Good afternoon. My name is Ian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Symantec Second Quarter Earning Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
In the interest of time and to get to everyone's questions, Thank you. I'll now turn the call over to mister Nate Pollock. Sir, you may begin.
Good afternoon. Thank you for joining our call to discuss our second quarter fiscal year 2018 earnings results. We've posted the earnings materials prepared remarks to our Investor Relations Events webpage. Speakers on today's call are Greg Clark, Symantec's CEO, Nick Noviello, Executive Vice President and CFO. This is a live call that will be available to replay via webcast on our website.
I'd like to remind everyone that all references to financial metrics are non GAAP unless otherwise stated. Please refer to the CFO commentary posted on the Investor Relations website for further definitions of our non GAAP metrics. Please note, non GAAP financial measures referenced during this call are reconciled to their comparable GAAP financial measures in the press release and supplemental materials posted on our website. We believe our presentation of non GAAP financial measures taken together with the corresponding GAAP financial measures, provides meaningful supplemental information regarding our operating performance for Regions discussed below. Our management team uses those non GAAP financial measures in assessing our operating results as well as on the planning, forecasting, annualizing future periods.
We believe our non GAAP financial measures also facilitate comparisons for our performance to prior periods and that investors benefit from understanding of the non GAAP financial measures. Non GAAP financial measures are supplemental. It should not be considered a substitute or financial information presented in accordance with GAAP. Today's call contains forward looking statements within the environment as we currently see it. Those statements are based on our current beliefs, assumptions, and expectations speak only as of the current date and as such involve risks and uncertainties, and may cause actual results to differ materially from our current expectations.
Please refer to the cautionary statement in our press release for more information. We will also find a detailed discussion about our risk factors and our filings with the SEC, and in particular, on our annual report, on Form 10 K for fiscal year ended March 31, 2017. And now I'd like to introduce our CEO, Greg Clark, go ahead, Greg.
Thank you for joining us, and good afternoon. Q2 represented a strong quarter for Symantec and marked an inflection point in our journey of transformation. Results came in at the midpoint of our revenue guidance and the lower end of our EPS guidance. With that said, we're very pleased with our Q2 results, and let me explain why. First, we completed many critical milestones this last quarter, including our $550,000,000 Symantec and Blue Book cost reduction and integration synergy program, as well as our year 1, 30,000,000 white box synergies.
These cost reduction milestones are all achieved ahead of schedule it resulted in significantly improved margins for our Enterprise segment and continued high margins for our Consumer segment. Yesterday, we also completed the divestiture of our website security and PKI solutions to Digicet, which enhances our long term growth potential in sharpened their focus. After the completion of these transformational initiatives, SamanTech is now a profitable and growing business at Crossroads in both its enterprise and consumer segments. Our enterprise business had a strong result in Q2. While Q2 revenue is flat from a year ago on an acquisition adjusted basis, deferred revenue for our enterprise segment grew 12% year over year.
We've also delivered 11 points of operating margin improvement in the enterprise segment from a year ago, moving us towards our longer term margin targets. Our cross selling strategy is working. More and more customers are choosing to standardize on our integrated cyber defense platform because of our superior protection, cross product integration, and lower overall cost of ownership. Adoption of our integrated cyber defense platform is leading to an increase in the number of larger multi product deals, which is a strong validation the mix of our bookings is shifting towards more ratable revenue recognition as customers are increasingly adopting our cloud subscription and virtual appliance products multi product deals. We anticipated this mix shift in our remarks at our last financial Analyst Day, but the shift is happening faster than we expected.
Although these trends affected in quarter revenue recognition for our enterprise segment in Q2, there are positive leading indicators of future growth. And Nick will discuss this topic further in his prepared remarks. Our Consumer Digital Safety segment overachieved our Q2 revenue guidance through growth in direct subscribers and an increase in ARPU. Northern subscriber declines continued to moderate based on improved customer retention, and we added a substantial number of new LifeLock members after the Equifax breach was announced in September, but this only marginally contributed to Q2 results. The cross sell of the digital safety solution into the Northern installed base is on track and we expect it to gain momentum through the remainder of the fiscal Based on our confidence in the consumer business, we are forecasting higher consumer segment revenue growth in the second half expanding fiscal year 'eighteen in the mid single digit revenue growth.
We are extremely excited about the future of our consumer as we continue to define a new category of digital safety. For the second half of fiscal twenty eighteen, Symantec is well positioned to achieve our plans. Have integrated our acquisitions, and we've developed a compelling portfolio across enterprise and consumer. Our enterprise sales capacity is now ramped and productive, And we have an enterprise sales pipeline that supports our second half growth target, including a record number of deals or great figures. Reaching our goals for the 2nd half incorporates continued historical conversion rates of our pipeline, including these larger sales opportunities, and we are reaffirming our fiscal 2018 revenue and EPS guidance after adjusting for the impact of the divestiture of our website security and PKI solutions to Digicet.
Let me now discuss the threat environment. Last quarter, there were several major cyber attacks that received widespread public attention. Symantec products fared very well in these incidents, And that performance has driven increased long term interest in Symantec as well as reaffirmed our relevance and leadership in the industry. First, the Petcher and WannaCryte, ransomware attack caused significant and unprecedented economic damage to prizes measured in the hundreds of 1,000,000 of dollars, banking security top of mind in the boardroom, as well as the general public, Ransomware attacks and cyber extortion for impacting enterprises as well as consumers. During the 1st 6 months of 2017, 42% of Ransomware globally incurred inside the enterprise, up from 30% in 201629% in 2015.
The Equifax breach is also a significant event last quarter, reminding all of us about the importance of digital safety. The Equifax breach is also a reminder for the enterprise boardroom that protection of data is paramount. This reality coupled with regulations like GDPR make data protection more relevant than ever. The significant Consumer concern discovered last month labeled the crack vulnerability, which consisted of a vulnerability in WiFi devices, makes it possible for an attacker to intercept web traffic. This vulnerability is very difficult to patch, and as a result, will be a problem for years to come driving demand for a consumer VPN.
