Question-and-Answer Session
Operator
(Operator Instructions) We will pause for just a moment to compile the Q&A roster.
Your first question is from Walter Pritchard with Cowen.
Walter Pritchard - Cowen & Co.
Hi. Eric, just wondering on the MDF you talked about being lower this quarter than you expected. Could you talk about in what specific areas? And I guess I'm just trying to figure out how if it's lower this quarter. It sounds like you expect it to almost catch up later in the year. And, therefore, that's why you're not raising to pull your guidance more than you are, just having the upside roll through.
Eric Brown
Yeah. Thanks. I think that our view, kind of, coming into the year was that we were just coming off of a, kind of, a reshaping of the sales and marketing organization, which we executed or initiated as of Q4 and finished in Q1 2007.
And while we were in the midst of that, we were a bit more, kind of, tempered in terms of our MDF expenditures. Having now, kind of, moved through that transformation, we think that we'll be back to more normalized rates of MDF spend in the corporate side of the business.
Kelsey Doherty
Next question, please?
Operator
Your next question comes from Daniel Ives with Friedman, Billings.
Daniel Ives - Friedman, Billings, Ramsey
Yeah. Could you specifically talk about, on the enterprise side, what sort of demand you're seeing for the IPS solution and maybe touch on pricing?
Eric Brown
Okay. Daniel, this is Eric. The -- first of all, IntruShield continues to perform exceedingly well. And we noted that we had a couple large IntruShield transactions that occurred at the very tail end of the quarter.
In terms of pricing trends across corporate, both IntruShield, the management lines and the systems line, we saw continued stability in pricing. And so no net change versus what we've seen over the past several quarters.
Kelsey Doherty
Next question, please?
Operator
Your next question comes from Ed Maguire with Merrill Lynch.
Ed Maguire - Merrill Lynch
Hi. A question for Dave. Since you've joined McAfee, what have you identified or what have you been able to see in terms of any process improvements or organizational changes that you think you can affect over the next few months?
Dave DeWalt
Yes, thanks Ed. You know, I got a chance now to get my arms around this a little bit, but still only 30 days into it. I talked a little bit about these kind of six, seven key actions that I was looking at.
Probably the biggest areas is a lot of things the company is doing well, it is just trying to improve upon what they are already doing, but go-to-market models is an area I know pretty well coming from EMC and having managed a pretty big business there.
Some of the rigor and discipline I talked about in the forecasting model really trying to come up with measurements on how we can drive enterprise type transactions, compliment the consumer in the small to medium business markets.
Just operating management efficiencies that's an area that I know pretty well. And of course the company has done a good job of from the results here, but there is always room for improvement every company has it and I am going to look to try to lead that and take it to the next step.
Kelsey Doherty
Next call, please?
Operator
Your next question comes from John DiFucci with Bear Stearns.
John DiFucci - Bear Stearns
Eric you had mentioned a change in some of the balance sheet and how you, it's been about a $125 million liability having to do with unrecognized tax. Can you sort of explain that a little more detailed, because it looks like the operating cash flow benefited from some difference there in deferred taxes, and I am assuming there is some relation to what you are talking about there?
Eric Brown
No, there would be no correlation between the kind of the FIN 48 related adjustments and the operating cash flow. The other side that the tax related entries that I mentioned were going to the balance sheet to additional paid in capital.
And so, if you do the lock ford on the balance sheet from 12/31/06 to 3/31/07, you will see those entries there in the APIC section, but they do not impact the $102 million of operating cash flow.
Kelsey Doherty
Next question, please.
Operator
Your next question comes from Phil Winslow with Credit Suisse.
Phil Winslow - Credit Suisse
Hi guys. Good quarter. Dave, I have a question for you, as far as the sales force goes. Obviously, you have a lot of experience and when I am working with enterprise sales forces, when you'd look at I guess your channel structure and your direct sales model. How do you plan to balance that going-forward and just sort of the commitment between those two?
Dave DeWalt
Good question. It is tough for a company sometimes to do both channels and direct. I really don't have a strategy to change what this Company is doing, the goal here is to leverage our channel partners, and we get a lot more leverage, we do 100% of our business in channels today.
I don't want to repeat that. This is an incredibly leveragable model when you have got thousands of partners, thousands of distributors, multi-tiered models. We want to keep doing that, but what we want to do in addition to that, is get a higher touch model as well and continue to drive to enterprise accounts, we see a lot of opportunity.
I mentioned a couple of largest customers in the world calling me on the first few days I mean these are recognized top handful of companies who came in and said, this is very strategic to us, but we would like to see more of you.
And that doesn't mean we are going to change our model for how we deliver or fulfill our technologies, but it gives us an opportunity to become more of a trusted advisor to these larger companies and really compliment the model that we have already have in place.
And the more I have seen in the security marketplace from both my EMC lenses over the last couple years, as well as now for McAfee. There is really no major company here who has the Trusted Advisor kind of code encode status with many of the big companies. What an opportunity for us to get that.
And as I look at the IntruShield product lines, that Eric talked about, the E-policy orchestrater products, and the whole framework there. You look at our AV suite that moves up to the enterprise there is a lot of rich and fertile areas for us to go.
