Trend Micro Inc

TSE:4704

Earnings Call Transcript 2017-Q4

[Mahendra Negi, executive]

I would like to start with the result of the fourth quarter. 11% growth in terms of net sales, JPY 41 billion, and all the detailed explanation will be given later, but we believe that this number is quite solid. Now 4% reduction in operating income, JPY 85 billion. This is less than our forecast. So you may have some questions about this. This can mainly explained by some of the other factors below pre-GAAP sales. This is JPY 47 billion, which is up by 14%. Post-GAAP, well, there's a difference of JPY 6 billion, between JPY 41 billion and JPY 47 billion. And this JPY 6 billion -- and you can see the expenses, expenses are not really deferred, but the revenue is booked, so this is the biggest difference. The variable expenses are included. And second point, I would like to point out is that if you look at the stock price at the end of December, we have a stock price linked. We will switch basically JPY 700 million, which was not really in the first plan. And third point, a small-scale acquisition and also some other expenses with its expansion included. So all in all, we have lower operating income. In terms of ordinary income, the negative number is bigger at 17%. But in the previous year, between operating and ordinary income, there was a JPY 2 billion because of the exchange rate. But we did not experience the same this year. So for this fiscal quarter, this is 70% below the quarter of 2016, but there's nothing abnormal going on.

And then in terms of net income, minus 28%. Now the corporate tax rate went down in the United States. And deferred tax asset had to be partially reversed, and because of that, there is a temporary increase in the tax rate, which is approximately JPY 1.5 billion, a one-time expense included in this number.

So starting from this quarter, we will go back to the normal rate. So this is a temporary factor. And in terms of cash flow, 2-digit growth is increasing in terms of operational cash flow. So there is no trend for negative changes. And I've already explained the pre-GAAP figure, 14% up, JPY 47 billion. And this is the highest number on record in the history of Micro -- of Trend Micro. And 101% progress in terms of revenue; no problems seen here. And in terms of income, 97% achievement, which is a little bit short of expectation, as I mentioned before, and this is the number in U.S. dollars.

Now regional numbers. In yen and without exchange rate impact, minus 1% in Japan, and other than that, growth in every region. The reason we see a negative number in Japan is because -- I'll explain the pre-GAAP number later, but there is growth with enterprise business. In FY 2016, fourth quarter, there was a big growth. So in the 2017, we don't have the same factor. So there is growth of minus 1%.

We can see the decomposition, and this is sales by segment. As I mentioned before, enterprise business is showing growth in Japan, and all the enterprise businesses, across the board are showing double-digit growth. This is after deferred. And this is before accounting for deferred, you can see all the details in this slide.

Hybrid Infrastructure protection. In the previous quarter, there was concern that the growth rate may be slowing down, but we had the biggest fourth quarter now with a very high growth rate. We had major deals in network and 1 big US bank. This is probably the largest deal in the history of Trend Micro. Several years ago, we said that JPY 100 million deal was big, but this is USD 10 million deal. So in the world of network cloud computing, we are now able to gain big deals.

User Protection. The market is mature, but we are still being -- seeing growth of 7%. And in the fourth quarter, we had very solid growth in terms of enterprise business.

This is the sales by region. Here we see the pre-GAAP numbers. As I mentioned before, outside of Japan, growth rate is very high. And the Europe is showing very high growth. And without the exchange rate impact, you can see the growth rate here. EMEA, Asia and the Middle East and Africa is showing very high growth.

And this is enterprise and retail, same exchange rate, 13% growth in terms of enterprise and 1% growth for consumer. So very small number, but growth continues. This is deferred revenue. JPY 6 billion, that I mentioned before, is included in this deferred revenue number.

Let's move on to cost. Cost has increased quite a lot. As I explained before, one of the factors is that every 6 months, we see the impact of variable expenses, especially for pre-GAAP profit-related bonus or sales commission is paid every 6 months, and we see this trend. Still, we see this -- the increase in cost because the pre-GAAP growth was very high and also strategic product sales was strong. And also, new customers were acquired in large number. In order to acquire new customers, we had to pay more commissions, and that is why the variable expenses went up.

And also this was pushed up by stock price. In terms of admin, administration, in dark blue, you see an increase in this segment because the backend that we use, such as AWS and Azure, we are increasing the backend usage volume. So as we continue to increase the usage, of course we have to pay more because it's pay-for-service. But still, this is linked to revenue as well. So this is not a bad story at all. This is pre-GAAP total cost.

Moving onto cash flow. As I mentioned before, although the operating income is down, cash flow is growing by 13%. So this is JPY 13.7 billion. And 120 headcounts have been added in this quarter. And this includes the employees of the company that we acquired in Canada. And 2 to 3 years ahead -- we are looking 2 to 3 years ahead. We're still already investing into R&D and also sales for the future business.