We're also seeing a current trend of adversaries focusing on mobile devices. In October, our threat research team discovered 8 apps on the Google Play Store, allowing the modification of characters in Minecraft Pocket Edition. But these apps actually contain a malware called SoftBot, the apps have been quietly building a botnet as well as generating ad revenue for the creatives. We believe up to 2,600,000 Android devices downloaded and been infected with the StockBot malware. We recently released our Mobile Threat Intelligence Report found that untapped operating system vulnerabilities are prevalent in mobile.
We predict that in the near future, mobile or cyber attacks will be the primary attack factor, even unclosed operating systems, bolstering the demand for our recent acquisition of Spikewir. In September, the Symantec Threat Research team uncovered new activity by the Dragonfly attack group, which has recently been conducting reconnaissance into the operations of energy firms, allowing them to now potentially sabotage and disrupt power distribution. This is an example our Symantec threat research team is a leader in discovering new threats and providing critical threat intelligence needed to block sophisticated attacks. Symantech has helped protect customers across the breadth of these threats and delivered substantial value to them during one of the most active attack quarters on record. Now turning to our enterprise business.
Our integrated cyber defense platform is resonating with customers. As enterprises are rethinking their security architecture to deal with the evolving threat landscape, they are increasingly building their strategic security capabilities around Symantec. Now let's turn to a strategic component of our integrated cyber defense platform, which is our endpoint. Last year, we laid out a roadmap for innovation on Endpoint, and we have delivered on these commitments with step 14 at the Cornerstone. Our latest major milestone for our releases last week of SEP 14.1, SEP Mobile, and ATP 3.0, our updated EDI product.
With these releases, we are now delivering defense in-depth across modern and traditional endpoint, providing an integrated, scalable multilayer approach endpoint protection that is delivered from a single agent. We are the 1st in the industry to deliver deception, mobile threat detection, and EVR in a single agent architecture. This achievement has been high on the wish list of our enterprise customers who have been suffering fatigue from sourcing and managing different endpoint technologies across multiple vendors. This also simplifies and optimizes enterprise IT environments, lowers costs and improved security posture. Set 14.1 represents a major new milestone for our Symantec endpoint protection product line and includes breakthrough innovations.
It helps our customers improve their security posture, providing them actionable intelligence into suspicious files in their environment and allows them to set aggressive protection policies for specific groups and devices. 1 key innovation is set 14.1 is our new deception technology. Sept detection uses sophisticated decoy to help customers on cover hidden adversaries who have been able to evade other defenses. We believe we are the only security vendor with this advanced technology integrated in our endpoint portfolio. Set 14.1 product continues to be well received with more than onethree of our endpoint customer base now running step 14, which is resulting in improved renewal rates.
We're also seeing displacement accelerate against both legacy and NextGen endpoint provide us. Our EDR solution called ATP has seen strong growth of 3x from a year ago and we are now at over 7,000,000 seats. ATP 3.0 further differentiates us adding a series of technology, including fileless attack to section and enhanced adversary intelligence and closes the gap versus our competition with slight recorder functionality. This flight recorder records all activity on the endpoint and provides valuable forensic data to incident responders, with no new agent to install. We also introduced EDR Cloud last quarter for customers to quickly perform agentless scanning automated investigation environments without theft.
Adding to our endpoint differentiation, we now have the ability to defend both operating systems, With the acquisition of SkyCure, we now call SEP Mobile, we are a leader in IOS and Android mobile protection. SEP Mobile delivers multi layer protection for mobile endpoints to customers to defend BYOD and corporate device from advanced threats across Android, iOS and Windows. We've also successfully integrated SkyCure with our global intelligence network and we are already seeing great value from the state integration for our customers. Now turning to our network defense solutions. Symantech's secure gateway and 5 class isolation technology differentiates our integrated cyber defense platform.
Isolation is a game changer in threat defense and is available in cloud on premise and hybrid configurations. The Internet is quickly going docker encryption which drives the need for Symantec across Endpoint, Email and Web. To this point, proxies are becoming more relevant as they are built to decrypt traffic is efficiently and eliminate encryption blind spot. In line with the increasing adoption of cloud applications in the enterprise, Our cloud access security broker is experiencing rapid growth. Cloud access security brokers are an outstanding control for adding data protection multifactor authentication to cloud applications, delivering security and compliance to our enterprise customers.
Now for some customer examples that illustrate our integrated cyber defense platform adoption. A large insurance company facing a proxy refresh chose to adopt the integrated cyber defense platform extending that footprint from on premise proxies to include the cloud proxy and adding on additional defensive capabilities of CASB isolation, and SandBox components of our platform. This was driven by the ability to leverage integrations across these poor solutions as well as integrating into their existing CEP endpoint deployment. This is a true platform win for Symantec and showcases our cross sell execution at the time of proxy refresh and how we mitigate against competitive loss from point vendors. Another example we see traction is with vendor consolidation.
Customers can avoid the overhead of integration and sustainment across multiple vendors, by choosing to adopt our integrated cyber defense platform, stitching together a portfolio of Point Solutions is typically complex, risky, expensive, and fragile. For example, a large medical device manufacturer who's been a longtime Symantec DLP customer but an endpoint customer, one of our competitors, understood our vision and was impressed with our integrated cyber defense platform They purchased set encryption, CASB, and cloud DLP, and cloud proxy. For more than 30,000 seats. We were selected not only for technology innovation, but for our cross product integrations, which this customer concluded will improve their security posture, simplify their IT environment, and lower their total costs and increase their soft productivity. Another example of vendor consolidation we are seeing involves 1 of Europe's largest retailers.
