very embedded applications, embedded infrastructure that do not change easily. And they're proven, trusted and works. And all of CA, all of Brocade and a lot of Symantec are in those embedded applications. They do not change. They're sticky. That fits exactly the Broadcom franchise model of sustainable revenue. The 20%, he says, seems to get a lot of attention. They are the bright, shiny objects of advanced features that the world a lot of the world seems to look at. But a lot of world seems to need the fact that, that 80% spend that grinds up year after year after year. And embedded solutions, infrastructure solutions do not easily get displaced nor changed dramatically. Stable. They may not grow double digits, but they do grow as consumption as the enterprises grow, and they are very sustainable. That's ours, in simple terms, our model. Yes. And I think this is Art. I think if you look at the portfolio that we're talking about here, even in an industry that is filled with sort of flash of the pan and sort of exciting new technologies, each of the technologies we've talked about have been market leaders for decades. And they're market leaders and any technology that's been a leader for that long has a sustained customer relationship, has a sustained deployment and isn't about the shiny new object. This is about core infrastructure that customers use to protect themselves. Your next question is from John Pitzer with Credit Suisse. Yes. Good afternoon, guys. Hock, just on that, can you talk a little bit about the expected organic growth you see in the Symantec Enterprise business? Is that $2,000,000,000 of revenue you talked about kind of a stable run rate and you also in your prepared comments talked about just revenue synergies with Brocade and CA. I'm just kind of curious is that solely a function of just customer footprint and distribution? Or are there actual technology building blocks from all three businesses that you can start to blend together to create sort of new innovative solutions? Thank you. Well, good question. Yes, it's both to answer your question directly. The most obvious one is, as I say, we look at the G2000, the biggest span of IT globally, enterprises. And we also see overlap of Brocade, overlap of CA software and overlap to some of Cementa. But it's not complete overlap. What we are doing is we actually by as we combine these three together, we actually are seeing more an expansion of customers within the G2000 where we have some level of footprint. And the cross selling opportunities that present of expanding the footprint of all three to a larger group of large enterprises is there to drive organic growth within these three product lines. And keep in mind, we will create, as we have done for CN Bokeh, a common sales organization just targeting those G2000. And as the number of accounts expand with the addition of Symantec, So will we expand our sales organization, but we see that as great investment to drive organic growth within the portfolio that we have, for sure. And the other way we have, obviously, is to get very innovative of the way we sell our products, as I say, to offer portfolio wide licensing arrangement to the same customer and hence through the benefits of doing this for enterprise wide portfolio expansion as you go through customer by customer to basically increase, as I put it, share of the wallet in each of these customers. The other area of organic growth. And to simply put it this way, we expect what is now approximately a $7,000,000,000 plus portfolio between Brocade, CA and Cemente to be a business segment that will actually grow and grow within the scope of our core customer group within the Global 2,000. Your next question is from Stacy Rasgon with Bernstein Research. Hi, guys. Thanks for taking my question. With more than $2,000,000,000 in revenue that to me that suggests that you don't see very much of the current revenue profile at risk. They're running about 2,300,000,000 to 4. Dollars. How do I square that with that? I mean, I'm going to be a little blunt here. I guess, no offense to Art, but most of Hock, most of your investors sort of have a low opinion, I think, of the quality of this asset set. It looks like it's been losing sale. It hasn't really been growing in the market, but it has been growing. I guess, how do investors get confidence that, that franchise actually is sustainable and that it actually can hold it, especially given the magnitude of the cost cuts that are coming out of it because it doesn't seem like it was able to grow before while that cost was so low. I guess, how do we have your own investors get comfortable with this? Well, I can go into rings and rings of discussion of how it is embedded and all that stuff. But and how we actually not look only for it to, what I should say, possibly decline. We think it will actually grow in conjunction with our focus on the Global 2 1,000 infrastructure together with our other portfolio of products, which we have seen its growth. But the best indicator, the process in the meeting, as I say, we did okay over 2 years ago. Whoever thought when we thought it and we sat down in front of it 2 years ago in a call and said, well, this is about maybe $1,300,000,000 $1,400,000,000 revenue. And we will make about $800,000,000 $700,000,000 $800,000,000 of EBITDA, and we like to think that it probably will be flat at best. Well, it grew pretty dramatically in 2017 2018. And we made over $1,000,000,000 of EBITDA just last year, and it continue to be to have momentum and moving along. Now 2018 was extraordinarily strong, given my view, but 2019 sustained to a large extent. Then we bought CA. We see the same thing happening now, 9 months to be fair. So it's not as long as Brocade. But we've been running franchises for a long time, and we know when something is behaved by a franchise. And in the face of CA, with booking in our core accounts, our rate of booking increases more on an annualized basis, more than 7%, 8% a year on our core accounts as we increase capacity, as we increase products. Our annualized on our core accounts, which represents some 75% of the revenue, we're booking 7% to 8% annual growth rate, 9 months now with renewals. Now to be fair, on the long tail of the 25%, which tends to happen, which are the smaller enterprises, SMBs, where stickiness does not exist as much, where bright Chinese objects exist a lot, as we say, sure, we expect attrition, especially when we're not focused on that, of about 10% or so revenue a year. But that is more than compensated by the 75% growth in bookings and translating the revenues on this on the core accounts where that kind of enterprise software, those are very sustainable, very sticky. Those are the core software, enterprise infrastructure software built or embedded into the core IT infrastructure of those Global 2,000 companies. You do not take them out easily, especially if you continue to do a great job of providing support and adoption for those Global 2,000 Enterprises. That's the game here. It's not, as I say, about looking at that 20% advanced feature software, which, in my view, attracts everyone, no question, but it represents a small part of the rail spend. And they are your words exactly very competitive, very often emerging players and not in the least sticky. We have reached the allotted time for questions. I will now turn the call back to Tom Krause. Okay. Thanks, everybody. Out of respect for our friends over at Symantec, they're going to be kicking off their call now. So we're going to pause the call and end it at this time. And thank you very much for joining, and we'll be talking again now on September 12. We'll do our next earnings call. Thanks, everybody. Thank you. Thank you for participating in today's conference call. You may now disconnect.