And not to take anything away from the other segments, just to say it looked pretty obvious to me, that we could do a lot more to improve across a number of segments from commercial and mid market up enterprise and keep doing what we're doing on consumer and keep driving that.
Kelsey Doherty
Next question, please.
Operator
Your next question comes from Todd Raker with Deutsche Bank.
Todd Raker - Deutsche Bank
Hey guys nice quarter. I wonder if you could just comment more generally on the competitive landscape and you cited a competitive displacement. What is it that's driving share toward you guys and do you think you are picking up share more broadly?
And as part of this discussion there has been some rumblings around pricing on the enterprise AV market. Can you talk about pricing trends, and have you seen any price increases across the competitive landscape?
Dave DeWalt
Yes Todd, this is Dave, thanks. I will answer the first part and I will ask Eric, to comment. The biggest thing I saw quickly I dove into as many transactions, as I could. Really reviewed the go forward pipeline, but also the past transactions to build a bit of a profile on what was working.
The biggest thing we talked about was the suite approach. This is really resonating. And when you look at leading indicators for a marketplace, the movement from kind of Best-of-breed, point solutions to a Best-of-breed stack or a suite.
We are getting right into that mode and customers I think more and more are looking for a suite, a trusted advisor, then when you couple that with a SRM, we are doing a pretty good job of evangelizing or getting an advantage with a customer competitively.
And I noticed that a lot on one-off data review that I did, and what was working for us and telling a more consolidated story of SRM coupled with a suite approach.
It works and it is a pretty clear advantage that we have over these point companies and point products, I think that is a good opportunity for us to lever.
Eric, you want to comment on that?
Eric Brown
Yes. In response to the second half of your question again back to pricing and discounting overall. Again, we track your price points and your net discounting from our net-based price list fairly carefully.
And again, in this past quarter, Q1 '07 there was no change versus what we have seen in the past 3 to 4 quarters there, so again, I would emphasize the notion of pricing stability. I think what we are seeing is that we have a differentiated approach versus other vendors we are building off of the SRM framework, which is powered by ePO
Our integrated management council and framework. And I think that that's important messaging, and so we have been able to maintain the price points across the product lines, be it systems, a network, or management.
Kelsey Doherty
Thanks a lot. Next question, please.
Operator
Your next question comes from Jordan Roberts with Jefferies & Company.
Katherine Egbert - Jefferies & Co.
Hi, this is Katharine Egbert with Jefferies. Just if I may, it looks like the results that we are seeing some software companies are somewhat mixed. Can you talk about, you guys had a really nice quarter, can you talk about the macro-environment for spending?
What you saw in Q1, and then what you think about Q2 since you are upping guidance a little bit?
Dave DeWalt
I will answer the first part. This is Dave. I don't know that the IT spending has changed all that much year-over-year. I certainly haven't seen that. It's incrementally stepping up over the last couple years, we have seen some modest improvements, certainly security risk management pretty top of mind for a lot of companies, a lot of consumers right now.
You look at what I mentioned on the data leakage, data loss prevention areas a lot of companies are getting sensationalized in the headlines right now about issues they've had in that regard and we are seeing a lot of initiatives there I think that's a little bit greater growth than maybe you see in other areas, but generally, it's a challenge to see an expansion of the IT spend, but having said that, it is a continued steady climb. Eric?
Eric Brown
I would also note that we had really good balanced performance reporting 16% year-over-year growth in both corporate and consumer and I think, again the international geographies did very well. In particular, we saw very nice gains in all the international geographies for the consumer business, as we continue to push the online model outside of North America.
Dave DeWalt
I believe it's one of the strength the company has. I took an assessment, you look at the elasticity of the model here, and you got a nice balance of growth, both consumer-up through the corporate segment but then you have got elasticity of the model geographically as well.
And the Company has got a nice blend between it's North American segment and it's international segment, and when you start to look at geo and by product line and by kind of market segment, you see a lot of balance here and a lot of opportunity to continue to grow where some markets might be weaker, and some markets might be stronger we can be respond to that.
Kelsey Doherty
Great, thanks. Next question, please.
Operator
Your next question comes from Rob Owens with Pacific Crest.
Rob Owens - Pacific Crest Securities
Yes, good afternoon. Could you give us some color on TOPS and just the ramp you are seeing in the marketplace, I think it's been out almost a year now with the lack of competitive solution out there. Are you seeing market share gain? And what kind of traction do you think you will see going-forward?
Dave DeWalt
Good question, I'll answer the first part, maybe Eric can add on too. We mentioned earlier we have the TOPS suite, and we did this by segment as well, so we talked a little bit about the TOPS suite for the consumer, TOPS suite for SMB and then, TOPS suite for the enterprise, and then we have a TOPS suite enterprise Advanced, as well kind of the whole enchilada for our product line.
And, when you look at Gartner and certainly I have and look at some of the analysts, they are ranking us as kind of filling out each of the key areas of the suite. And it creates a nice competitive positioning for us, and again we want to continue to be able to fill that suite out, do it as a package, make it integrated, that single agent, single console kind of style, is a real advantage for us right now technically.