This customer had been heavily invested in Symantec DLP and proxy SG, but last quarter purchased SAP and email dot cloud for more than 20,000 seats displacing an incumbent vendor for endpoint and email. The customer chose us for our solid EBI capabilities in a single agent and they saw Symantec as a partner for their journey to Office 365. Q2 is typically a large government spending quarter, and I'm pleased that we saw a solid federal procurement for our portfolio, we closed several large deal with defense and government customers looking to build their security capabilities around Symantec. Moving to Consumer Digital Safety. With the acquisition of LifeLock and the launch of Norton Core and our WiFi privacy solution, we have created digital safety category that spans across consumer devices and information and extends to protect consumer's identity.
The consumer threat landscape is evolving and demonstrates why consumers need a single partner in digital safety to protect their devices, identity, and home. LifeLock continues to have the strongest brand recognition for both identity protection and remediation. Many of our new customers stated that the Equifax breach was the proverbial last straw. They knew what LifeLock was. They knew they eventually wanted it but we're postponing adoption of an identity protection solution.
When the breach happened, they signed up for LifeLock and speaks volumes to the strong brand recognition for LifeLock. One of the investment themes we discussed at the time of the LifeLock acquisition was the opportunity to cross sell LifeLock into the Northern cohort. We're pleased with the solid early traction from our cross selling campaign that launched in mid September. We'll have more to share on the progress of our cross sell efforts when we discuss our Q3 results. We also remain excited about the opportunity to expand LifeLock into overseas markets.
Our Norton product continues to be more relevant than ever and customer retention continues to improve. Recent headlines underscore that we are the most trusted brand in consumer security, which was reflected in a strong customer retention rate last quarter. As we spoke earlier last month, crack vulnerability and the Wi Fi protocol highlights the importance of VPNs for consumers, And how this is an important element for digital safety, we are seeing continued strong momentum in sales of our Northern Wi Fi VPN product. We also called out Norton Core last quarter. It has been well received in the market, and we will be expanding our rollout this quarter.
The transformation of our consumer segment is succeeding. We have exceeded our expected first half growth, adjusted for acquisition as we laid out a financial Analyst Day last June. We've transitioned our consumer business from being focused on Norton's charity for the PC and MAC to a much broader digital safety solution and value proposition for the consumer. Our strategy is working, and we expect We will be significantly ramping the expansion of Digital Safety over the next two quarters. In summary, We believe our integrated cyber defense platform and consumer digital safety vision is resonating more than ever with customers and we are leading with cutting edge innovation across both segments.
Now let me turn the call over to Nick to discuss the financials.
Thank you, Greg, and good afternoon, everyone. I'd like to remind everyone that all references to financial metrics are non GAAP, unless otherwise stated. Please note, we've posted supplemental materials and CFO commentary to our Investor Relations website. There are a set of topics and highlights I would like to walk through with you today. First, I'll review our fiscal Q2 results.
2nd, we will run through the significant milestone we have reached in our cost production and integration synergy initiatives. 3rd, with the announcement of the divestiture of our website security and PKI solutions on our earnings call last quarter, I shared with you a framework around how the financial impact of I will update you on the impact of the divestiture to our fiscal year 2018 Q3 guidance. Finally, with all of these elements understood, I will close and reiterate our medium term outlook. Let me start with an overview of our financial results for Q2. Our second quarter revenue was $1,276,000,000, at about the midpoint of our prior revenue guidance range, including a slight foreign currency benefit versus our prior guidance.
Let me give you the statistics for revenue growth and constant currency adjusted for acquisitions. Total year over year revenue growth was flat, at the low end of our prior guidance range. Year over year revenue growth was comprised of Consumer Digital Safety segment revenue growth of more than 1% over the high end of our prior guidance range and flat revenue in our enterprise segment at the low end of our prior guidance range. At the same time, year over year deferred revenue adjusted for purchase accounting acquisitions and divestitures was flat in our Consumer Digital Safety segment and up 12% in our Enterprise Security segment. We look at the combination of in quarter recognized revenue and deferred revenue as a strong indicator of the health of our business segments.
To be clear, Q2 business results in our enterprise segment were as planned, with sales capacity in place and delivery, but included a higher mix of ratable business. This resulted in, in less in quarter recognized revenue and more revenue deferred to the balance sheet. It has follow on impact to in quarter revenue, margins and EPS, but as a tailwind to revenue going forward. Operating margin for the second quarter was 34% at the low end of our prior guidance range of 34% to 36%. Overall spending finished the quarter on track, finished on track for the quarter.
Despite increased marketing costs in our Consumer Digital Safety segment, and headwinds from M And A And divestiture related costs, which totaled approximately $20,000,000. Fully diluted shares outstanding was lower by 4,000,000 shares at 666,000,000 shares, relative to our prior Q2 guidance of 670,000,000 shares, partially due to less dilution from our convertible notes, driven by a lower share price. Please see the dilution tables posted to our Investor Relations website, where you can see the impact to diluted share count from the convertible notes at various stock prices. Fully diluted earnings per share was 0.40 dollars at the low end of our prior guidance range, impacted by the mix of and approximately $0.02 from the combination of increased marketing costs in our Consumer Digital Safety segment and headwinds from M And A and divestiture related costs. Finally, cash flow from operating activities during the quarter was $177,000,000, and CapEx was $25,000,000.
Now let's discuss in more detail our Q2 operating segment performance. First, Enterprise Security. Our Enterprise Security segment revenue was $701,000,000 and grew 14% year over year on a constant currency basis. As you know, our Enterprise Security segment also incorporates the financial results of the website security and PKI solutions we have now sold to Digisert. We did not ultimately account for the sale of discontinued operations, So the financial results related to these solutions
are
included as part of the overall enterprise segment in Q2 and incorporated on the balance sheet as assets and liabilities held for sale. We have included a set of information in the CFO commentary on our Investor Relations website to assist you in your modeling. Overall, Enterprise Security segment revenue growth and constant currency adjusted for acquisitions was flat year over year, and up 1% excluding our website security and TTi solutions. At the same time, enterprise security adjusted deferred revenue was up 12% year over year. Enterprise business activity was strong and in line with our expectations.