Admin business process. We have 851 people, and there has been no change in the headcount in this group. So going forward, we will be increasing headcount that will be contributing to revenue.

Then the highlights for fourth quarter. As already mentioned, we have the highest ever quarterly revenues. And also we've seen strong growth in both Hybrid Infrastructure and User Protection. Aside from Japan, in all the other regions, there was double-digit growth that continued. As for the lowlights, we have Japan with a slower growth rate for the quarter. And pre-GAAP revenues were high, and so therefore, there was an increase in the variable compensation cost. When the stock prices go up, then the variable expenses increases. Those were the year-long numbers. We have disclosed the numbers for each quarter, and this is the total. And everybody must be interested in this -- on constant currency basis how the net sales progressed. From 3 years ago, this trend has not changed. And the cloud and the Hybrid Infrastructure has this. And the business growth rates are high, and so therefore, as it becomes larger, this will change the growth rates of the company.

Now the dividends. The payout ratio has not changed. The goodwill, amortization of TippingPoint has been covered, and we are now working at a 70% payout ratio, so it's JPY 149 per share or 6% increase on a year-over-year basis, and this is a record high. And of course, we will need approval of the shareholders at the ordinary general meeting, but we would like to propose this number there.

Next, the forecast for 2018. We believe that Japan will grow by 5% year-over-year and higher growth rate elsewhere, except for North America, which is flat on a year-over-year basis. This is because in 2017, we have posted the TippingPoint sales, but from January, this will be allocated by region. And so compared to the previous year, the North America sales -- a part of which was posted as North America sales will now be allocated to the regions. And so therefore, this will lower the numbers for North America. And I intend to explain about this in more detail. But overall, we'll use this as the basis. And we have exchange rate forecast as described here. And that is the forecast for 2018. And we have 2-digit growth -- double-digit growth in net sales and operating income. Thank you very much. And I can go into more detail in the Q&A session. Thank you very much for your attention.

[Eva Chen, executive]

[Foreign Language] How do you do, ladies and gentlemen? Oh, I want to say happy 2018, the New Year. And today, actually is the Chinese New Year Eve. 2018 is a very special year for Trend Micro, because this is the year that we are turning 30 years old. In 1988, when we first set up this company, we were less than 10 people, 2 of them actually is the reporter from NHK come to our very small office and reporting about a product called Virus Buster for PC saving. Then in 1998, we went IPO in Japan market. Back then, we had less than 1,000 people. And last month, we had the sales kickoff in Vancouver. The company, as you can see, already grow to nearly 6,000 people. 30 years, we are very honored, very happy that we can grow in the cybersecurity business. And we has always stick to 1 single strategy, which is, we want to provide a world safe for changing digital information. So 30 years ago, we say we want to provide peace of mind computing. We delivered that by becoming #1 in endpoint security for all the PCs in Japan, in Germany, in Brazil and a lots of other countries.

20 years ago, we have realized that Internet is going to be the major vehicle for exchanging digital information. And therefore, we say we want to be your Internet virus wall. By doing that, we jump in to Internet, we create a Smart Protection Network and utilize Internet technology to provide the protection for customer, and we become #1 in the Internet gateway protection also. 10 years ago, it's not only Internet, it moved into cloud, massive computing power. And we say, we want to securing your journey to the cloud. In the past 10 years, we've been investing all our resources for customer to moving from Internet to virtualization that has entered, to modernize -- that has entered in the cloud, like AWS. And now Trend Micro has already become #1 in cloud security worldwide.

So what's next? Next, what we want to say. From now on, what we need to do is securing your connected world. The world is extremely connected, and all the devices are going to be all connected, connected car, SMART FACTORY, connected devices, all of this connected and need a huge amount of attention to how this connection are secured.

That's why our strategy. For 30 years, we never changed. That is, our strategy is continuing to adopt our protection, so that we can provide solving customers' problems, security problem by anticipate the infrastructure change or embrace the customer's user-behavior change and also adopt to provide all full range of threat protection for our customer. That strategy is what we call XGen security. It's not just next gen what's called next, it's XGen. You need to be taking care of customer, their previous infrastructure, their future infrastructure, that's what we say XGen is cross-generation cybersecurity technology.