However, we experienced a greater mix of large, more ratable, sell transactions in the quarter. Our customers are embracing our integrated fiber defense platform and are building it into their IT and journey architectures for the long term. To the Greek business did not show up as in quarter recognized revenue, we expect it will show up in deferred revenue and cash flow, consistent with this quarter. And with respect to our financial model, more ratable business creates greater visibility for the long term. We continue to have a robust enterprise pipeline and are confident in our visibility for fiscal year 2018 second half business, which, as we have indicated previously, also incorporates the refresh of Symantec's secure web gateway franchise proxy SG.
That said, we expect to experience some continued variability between in quarter recognized revenue and deferred revenue which we will disclose as part of earnings each quarter. Finally, Enterprise Security operating margin was 23%, up 11 points year over year. Reflecting our success in continuing to take out costs while growing the business. Turning to Consumer Digital Safety. Our Consumer Digital Safety segment revenue was $575,000,000 and grew 42% year over year on a constant currency basis.
Consumer Digital Safety Revenue grew more than 1% year over year in constant currency adjusted for acquisitions and adjusted deferred revenue was flat. This is the 2nd consecutive quarter of growth and above the high end of our Q2 revenue guidance of flat to plus 1% growth. Outperformance in the quarter was driven by LifeLock revenues, which grew double digits year over year, and continued stabilization in Northeast, which declined 3% year over year, compared to a decline of to the digital safety solutions and growth rates for each product line will be less discernible. As a result, we do not plan to provide revenue growth split out for LifeLock in Norton in the future. We added a substantial number of new LifeLock members after the Equifax breach was announced in September.
Since these new members joined in the last several weeks of second quarter, we saw minimal revenue contribution from them in Q2, but expect to see the benefit in future periods. Moving to our consumer metrics, which are defined in the CFO commentary, Direct customer count was $21,300,000 at the end of the quarter, up 1% from Q1. Direct ARPU increased to $8.07 per month, up 3% from Q1. If you recall, we expect these direct customer statistics to represent approximately 90% of the revenue stream at any one point in time. And partner revenue was 61,000,000.
Finally, Consumer Digital Safety operating margin was 47%, consistent with our strong Q1 margin. Turning to the balance sheet and capital allocation. At the end of the fiscal second quarter, we had $2,000,000,000 in cash and short term investments and $6,300,000,000 in gross debt, including $1,750,000,000 of convertible notes. In October, we prepaid $380,000,000 of principal on our senior term loan to further deleverage the balance sheet. And as a reminder, we have $800,000,000 remaining under our current share repurchase authorization from our Board of Directors.
Let me now pivot to talk about our cost reduction and integration synergy initiatives. I'm pleased to share that we've successfully executed ahead of schedule On the $400,000,000, net cost reduction commitment announced in Q1 FY17 and the $150,000,000 of Blue Coat integration synergies committed to at the acquisition announcement. In the Consumer segment, we've also already achieved our committed fiscal year 2018 acquisition cost synergies, and we're leveraging the combined marketing budgets of LifeLock and Norton to drive our digital safety strategy, and reduce the cost of customer acquisition. As seen in our operating margins, our business is operating more efficiently than just a year ago, and we continue to drive cost efficiency and optimization actions. As we look to fiscal year 2019, we continue to expect our cash commitments related to restructuring and transition costs to decline materially from this the sale of our website security and related TKI solutions to Digisert.
We successfully closed the transaction yesterday and received approximately 9 $1,000,000 in cash proceeds and a 27 percent common stock ownership interest in DigiCert after giving effect to employee equity incentives. We plan to use the transaction proceeds, net of expected taxes and expenses, primarily to repay debt. We will account for our ownership stake under the equity method of investment. Through the second quarter, the financial results from the website security and PKI solutions were included in our Enterprise Security segment results. For Q3, the month of October will be included in Enterprise segment results.
We've provided more information regarding the historical revenues for the website security and PK Act solutions in our supplemental materials posted on our Investor Relations website. As a result of closing the sale, we are now updating our prior fiscal year 2018 guidance, to include the impact of the divestiture. Last quarter, I framed the website security and PKI products as contributing on a full year basis slightly over $400,000,000 in revenue $180,000,000 in operating income. I also indicated that Symantec was continued to be burdened with stranded costs of just over $50,000,000 per year that were previously allocated to the product lines, which will not transfer to Digisert. There are no changes to these prior estimates.
Moving to our updated fiscal year 2018 outlook. Our fiscal year 2018 guidance initially provided in May was reconfirmed at our Q1 earnings call on a constant currency basis, but on a nominal basis was updated for favorable foreign currency. Now we are going to update our outlook for 2 elements. The impact of the divestiture and additional favorable foreign currencies. The divestiture results in the exclusion of 5 months, November through March, of previously planned revenue and income of the website security and TKI solutions.
The combined impact of these changes results in full year revenue guidance of $5,000,000,000 to $5,100,000,000 from our previously guided 5.16to5. $26,000,000,000, a net decrease of $160,000,000. At the midpoint of our guidance, We expect this represents approximately 3% total revenue growth in constant currency, adjusted for acquisitions and divestitures. Now I'll provide guidance for revenue adjusted for constant currency, acquisitions, and divestitures for our segments. We now expect 2% to 5% enterprise security revenue growth compared to our previous guidance of 3% to 5%.
As Greg indicated, supporting our enterprise revenue guidance is a strong pipeline for the second half, with a record number of large deal opportunities. We are adjusting of approximately $25,000,000 of forecasted Q2 in quarter revenue that showed up on the balance sheet as deferred revenue. And we now expect 2% to 4% consumer digital safety revenue growth compared to our previous guidance of 1% to 3%. Supporting our consumer digital safety guidance is the subscriber ARPU and retention improvements we have already seen through Q2. As well as member growth resulting from the Equifax breach.
We expect operating margins for fiscal year 2018, of 35% to 36% compared to previous guidance of 36% to 37%, primarily driven by the divestiture. Finally, we expect EPS guidance of $1.79 to $1.89. The $0.13 reduction to our prior EPS guidance is driven primarily by the divestiture, as well as M and A and divestiture related costs incurred incurred in Q2. On our last earnings call, We indicated the divestiture would have a full year impact of $0.20 to EPS, which had included the benefit of equity income of $0.01 to $0.02. Our revised guidance does not include the EPS impact of income from our equity interest.
We now expect FY18 cash flow from operations of $800,000,000 to $1,000,000,000. This compares to the guidance of $1,000,000,000 to $1,200,000,000 that was provided at Financial Analyst Day. This updated guidance includes the impact structuring, transit the transition and other related project costs, which we continue to expect to total approximately $500,000,000 in FY18. Our revised cash flow guidance from operations include the following. Approximately $100,000,000 reduction associated with the operations of the divestiture, approximately $225,000,000 of one time cash taxes, fees, and expenses associated with the divestiture and approximately $125,000,000 of benefit from other cash items, including deferred revenue.
Moving to our third quarter outlook. Our 3rd quarter guidance excludes the November December plan for the now divested website security and PKI solutions. On a nominal basis, we expect 3rd quarter revenue of $1,250,000,000 to $1,280,000,000, up 4% to 6% in constant currency, adjusted for acquisitions and divestitures. We expect revenues for our enterprise segment to increase 5% to 8% and for our Consumer Digital Safety segment to increase 2% to 4% with both growth rates adjusted for constant currency and acquisitions and divestitures. We expect total company operating margins of 36% to 37%.
And we expect EPS of $0.42 to $0.46, reflecting an underlying share count of approximately 674,000,000 shares. Now let me close with our medium term outlook. Looking out to fiscal year 2019 and fiscal year 2020, we continue to be very excited about our future. We are reiterating the guidance we provided on our last earnings call, We expect total organic revenue growth for fiscal 20192020 to be in the mid to high single digits, with operating margins in the high 30s and EPS growth in the low teens. This is supported by strong positions and growth potential in each of our business segments.
We have turned the corner on what consumer used to be at Savantec and feel strongly that we have the strategy, the brands, the marketing dollars and the breadth of the digital safety platform that together support consumer digital safety organic revenue growth in the low to mid single digits with operating margins over 40%. And on the enterprise side, The power of our integrated cyber defense platform based on our engineering capability, our installed base presence, strong in place sales capacity and cross an upsell opportunity that we are already seeing take place support our enterprise security, organic revenue growth of high single to low double digits, with operating margins in the high 20s post the divestiture. Now let's transition the call to Q And A. Operator, please take it from here.
A
question and answer session.
Our first question is from the line of Sarah Hindlian from Macquarie.
Alright. Thank you very much. Hey, guys. I wanna dig into the enterprise segment and deferred revenues a little bit. There's some whole versions there.
Which sounds like is, mix shift related, but we'd love some color on what is driving that mix shift subscription and in period revenues within the business lines. And then, Nick, as a follow-up, maybe you can help me quantify, that impact across some of the reported enterprise segment results in the period.
So a couple of things that are going on first of all. We're very pleased with the amount of business that we sold in Q2. It was There was a big step up for us as you can see in the sequential and also, but also underscore the margin increase that we drove. We are seeing an increased, your commitment to our integrated cyber defense platforms, We are seeing a bigger uptake in our subscription products. And this is driven by a couple of things.
We are at a point now where the feature parity between, say, a virtual appliance and an appliance is the same. In fact, there are some configurations where virtual clients even perform better than some physical appliances as there have been substantial improvements in things like VMware and the hardware underneath these platforms. So this is driving where we are seeing a capacity increase. We're seeing a very strong uptake of a proxy SD refresh. We are seeing a movement to subscription there.
We're also seeing it as we have in our DLP product, a very powerful instance of the same DLP product cloud delivered. This, does, does create, you know, the shift of inferior revenue to subscriptions. We are not, cutting, you know, abnormal terms, we're seeing normal terms and standard discounting, and really this mix shift is driving an increase in deferred revenue. And as you can see from Nick's remarks, we are reaffirming our revenue guide, and you noticed in the cash flow comments, that we are increasing our fiscal 'eighteen cash flows. So there is a strong correlation between the deferred revenue actually selling the right amount of business in the quarter.
Nick, anything?
Yes. Sarah, let me add a couple of points for you as well. So I indicated in the script that basically $25,000,000 of forecasted in quarter revenue moved to deferred revenue on the enterprise side of the fence. So So we can all kind of do the math on that. And I think some of the deferred revenue statistics are pretty exciting there.
And we've actually disclosed that on our, on our CFO commentary, where we've done a full walk, to really work through from, GAAP deferred revenue through purchase accounting through Veritas, through LifeLock, and through the divestiture, really what's going on at the time the deferred revenue lines. And that, that is the underpinning to my comment about enterprise deferred revenue growth, which is you know, let's say, clean of website security and TKI, that's up 12%. You know, we've got growth on both the short term and the long side of the fence, but we're really excited about that deferred revenue growth. And we look at the combination of in quarter recognized plus deferred as really giving us a perspective on really the business conditions and the business performance in the quarter.
We added to the reporting metrics of deferred revenue because we wanted to be able to give, people the ability to get a better handle on growth. Revenue plus the furthest. The way to do that, we did anticipate mix shift has happened a little faster than we thought. You know, and, you know, we're excited about it. It's actually good news story.
And our next question is from the line of Saket Kalia from Barclays Capital.
Hey, guys. Thanks for taking my questions here. Craig, maybe we'll start with you. Qualitatively, if we look at the enterprise business, in the second half of this year, excluding SSL, can you just walk us through the drivers for acceleration? And I've got a follow-up for Nick after that.
Yes, definitely. I think, you know, one of the key things, and we mentioned this in our comments on financial analyst day, we now have a ramp sales force and we saw that kick in in Q2. We also have a second half that's bolstered by the blue coat refresh and the cross selling that goes on around that. There were some examples that in the prepared remarks. And, you know, we really have, I think, now seen enough evidence that we can't execute to cross sell in the Integrated side of the fence.