We say XGen technology, Trend Micro was able to -- in the past 2 years, we are very proud to say, we block more than 1.7 billion ransomware. And if you think ransomware, they ask for one bitcoin as the payment, that's how much money that we saved for the world. We block all those ransomware. All those x generation technology has been put into our 3 major solutions, which is our network defense, our hybrid cloud security and our User Protection. And in the past few years, last year, we add more than 2,000 customers in the hybrid cloud security. We add more than 13,000 -- 1,300, I'm sorry, 1,300 new customers for the Deep Discovery or network defense or TippingPoint technology. Those are the very large enterprise customer. And we are very proud also that in User Protection, endpoint protection, which most of the people see us like a red ocean, a lot of competition, we actually add more than 16,000 customers, new customers.

And we are not stopping there. We continue to invest in this new environment. So last Q4, we acquire a company called Immunio. Immunio, what they do is application security. So we not only provide security for the server infrastructure but also the application. Because now with serverless and container technology, application security is very important. And also, we are very happy that we were able to acquire a group of, I would call them, genius. These are the real genius that knows not only finding the vulnerability, but knows how to exploit this vulnerability and produce the best protection out of that. And this is a group of people that originally belonged to -- tell us security lab, and we were able to acquire them. And this group, we're at, all these very critical threat intelligence to Trend Micro's threat intelligence and provide together with our Smart Protection Network.

These 2 major acquisition and investment is part of the reason that you see our cost increased in Q4 last quarter. So what's next? What's next in the eye, where we can say, yes, there is more server, more cloud. And then adding on is IoT and 5G, which the result is massive more data. A lot more data that need to be processed. On the user requirement side, as you know, the privacy law, GDPR is in effect, and that will require user to produce more and more security-related compliances report. And the first time, the information technology people would have to work with the operation technology people in all the different industry sector. And therefore, it require new way of communicating and seeing the different angle of their data. And that resulting in a big problem, which is the skill set shortage. The security is very hot topic, but security people is very hard to train. And therefore, there is a huge problem going on, which is the skill set shortage problem.

And on the threat side, there's just more and more attack as you can see. And I'd like to mention about the cryptocurrency vulnerability. A lot of people probably are curious about their bitcoins or of this currency. Although the blockchain is a very good technology, however, utilizing that as the currency platform create a lot of vulnerability. And as you can see, when there's more money exchange in digital form, there will be more attacks on this infrastructure. And even the bitcoin, you can see the exchange center just disappear and people can steal all those bitcoins. So I would say, the threats sign, will become more and more infrastructure attacked.

So that's what we see. In 2020, there will be more than 20 billions of things connected. Each of them generate a lot of data, and that's why Trend Micro predicts that there will be more than 27 new ransomware families coming. Last year, it's a family. It's not like one ransomware. It's 27 new ransomware family come to exist every month. And this year onward, there will be more. And endpoint, still is the biggest target. But endpoint is the most vulnerable, where user are using the endpoint and user become the target. And that's why the BEC, people receive a e-mail and transfer millions of company money to the hackers. Those damage is piling up to USD 9 billion. And we believe that further compromise of IOT devices will be launching DDoS. Actually, there is suspicion this time in the Winter Olympics. You see all those storms, actually, it's not really fine there. Because at that time, there was too many attack. They cannot fly in real time, and it became like video. So you can see, the IoT devices and using those devices to launch DDoS is going to be a big threat. So those are all the prediction. And overall, all I can say is just, there is, like, 2 perfect storm. The treat becoming more complicated, the damage become bigger and the cybersecurity people expertise become more and more less and hard to find.

So that's why we believe the solution rely on something we call it, security operations centre, SOC; which is we need to have people that utilizing this cybersecurity expert, they centralize them, so that they can service more scalable -- service more people. And therefore, they can also have more visibility to see the whole overall picture rather than each of them just see the silo. So security operation center, already a lots of survey, and we find a lot of company are setting up the security operation center. But it's not just the big enterprise or the government that is setting up security operation center. Actually, there's different forms of security operation center. First, for the smaller business and consumer because they cannot deal with that, therefore, they will ask their provider, for instance, consumer will go to the telecom company, "Can you provide me with continuous security monitoring?" And therefore, for Trend Micro, we will be enabling the telecom company to provide this type of service to small business and to consumer. Or in some cases, Trend Micro ourselves, like our Smart Protection Network, our premium services, is like a Trend Micro is operate us consumers security operations center and provide this type of service. So it's not just we are selling Virus Buster product, we are selling our premium service to our customer.

The second one, midsize enterprise or, say, smaller enterprise. They can afford to have their own security operation center. And therefore, they will outsource. They will try to find a expert channel to provide that, which we call them managed security service providers. And in that role, Trend Micro will be the one that enable those partner, those managed service provider to provide this type of SOC services. So we enable them in various of our region. And for the enterprise, DOE, they need to establish their own security operation center, but they have a lot of problem to be solved, because the current security operation center has lots of problem that they cannot deal with. And therefore, no matter it is for the telecom company, for the MSP or for the enterprise customer's security operation center, they need to have something we call it XGen security operations centre.

So let's first look at what is today's security operation center. What are they doing, and what is the problem they were facing? First, they mostly, sitting there and looking at the big screen, they need to monitor a lots of the alerts, security alerts, and deal with these alerts. But the painful thing about this is there is just too many alerts. I talk with some of the customers and they -- their security operation center say, "In a day, they can receive over millions of security alerts." So they cannot deal with so many alerts. They cannot prioritize them. And even worse is that even with so many alerts, they were not able to find those real alerts that was a known alert, a known threat, that attacked them. There is no alert happen, but they suddenly discover that they were under attack for 2 years already.

That's the biggest pain they were facing. The second one is, they were manage each of the individual events. Every time they see a alert, they deal with their event and then they fire a case ticket to solve that. They were not able to see the overall -- like, in the endpoint, there is a fire download. In the firewall, there is a connection, go to the malicious IP address, and then on the server, there was file got encrypted. Each of them is just individual event. They were not able to put them together and say, "Oh, this actually is one instance." There was one campaign, one APT that was attacking the whole infrastructure. So silos of visibility is limited understanding of what is really happening in my environment.

And then the third one, their main job is to generate report. And then with that report, they go to each department, endpoint to firewall, and ask them, say, "Okay, you should do this and you should do that." But nowadays, they cannot just generate report. They need to take action. Their pain point is that it's too slow. By the time they get all the report together, the evidence they gather can go to each of the department and take action was too slow. And therefore, their CIO, their CEO, their Board are asking them, say, "You need to take action. You need to have early detection. You need to take fast action to deal with that." So these are all the pain points. What can we do? What do they need? What do they need is: first one, monitoring. You cannot use human being to monitor millions of alert. You must employ, using AI technology, and with very thorough threat intelligence to form the model, so that you can detect a nonthreat, you can early detect the treats and you can understand the total impact.

And second one -- therefore, second one is, you need to be able to do the total root cause and impact analysis in a very efficient fast way. And taking that analysis, you should be automate -- somewhat automate the process, so that you can take action much faster. And that's where I believe Trend Micro has the biggest opportunity. We can help no matter it's MSSP, no matter it's outsourced center or the government or big enterprise security operation center, we can provide them with the AI-enabled threat-hunting platform.

First of all, Trend Micro's all of our existing product, we would do something we call SOC enabling. Means that we adding certain feature, collecting more information and giving those information, more tagging. Then we were able to send those information back to the security operations centre, provide them with more contextual information. With those information and we provide them with the threat knowledge and the AI-enabled threat-hunting platform. They will be able to hunt and early detection of all those threats. The second one is that, with that we can also automate -- help them automate, link with their existing other third-party products. We were using all this information and we communicate using something that is called IOC, Indicator of Compromise. There's industry standard starting to emerge, called STIX and TAXII, which is a way of describing the compromise instead, which Trend Micro is one of the big supporter of that standard. And we will be using all these standard to passing this information out. And therefore, we can enable the security operations centre to operate faster, and also they can be connected. They can connect with their existing product, existing solution and that's what we call our strategy for the next 10 years I will say, is security operations centre enabler. Trend Micro is not trying to build or we don't want to become the security operation center, but our product, our technology, will enable all the security operation center to provide their customer even better solution. And thereby, they will use Trend Micro's products in all those infrastructure. So that's all of it, I believe. With that, we will be securing your connected world. Thank you.

[Akihiko Omikawa, executive]

I'm Omikawa, and I'd like to talk about the situation in Japan. And there is also a new item that I'd like to report upon. Last fiscal year, we talked about this. And we confirm this each time we make a report, but in regard to Japan, there are very large enterprise area, SMV, as well as the consumer area. In the Japanese market, we have #1 position. And we have very good partner engagement as well. And in managed security services, we have been moving forward. We have talked about this since last year. And we have taken advantage of advanced technologies to make proposals to our customers. And what's important here is XGen. Smart optimal integration is pursued here. And in the enterprise market, it was said that the multivendor policy is the correct one. Not just Trend Micro but to have the safest security, it was necessary to take a multivendor policy. But things have become more complicated. Devices have increased, and as Eva Chen has explained, there are a lot of different incident reports. And the contents of the reports and the way things are expressed are different if you have many different vendors. And if there is human intervention, it's very difficult and very time consuming. Recently, we have a concept from the endpoint server and network, we'll have a connected defense. So that if something happens automatically, this will be conveyed and we have taken actions.