So it's really that strategy is working. We've talked through a number of, larger deals in the prepared remarks that give you some, some hands on examples of that. And, you know, we have a pipeline now that is really commensurate with that ramp sales force. We're very excited about the size of it, and, you know, we still have work to do to close those transactions, as we mentioned, there's some large ones in there. And, but we believe will be successful across all that.
The other thing that's happening is competitors don't have the same value proposition. And as you move to the cloud, And now you've gotta get some cloud stuff to go. You have to get 3 or 4 cloud vendors to work in consulate trying to deal with that SLA is really hard. So I think we got a big leg up on the competitor. And if you try to, you know, hold together those point solutions, especially in cloud era, it's very difficult for the CIO to do that.
It's expensive. It's fragile. And so we put all that together, and we think that we've got ramped capacity. We've got the right product, and we've got what we need. You know, as we look at our pipeline, to deliver the growth in the 2nd half.
And that's, you know, given us a lot of confidence. And as you can see today reaffirming our
Got it. That's very helpful. And for my follow-up, maybe for you, Nick, can you just remind us how you recognize sales commissions, you know, we talked about the $25,000,000 that moved to the balance sheet, but can you remind us, are you amortizing those sales commissions, or are we do we have a little bit of a mismatch with upfront commissions and more ratable revenue?
No. I mean, that does are amortized over time. Okay. So we we see that. And and that is a policy that's being effective to ManTech.
It's something that any in fact, any acquisition would be removed to that policy.
And our next question is from the line of Joel Fishbein from BTIG. Good
afternoon, guys. Just two quick ones. A question and a follow-up. Greg, you know, obviously, you the integrated cyber defense is resonating here, with the customers. Are there any areas you know, in that you think that you're falling short or where you need to augment the cyber defense platform.
Going forward and how are you feeling about current valuations that are out there right now?
Yes, so I think We are very pleased with the portfolio that we have both on the enterprise integrated side of defense side and also on the Digital Safety side of Consumer's very strong portfolio. We have also driven a lot of integration with third parties as well. So we do have a really strong ecosystem of other IS these that we work with in our portfolio. So right now, I think we like the the products set that we have. And to talk about valuations, I think they change all the time.
We're very disciplined around M and A. You know, we do small acquisitions, as you saw for you through the year that we can absolutely control our destiny and we know we can walk. We know we really work out with our customers, make sure we can sell those. Those are definitely not going to upset anything in our finances, and then we also are very disciplined around doing things that are good for our equity as we've mentioned in the past with discipline around M And A. And we'd like to set up we have right now And we're, we're, you know, totally able to execute our plans with what we have.
Great. And then just as quick follow-up. You talked about the threat environment driving, some adoption of proxy. Can you just tell us where you think we are with proxy refresh and if you think the environment will be driving, quicker adoption there?
I think,
I'll answer your refresh question first. We are seeing a strong adoption of the the next platform and the new set of technologies and the refresh. Those rates are consistent with the last refresh. There may be some some flood running around from some of our competitors that are saying that's not going well. That's going very well.
And you can see in the deferred revenue build, a lot of the cloud based stuff is in the deferred revenue build and deferred revenue is larger than the whole world of many of those those other competitors. And so we're doing extremely well in cloud, and that is driven by the physical phone factor moving to our virtual appliances, which support software defined, which is what a lot of our major customers and telecom players like. And in addition to that, the PureCloud offering is growing very strong, and we've got some great partnerships around the world on that. So we do think that that is happening, and there's a very, very strong bright spot in our cloud access broker, you know, CASB front that is posting some very impressive growth rates and some wins. Again, it's all ratable, it's all cloud delivered.
And, you know, the threat environment, we are seeing some pretty strong, reasons in the cryptography that the internet is recorded by sort of the conservative folks is 50% encrypted. And I've had some telecom companies coming in and said they think it's more like 85% encrypted right now. And proxies and isolation, and there's, you know, the Fireglass acquisition really deliver around, being able to really hunt these threats down out of there and protect, protect against that. So proxy demand is strong. It does not require a a infrastructure ownership to deploy, which means if you're if you're using cloud, if someone else is running it, still put proxy in, so we do see strong demand for proxy.
And that part of that business is alive and well. Again, there is a delivery platform that is ratable in the refresh, and we are excited about that as we are being designed into the future networks. And, you know, so as I mentioned before, this is, you know, this is something that we are excited about that mix shift. It is not an issue.
And our next question is from the line of Brad Zelnick from Credit Suisse.
Thanks very much guys. I've got one for Greg and a follow-up for Nick. So, Greg, on the consumer business, I think it's stronger than any of us would have imagined even just a year ago, given that strength, would you consider spinning that business out to unlock value for shareholders and open it up to additional partnership opportunities?
So I think the consumer business, you're right, is is fixed. It is a very strong growth engine, and we are seeing that even outside of the influence of the Equifax breach that definitely had some very strong tailwinds. As I mentioned in the prepared remarks, there's a number of vectors in there. They're all going well. And we are ahead on the integration.
We're ahead on that case, and as such, we're raising our outlook for that piece of the business. Also, financial Analyst Day, we talked about margins in the low 40s, and you can see that coming in, you know, at the numbers that we're posting in the last couple of quarters. So I would, you know, If we go back a year and we took a look at what the overhang was on Symantec, it was that we had double digits and high single digit declines. In a very big piece of the cash flow. Strong, growth rates in that business at the size of business that it is.
Moving to your question as to would we spin it off? We like it right where it is. It is, doing, good work. It is it is we have 2 organizations in the business. 1, I focus on enterprise and one that focuses on consumer.
But I am, extremely excited about this. And as people work from home and mobile really sets in in the world, even more than it is now and work in business process, we think a clean home as a clean enterprise. And we definitely see a strong correlation between what we're doing in Northern Core. And a much safer enterprise network. And so we are excited about this, and we also have conversations in the service provider industry about what we're doing in digital safety that are very encouraging.