CTD is the concept, where we have integrated solutions. And in the central government or the local government, this CTD is being used by many people now. So rather than multivendor approach, there is a tendency for people to focus on a single-vendor approach to take more speedier response. And we have been ahead in providing solutions. And since last year, we have been getting good reaction to this. And on a global basis as well as in Japan, our solution sets are being adopted in many cases. And when it comes to the Hybrid Infrastructure protection area, Deep Security is doing very well. We have increased the number of customers very steadily. But when it comes to Deep Discovery, as Mr. Negi has mentioned, there was a big deal. Compared to that, in Q4, Deep Discovery was slightly down and that led to the negative factor in the Japanese results. But that's just an issue for the fourth quarter. And so there's no major problem here. Meanwhile, when it comes to Deep Discovery, what can be said is that we are pursuing a partner model. We have major managed service security providers taking advantage of Deep Discovery as they deploy management services. So the range covered -- we'll cover both IT and OT. And we have the Deep Discovery penetration achieved through our managed security service partners. In Q4, it was the impact of TippingPoint. HP did not sell TippingPoint that much, and so there is not a big customer base here. But Trend Micro has learned how to sell this. And as of Q4, we've been able to get completely new TippingPoint customers. And this fiscal year in Q1 as well, from large customers, where there are IDM that's already been deployed, our customers are adopting TippingPoint, and so very good deals are emerging. Finally, in Japan, TippingPoint business is something that could be covered by our mainstream sales staff.

Next, for the user protection area, this is a very large market that we already have. But last year, they were quite a few ransomware incidents. In this area as well, we have a large user base, but we are still achieving growth. On a monthly basis, the SaaS Virus Buster security solution has been increasing each quarter at a rate of over 20% on a cumulative basis, and we have major growth here. And at the Cloud Edge UTM, we have solid relationships with new partners and in the new situation. It's going at a rate of 100 units per day. This is doing quite well right now. And as for Office 365, cloud application security, in Q4, a single order was over JPY 10,000. And over the past few years, the idea was that we should get a 160,000 users, and we have been able to get good deals. So we have new solutions, and we have the monthly charge, and also the MSSP, the cloud-based managed security services using User Protection. And our partners are able to offer monitoring services on a monthly basis, not on a selloff basis.

So throughout the year end-user protection extended approach really worked. And we now have good solution, including deep learning. In addition, we have a CTD. So one vendor can manage a very big scope. It's now well understood, and that translated into strong sales. Managed service partner collaboration has been strengthening, as Eva mentioned. We are aiming for next-generation SOC. We want to be the enabler, and we already have some candidates that we want to collaborate with and deepen our relationships with. We also have vertical solutions, finance, retail, manufacturing and education, public. We have dedicated teams who can speak the language of each industry as they explain a solution. And in January this year, we will start SMART FACTORY Expo. Well, Trend Micro will be exhibiting at the SMART FACTORY Expo.

Now in the area of consumers, IoT, XGen and digital life support was a plan for the fiscal year. Flexible sport service for digital lifestyle is now expanded to include consumer-type SOC. And also, home security within people's homes. So our concept has further expanded. And this year, in Japan and the United States, Home Network Security will be again sold in the American market in the second quarter.

In Japan, Trend Micro is the only one that's growing, in terms of consumer business. Every other vendor is losing. In terms of share and also unit price, we are trending high. And many products and solutions with supports selling Virus Buster sales in the common shop. Mobile security sales is very strong. 70% to 80% of these distributors are selling our products, supporting strong sales. Not many people buy PCs these days, they buy smartphones instead. And our solutions can be provided to the smartphones buyers through these channels, and this is helping sustain the sales.

At the global level, we have been selling products for Mac -- Macintosh. And in FY '16 and '17, the sales tripled because there are many users in the United States. If you look at Macintosh utility, our product is actually #1. Sales is growing strong, and we will continue to focus in this area. So for FY '17, this is what we have achieved.

Now, in January, at the SMART FACTORY Expo, we actually did this expo with Alexa, Hagiwara, and also, Yaskawa. We worked together on this expo. Existing factories were damaged with ransomware. And OT security is a big challenge for big companies. And IT department is responsible for that because the factories do not have budget for this. Now IT department has to take care of OT as well. They have to start with planning and concept. What to do with the existing factory? The only thing you need to add is this appliance. And for each production line, if there is problem with the network, you can stop the manufacturing line automatically, because it's connected to the switch. Deep Discovery product is now included in this small-sized Linux server, and the policy manager can also be used to implement the security policy defined by the customer. And if there is any problem, it connects to the SDN switch and stops the line. And Hagiwara made something like this. It's a very, very simple monitor for the factory operators. They can see the device with a problem, and all we need to do is insert this USB stick, and it's color-coded, green for safe and red for dangerous.

And this whole set can be implemented in existing factories, and we do have target user who is setting this deployment line now. You can cover individual lines or you can also put the TippingPoint at the entrance of the factory and factory gateway can include our IoT security in the Linux system. We can provide comprehensive solution. And we now have Hagiwara, Yaskawa and Yokogawa, all of these factory-oriented silos that we can develop new partnership with. Now yesterday, we made this announcement: Panasonic and Trend Micro will be working on cybersecurity solution for connected cars. This is a joint development project. And we have been doing some experiments. And as of yesterday, we made this announcement. This is not only about the vehicles themselves but also cloud computing. Data coming from the vehicles can be gathered in the data center, on the cloud, which can be made secure by us. So this is a joint development with Panasonic, which was announced. The actual service is expected to start in 2020 and the joint development is currently underway. We're also approaching potential customers. And as of today, Home Network Security diamond box used to be all white and didn't really stand out, but we have switched the color to red, and Yodobashi Camera is very keen on displaying this. So this is a smart TV corner and PC corner, peripherals corner, game corner. Because the idea is, everything will be connected, all home appliances, including camera will be connected and that can be risky.

And these value resellers want to sell our solutions for devices that can be connected. So starting from now, we'll be focusing a lot on Home Network Security. Home Network Security devices are increasing very quickly in the U.S. too. So we want to start this in the U.S. in the second quarter, too. CSOC, home network, everything should be included in the network security, so that we can start delivering the solution in the U.S. and also in Japan this year.

So that's what I wanted to report to you. Thank you for your kind attention.

[Unknown Executive]

Both Negi and Omikawa mentioned about big deal of the previous year and why the revenue declined in Japan this year. And I would like to add one comment. As was already explained in the previous fourth quarter, hardware sales lump-sum accounting was done, which had an impact of JPY 1.3 billion, which does not exist in this fiscal year, which I believe is the biggest factor. And without this factor, we would have had an increase in net sales as well. This is accounting process. So pre-GAAP is not affected. Now we would like to open the floor for questions, and please remember what I said in the outset, and please be kind and gentle with your questions.

[Foreign Language]

[Operator]

[Operator Instructions]

[Hideaki Tanaka, analyst]

My name is Tanaka of Mitsubishi UFJ Morgan Stanley Securities. And there are 3 points that I'd like to ask. First, what are the plans for this fiscal year for the operating expenses? On a total basis, it was JPY 11.6 billion increase according to the calculations. What is the breakdown for this? Where will the increase take place?

[Unknown Executive]

And please allow me to explain. The biggest increase will be in the personnel costs, and it should be about JPY 7 billion increase that is anticipated there. Next would be the outsourcing expenses. And then as Mr. Negi had mentioned, there are various network expenses. For the use of public cloud, there will be more usage fees that will increase. So the biggest would be the personnel cost, the second would be outsourcing and the third would be administration costs. That's the breakdown we are considering. And as for sales marketing, we are not anticipating increases in costs there.

[Hideaki Tanaka, analyst]

Second point that I'd like to ask is, in regard to the sales, for this fiscal year, double-digit growth is planned, and it's very good number. But what about the sustainability as we head towards the future from your feeling? Do you think that you can continue this double-digit growth? And also, you mentioned the administration costs increasing because of cloud usage, there was Amazon and so on. What's the impact of this area, including the growth rates? Could you give us specific numbers? That would be very nice if you could do so. For the question is, whether the revenues will continue to grow. Well, it's fine that you anticipate. It's double-digit growth for this fiscal year. But on a normalized basis, it may be double -- single-digit growth that is more desirable, or do you feel that you can continue double-digit growth?

[Mahendra Negi, executive]

One thing, for fiscal 2017, the pre-GAAP revenue growth increased and the deferred profits are very high on the books. This will come back. And on post-GAAP, we have increased the pre-GAAP, and we anticipate what we'll be able to achieve. For fiscal 2019, 1 year ahead, we can't really see what will happen there. But as Mr. Omikawa has mentioned and has Eva has mentioned, unlike before, we're going to deal with buyers that have bigger budgets. So this means that Trend Micro could be successful in positioning itself, so that we can tie this to sales and we can anticipate further growth. Of course, we're just forecasting for FY 2018, and there's the pre-GAAP balance and the deferred revenues and the net sales have been looked at, and we believe we can achieve this forecast. As for the networking expenses and the backend expenses, we haven't increased the headcount. The sales and development people are increased. For the admin backend side, it's the data volumes. As Eva has mentioned, we have a tremendous amount of data volume. And as for services, in the United States, in some of the company's cases, there's the service-based businesses. And we see this phenomenon taking place, and there is more and more monthly subscription payments instead of a large lump-sum for 2 years. So for growth rates, the -- for the -- pre-GAAP numbers seem to be down. But ultimately, as we shift to a service-based business, if we go to a Software-as-a-Service or service volumes -- and also the backend expenses will increase. But then we can think that, with net sales, we can fully cover this.