And so I would, you know, I'm very happy to report that after a year, take a look at the consumer business when, you know, last August and you take a look at it today, that is a completely different situation. And proud of the company and the team, and the partners that helped us really deliver, to that outcome.
That's helpful color. And for Nick, just to follow-up on Joel's question, if we think about the shift to more cloud and virtual adoption for proxy SG, and then we relate back to the Analyst Day expectation that you threw out for a $1,000,000,000 refresh opportunity. Now as the take rate, as we shift to more cloud and virtual, how should we be thinking about that? Or perhaps if you can't size it that way, just remind us when you think about the trade off and the impact to what can be recognized in revenue to what gets deferred, how do we think that opportunity through?
So I'd say first of all, you know, we laid out at our financial analyst day. Actually, a couple of slides that showed the difference between the physical to virtual and the cloud delivery model, just in business in general, but certainly that refresh could be a perfect example for that. You know, look, we, we knew actually Q4 of last year before that financial Analyst Day, we hit, that parity point on the engineering side between those platforms as well. But we came into this year, we expected that this was going to be the case. And, and, you know, as it goes, though, we have to expect a little bit of variability a little bit of variability this quarter in business in terms of what we expected in quarter versus deferred.
You know, we you know, look at that go forward. We expect a little bit of variability going forward. At the end of the day, and I think, you know, we've we've said this in a couple of different forms, the end of the day, we have to be able to, and we wanna be able to help customers in in whichever, delivery mechanism they want. We have built in a move towards more ratable into our forecast and into our guidance for the year as it happens there could always be a little bit of variability, which we would give you, full transparency on. I actually would also say, you know, around that full transparency point, if you go to that CFO commentary and you look at deferred revenue, actually taking out $300,000,000 of WSS and PKI, helps you see enterprise all by itself.
So you have full transparency as to what, Gallianna, and we'll show you that quarter after quarter including all of the pieces from from GAAP to non GAAP. So I hope that's helpful. But, you know, built into our of this year, was a view that the refresh would be occurring. We talked about that for second half. In fact, you know, we, we also had indicated that between that, front half of the year was going to be impacted by integration.
We'd be ramping up the new combined sales force in the first half. We'd be ramping them up on all the new products, new relationships with the channels, etcetera, and that would be coming to pass and coming through in, in, top line business and bookings growth and revenue growth in the second half, and we are on that path. We feel very good about it.
And our next question is from the line of Keith Weiss from Morgan Stanley.
Actually going to do a 1, 2 punch similar to my colleague, Mr. Zones there. Starting off on the consumer started equation, It seemed like you guys got a really nice bounce from Equifax. Fran was talking very bullishly about impacts we saw, I think it was like 6 days after of the subscriber adds that came from that bridge. How should we think about kind of how like the curve of that impact.
Obviously, it's going to be the most front end loaded, like when it happens, you guys file all the search terms, then we we get we get shunted to life lock. But how durable is that spike gonna be, like, or how quickly does it does it Peter out, and if you don't normalize. And then longer term, does LifeLock have or I'm sorry, Equifax having to give away more credit monitoring for free does that impact you negatively long term or is that not really an issue?
Yes. So yes, good question, Peter. There was a ton of press on on Equifax. First of all, Equifax didn't impact the Q2 revenues. It happened towards the end of the quarter and ratable recognition of desktop didn't impact those results as de minimis in the Q2 results.
So, a couple of thoughts for you, and I went into some detailers in the prepared remarks. Equifax was good. And it definitely, increased member counts in a significant way. But what we also saw, when, when we would offer the, combined digital safety bundle that we've been talking about for a number of quarters to the Norton cohort when it came up for subscription or even in period, work we're doing with them, we're seeing a much better uptake than we had modeled in our acquisition case of Norton folks just taken up, for more money, the, the Livebox value proposition. You also saw, if you look at the search terms of people search for Livebox, in substantial fashion when they just think about identity.
So the strength of that brand is big, and we do think that there is a, new normal for uptake and identity protection following Equifax. And that is more, as it was very strong at the beginning, but even weeks later, it is sustained in a way that's different than some of the other big breaches like Anthem. So, something else happened, which also, I think, drives to the power of the digital safety concept to when the crack vulnerability came out, and everybody talked about how dangerous roaming around on Wi Fi was. Now you could have pretty much, easy access to traffic on the WiFi through that vulnerability. So if you were sitting in a Starbucks in some some kid had some software and knew how to do it, they could be, you know, siphoning off your communications.
The spike in the VPN product is also be very, very substantial. And that product is a strong product. It's a $30 to $50 a year. Adder. And we're seeing that at very powerful growth rates as well.
And so the Northern conversion is good. The LifeLock uptake is very good. And we're also seeing the, other products in the Digital Safety realm really lived as well. And then we bring in noncore, and we we announced noncore being a year, it won some accolades. We've had it in the markets of Version 1, so we're careful with the introduction, and we're really starting to ramp that now.
And we anticipate strong uptake there. So I think you're also coming back to identity protection. LifeLock does a ton more than just credit, credit. It's very good at but it also takes care of all the other kinds of identity theft. And so the bad guys that have all those identities in many of which they already had are used for other kinds of identity crime as such as, you know, criminal driver's licenses, people buying guns in your name, people changing the address or register properties and then working on various things, tax returns, other things.
And also, if you have your identity stolen, which still happens all the time, the remediation and recovery of that is really delivered well from lockbox. So we are seeing better retentions I mean, I'm seeing more uptake, but I can tell you we're confident enough now to say that that that we believe that adjusted for acquisition to consumer business is gonna grow sustainably and add a strong cliff. And so in our guidance, we're talking about mid single digit growth rates. And we are seeing the derisking of the business from the PC declines happening way better than we thought. And also, we are within striking distance of PC unit growth.
It's not far away. And put all that together. And, there was a pretty there was a lot of negative analyst comments on consumer wide police so a year ago. And we're hoping that this information is changing the outlook on that. And, we're really proud of what we've accomplished.