[Hideaki Tanaka, analyst]

For the service-based or the cloud providers, do you think that there is considerable impact of those revenues?

[Mahendra Negi, executive]

That is increased, of course. Percentage-wise, it's not large, but every quarter, we are looking at this. Compared to the previous year, we're making comparisons, and so the impact should not be that great if we go very gradually on this.

[Hideaki Tanaka, analyst]

In regard to net sales, for the fourth quarter, for North America, the consumer has not gone down on a year-over-year basis. So we can calculate an increase here, but what about the US consumer market? Have we bought them out here?

[Unknown Executive]

No. Well, we can't really say it was a really bad situation, but we haven't seen a sudden recovery of sales, so there is a gradual decrease.

[Hideaki Tanaka, analyst]

Is that so?

[Unknown Executive]

For North America, it seems like there is good news from the consumer business, like in the Apple business. Or for the Apple products, for the Macintosh, it is selling, but we have a negative results for the North America market as a whole. We are doing better in Australia. And for the Macintosh business, it's still small. Even if we grow, there is decrease in the Windows business, so that overall we are seeing a decrease.

[Hideaki Tanaka, analyst]

I see. Third point I'd like to ask about, in regard to Panasonic partnership for automotive and also for the SMART FACTORY in the connected car area and the SMART FACTORY area, what do you think would be the increase in the market size for security-related area, not for next year or the year after that? What about 5 years ahead because it may seem to have large impact?

[Unknown Executive]

Now if we talk about 5 years ahead, it can be any number that we could cite here. We could talk about JPY 10 trillion. So no one knows what will happen 5 years ahead. Meanwhile, for the market itself, for connected cars, this is a reality. And as mentioned, a company that can solve customer pain will be profitable. If we do a proper job, then we should be able to generate sales. Also from this year, there is the solutions for the smartphone and there is a plus alpha aspect of new services. And this should show profits from this fiscal year. So that's a positive factor. As for the SMART FACTORY, we can offer solutions now with what we have. It's not just the IT area but also the OT area that we can cover. And we can target all factories as our target market. So that's a positive factor. And that could increase results and in new gateways and so on. There are new possibilities. But sales in that area will be generated from 1 year ahead onwards and for the automotive, we have to take a longer-term perspective.

[Eva Chen, executive]

For 30 years, Trend Micro is a revenue always attached to one thing that is PC shipment. Right? That when you ask our U.S., our consumer products are having a better news. The better news is actually -- just the PC shipment is not declining so rapid today in U.S. already. So then link to your second question, about the car, security, all of this. All I can say is, I'm so happy that it has nothing to do with PC now, right. What you're saying all of this are new for Trend Micro. Car, we never make a cent from car. So whatever new revenue that we can get from the car is the new revenue. And I think, overall, the cybersecurity chain, as you can all see, there's more connection point, there will be more threats and there is less security people that can deal with that. And therefore, the requirement or the demand for a better security product that can make people's life easier is in high demand. And we hope we can catch that trend.

[Foreign Language]

[Operator]

Any other questions?

[Unknown Analyst]

It's a very simple question. On Page 39, you're talking about TippingPoint revenue being distributed to various countries, but if it's not allocated, what is the growth rate of each country? And also, North America, Japan and Europe, how much were these numbers pushed up by TippingPoint?

[Unknown Executive]

I need to ask Habara san to explain this.

[Koichi Habara, executive]

I'm sorry, but we don't know. It's impossible to exclude or cut out that section. So I have to say something vague. So U.S. sales dropped. Well, TippingPoint is basically -- was basically 70% to 80% and the rest was mainly Europe. So the biggest impact was experienced in Europe. But other than that, it's a very, very small noise. And I don't think it makes a big difference.

[Unknown Analyst]

By the way, TippingPoint sales from last year, can you separate that out or not?

[Unknown Executive]

Well, let me add. Pre-GAAP may be possible, but post-GAAP would be difficult. And our forecast is based on post-GAAP, and this calculation is way too complicated. So which ones are deferred and where did it come back, it's very complicated. So from next time what we would like to do is to keep the numbers as they are, but on a verbal basis, we can explain the pre-GAAP growth behind it. Maybe we can explain more nuances, but as Habara san mentioned, 70% of the revenue is still in North America. So the biggest impact is a slight reduction in North America and shifting that to Europe.