So that's one of the better turnarounds and my knowledge base.
Got it. That's super helpful. And Nick, just on the full year 'eighteen guidance, I want to make sure I fully understand the bridge from the guidance prior to the guidance coming out of last quarter. So the puts and takes, you impacted for like the $25,000,000 in, revenues that got put onto the balance sheet this quarter. The divestiture taken out of the guidance and you sort of added back some incremental benefit from FX.
Is there any, have you kind of adjusted your expectations about ratable versus getting a license upfront in the back half as well, meaning you now have like assumption for more ratable revenue coming from the Bluetooth side of the equation into the back half as well.
Well, we had more ratable coming into the entirety of the year. So in terms of the first half, second half, you know, I think that We have $25,000,000 in Q2 that showed up as deferred revenue on the balance sheet. We have strong business activity and business activity on track to plan in guidance. So as we go into the second half, we have a very, very strong pipeline. We feel very good about it.
You know, in terms of that ratable recognition, there's a significant amount of ratable business already happening here. We know that that can be a little bit variable or on the edges. So we have to be conscious of that. We've tried to guide appropriately for those types of things, in the second half of the year. And in terms of the website security business and, and, or the website security and PKI solutions, you know, in that second half guide, there's there's really no difference, versus what we had, what we had talked about before on a full year basis.
What you just have to remember is that we're taking it out for the month of November through March. So in terms of walking prior guidance to current guidance, it is, pretty basic in terms of just the two pieces, the divestiture and then a little bit of FX rolling through there.
If you don't get, you know, Nick makes a a good comment. You know, we we're looking at the second half. It's a big ramp in the second half. We understand that we've got a pipe to support it. We've got capacity deployed to support it.
We have to execute the closure of that pipe. We feel good about our ability to do that. We do have, you know, good mix of transactions in this. I'm a very large the integrated digital safety platform is working, which is driving, you know, deal size up. There may be some timing in there, but we are definitely confident about the outlook and especially the long term outlook for up to.
And our next question is from the line of Michael Turits from Raymond James.
Hey guys, 2 quick ones if I could squeeze in. Of all, Greg, you talked a lot about, sub-fourteen and ATP and the new versions there. So what, if any, the impact that we see on renewal rates and or ASPs? And then the second question.
Yes, that's a very good question. So first of all, I'd like to just remind everybody that, we've said we were, and I think predictability is extremely important in what we're doing. And a year ago, we said we were going to come after these gaps in our unified, you know, converged endpoint around EDR and, you know, some of those other things we actually innovated some more there and delivered a deception blade in there as well. But we have completed with set 14.1, a very solid piece of work around EDR and flight recorders. We believe we have now reached feature parity with the point solutions that did that, and we have one major footprint with that.
We have 7,000,000 deployments now of the capability. So it is being battle hardened, and we believe that that is a huge footprint. And if you look at some of the folks that just specialize in that, I think we're going past there on an oil basis already, we do think that we have a very strong upsell capability around those value propositions that are delivered in 14.1 set 14 also has been, doing extremely well. And as I mentioned, we've got a really good, conversion rate. Set 14 in our install base.
And, we do see a strong improvement in what was less than acceptable renewal rates in prior periods before set 14 for the SEP agent. We've absolutely turned that around. And I think, you know, we are leading, you know, even in these events 0 day malware's, our AI detected, you know, WannaCry stopped at no signatures. You know, so we have got the proof proof that that's working and we continue to innovate that. And I think it's just a testament to the capacity and engineering that we have behind that problem.
We we shut that gap down in 12 months with quality product. And again, you know, I'm really proud of that team. I think they're really distinguished themselves in the industry and and that set of threat breach as the researches that comes with them is, differentiated. So I think we're gonna do very well in Endpoint as the Internet goes dark. Endpoint is gonna become extremely, extremely important.
And mobile end point is is where the future is. And we are one of the only large vendors that's preventing with our own technology or falsely across Windows. Apple products, including Mac and iOS and Android. And, so I think we're very well set up on the endpoint. This is a space we're super serious about, and we've got a lot of talent on it.
And, you know, we're gonna be there for the long haul.
Great. Thanks. Greg, my follow-up was, I think, for Nick. If I try to adjust, for next quarter for pulling out 2 months and then pulling up a good score for 5 months on the full year. It seems like you still even adjusting for that, you still came in below the third quarter, but you're pretty close on the full year.
So it seems as if when there's more of a 4th quarter versus 3rd quarter SKU. Math, right? And if so, why do we get that scan?
In terms of the overall business, say, on enterprise or what's specific piece you're talking about there, Michael?
Yeah. Total total numbers on revenue. A little bit.
Total number on revenue? Yeah. So, So first of all, you do have to adjust for that website security and PKI in Q3. So we're talking about taking out, leaving in 1 month based coats. You know, the overall revenues for the back half are pretty much what we expect them to be for that side of the business.
So there's really not much difference there in terms of the build up versus our original view of the year. Obviously, you know, we never gave, like, specific Q2, Q3, type of ramp. But as we look at the revenue stream for the second half, we're pretty very satisfied and feel very strong in our position there. As you may have seen, we tweaked a bit the, you know, enterprise down, basically by the consumer I'm sorry, by the second quarter, 25,000,000 consumer up, basically, the same amount inside of that overall revenue guidance for the year. That's pretty much all we've done to it.
So we feel on track, for what we're planning to do, we feel like we've got the, know, the pipeline on the enterprise side, the position as Greg indicated the, the sales capacity in place. And then obviously, the consumer metrics as well as supporting that side of the fence. So we feel quite good about it.
And at this time, I'm showing that we are at time. Presenters, do you have any closing remarks?
I'd just like to thank everybody for joining our call today. Thanks for support and look forward to, next time. Thank you very much.
Ladies and gentlemen, this concludes the Symantec Second Quarter Earnings Call. We thank you for your participation. You may now disconnect.