[Eva Chen, executive]

Another way to answer that, if you look at Page 13, there is a Hybrid Infrastructure protection and User Protection, those are 2 products that has nothing to do with TippingPoint. It's all regional products. And as you can see, our Hybrid Infrastructure protection was growing 19% year-over-year; and User Protection, even with such a big base already, we grow 7% year-on-year. So it's not that our other product was declining and we are using TippingPoint to facilitate. It's actually all our product lines has been growing.

[Hiroko Sato, analyst]

My name is Sato of Jefferies Securities. And it's a short-term question, I'm sorry, to say. But in regard to the large deal of JPY 1.3 billion, last year, how much contribution was there to profits? That's my first question.

[Unknown Executive]

In regard to that question, it's not a large deal that represented JPY 1.3 billion, but rather, up until Q4, they were deferred profits, and we did lump-sum recognition of JPY 1.3 billion. As for the size of the big deal, I'm not sure but it doesn't reach that amount.

[Hiroko Sato, analyst]

What was the impact on the profits then? It was not that great.

[Unknown Executive]

JPY 1.3 billion, well, it was reflected as is to the profits.

[Hiroko Sato, analyst]

Another aspect that I'd like to ask is in regard to Mr. Omikawa. Even if we deduct that, you're saying that the Japanese environment is very good. Is my understanding correct that the environment is very good?

[Akihiko Omikawa, executive]

Yes, I do believe that is the case. In the IT area, in the areas that we were dealing with, customers haven't decreasing their business. The number of endpoints hasn't gone down. And they are increasing the conventional solution, but also in new areas, the SaaS-type, Deep Security is increasing. So even in the volumes, Deep Security is penetrating and is increasing on a year-on-year basis. Deep Security is growing at 42% without a decrease in the speed. And for Deep Discovery, in the OT area, for the factory, there's a new potential market. We are seeing growth there. So conventional markets are still continuing, while in the new areas, in the commercial market, about 90% of the business continues in the next fiscal year. And in the consumer area, about 88% retention rate is maintained.

[Hiroko Sato, analyst]

So why is it guidance of just 5% growth? Isn't there more growth? Or is it a very conservative forecast that you have issued?

[Eva Chen, executive]

I think because, Omikawa san's view that world is always beautiful and better. Right? So if you're trying to test our conservative or not, you should actually look at Mahendra's face rather than look at Omikawa san's face. And if he is smiling, and he was willing to put out 11% year-on-year growth for next year, double-digit, I think the world is actually better than before.

[Hiroko Sato, analyst]

[Foreign Language] But still the PC market in Japan...

[Unknown Executive]

When it comes to the consumer team, it's doing well, but it is a reality that we are decreasing the number of units sold there. So we have to face that reality. And we were asked this question by Tanaka san about this, it's difficult to reply. Now the consumer market, last year, we had a record net sales for FY 2017. But the renewal users are going to decrease compared to the previous year. And so therefore, the forecast is a negative result. And so we have included that aspect as well.

[Hiroko Sato, analyst]

Finally then for today, there was something in the press about the fact that for the Trend Micro products, there was an article about a vulnerability, but has patches been released for this? And what about the costs incurred for this?

[Unknown Executive]

For today's announcement, it was appeared in ZDNet about the fact that there was a vulnerability that was discovered, but there were patches that were realized.

[Hiroko Sato, analyst]

There won't be any impact?

[Unknown Executive]

Well, the patches are already available, and so the expenses there have increased. So I don't have to worry about that. As far as expenses, Hiroko Sato, you don't have to be worried. You have patches available. So it's not going to be a problem that backfires. There will be no problem. Thank you, that's all. And also in regard to that vulnerability, this occurs periodically -- this happens periodically with our products as well as with other company's security products. It's the thing that happens on a common basis.

Any other questions?

[Foreign Language]

[Unknown Executive]

Incidentally, there was the team that we acquired from TELUS, and they do ZDI, so they are looking at vulnerabilities. But they are also looking at how those vulnerabilities are exploited and utilized. And we can take countermeasures accordingly. And from the TELUS team, we're able to take advantage of their wisdom. So that will just not only look at the discovery of vulnerabilities but also take remediation steps, as we've done in the past as well. Any other questions?

[Eva Chen, executive]

Sure, one thing. I think Mahendra and Omikawa san all mentioned about our CTD, the Connected Threat Defense, is a very strong strategy. And we were able to expand our customer insight to our existing customer, and so the new solution. Now you just imagine that all those connections before is from 1C to 3C, now we're expanding that to even more points in the organization. And as I mentioned, for the SOC, we are not only expanding our products connection with our own product, we connect with the, for instance, same system that they already using; and therefore, it will make our product the more sticky and it's easier for the security operation center to use Trend Micro's product. And therefore, the whole strategy about our action SOC is about selling more Trend Micro product through the SOC operation.