Eric Brown
Yeah, last quarter, we talked about the results in TOPS, and this quarter as well, we saw TOPS grow well over a 2X composite year-over-year corporate growth rate. So it's continuing to really accelerate in the marketplace.
We also note in our earnings release the number of awards that the company won for its products, as you can see, there have been a lot of very prominent mentions for the TOPS solution set.
Kelsey Doherty
Thanks. Next question.
Operator
Your next question comes from Kevin Buttigieg with A.G. Edwards.
Kevin Buttigie - A.G. Edwards
Thank you. Just back to the MDF for a second, could you quantify what that impact was, and it sounded like it was concentrated on the enterprise side, was there any impact on the consumer side of that business? Or was it completely enterprise?
Eric Brown
Yeah, I won't quantify it specifically. It's in the single-digit millions of dollars, where again, kind of entering the year going through kind of a reallocation of our resources we have, we're a bit more kind of circumspect in releasing certain types of funds. MDF is somewhat generally discretionary.
Now, that we have the kind of confidence of having kind of moved through that we expect to be back at normalized MDF spending levels. One other comment, I would make on expected spending. We expect to see operating expenses go up a bit in Q2 across the board, once a year; we reassess the workforce, give base salary increases. And so given that holding headcount constant we'll have a step-up in operating expense across all of our GAAP line items, cost of revenue, R&D, G&A, and sales and marketing.
Kelsey Doherty
Next question please.
Operator
Your next question comes from Sarah Friar with Goldman Sachs.
Derek Bingham - Goldman Sachs
Hi, it's Derek Bingham for Sarah. You pointed a few of a benefit from a higher end period realization rates, can you talk about any expectation on how end period realization rates might trend going forward, and what is driving that, and also if you could comment on any change to D-Links in the quarter?
Eric Brown
Sure, it's kind of interesting. Looking at the Q1 2007 results, it's a bit of the kind of the inverse to what we saw in the fourth quarter of 2005, where we had bookings and activity, but lower than expected revenue realization rates and that was a function of mix.
Here we saw the opposite kind of expected levels of activity or slightly better than expected levels of selling activity with the mix toward product lines, which yield a higher revenue realization. So, for example, IntruShield appliances, majority of the revenues booked up front versus in the fourth quarter of the year.
You will do a lot of enterprise permit into renewal contracts, which has zero end period realization. So, the mix worked quite favorably to our advantage here in the first quarter of 2007. We don't comment on expected realization rates as part of our guidance.
Kelsey Doherty
Next question, please.
Operator
Your next question comes from Philip Rueppel with Wachovia Securities.
Philip Rueppel - Wachovia Securities
Great, thank you. You talked about pricing on the enterprise side, how about on the consumer front. Has there been any change especially as you rolled out the Vista capable products in your OEM or service provider pricing?
And then for the end user has there been any pricing strategy changes after Symantec has rolled out its 360 products?
Dave DeWalt
Thanks Phil, this is Dave. Maybe it's a good time to introduce Bill Kerrigan here who runs our Consumer Business. Bill, do you want to comment on the pricing in consumer?
Bill Kerrigan
Sure, no pricing changes at all within our OEM channel, or the ISP channel. Where we saw some differences is the promotional activity was certainly very competitive in the retail channel in North America. At this point, we're not announcing any business models, subscription pricing changes, or licensing changes going forward for this product.
Kelsey Doherty
Great, thanks. We have time for two more questions.
Operator
Your next question comes from Brian Essex with Morgan Stanley.
Brian Essex - Morgan Stanley
Hi, good afternoon. I was wondering if you could comment, it looks like you had a great result on the operating margin line for Q1, maybe you could talk a little bit about, it looks with the Q2 guidance going forward, do you expect it to dip a little bit?
I don't know if you can talk about maybe some of the dynamics that play there, and how we can expect margins to fluctuate for the remainder of the year?
Eric Brown
Okay. This is Eric. Again first thing to notice, we're coming off a good realization quarter. So keep that in mind, I think also last year, if you go back, you look at what happened, Q1 versus Q2 of '06.you would have seen our non-GAAP operating margins drop by more than four percentage points, and so there is a bit of seasonality here.
Part of it is that, again our operating expenses, again holding everything else constant, holding headcount constant, will increase automatically in Q2 versus Q1, because that's when we put through our annualized base salary increases, as part of our focal review process.
The other things we touched upon earlier is that it's a bit more visibility. We'll feel better about releasing marketing funds such as MDF, and other advertising dollars, and so that's what's factored into our thinking in regards to the Q2 '07 guidance.
Kelsey Doherty
Next question, please?
Operator
Your next question comes from John Walsh with Citigroup.
John Walsh - Citigroup
Okay. On the enterprise side, could you talk about ePolicy Orchestrator, or any kind of color as far as the adoption? Or how that effects large deals? And then, maybe just overall large deal metrics in the quarter?
Eric Brown
I'll comment on the, maybe the second half of that question. I mean, the large deal metrics year-over-year were actually pretty good, we reported six transactions in excess of $1 million this quarter, compared to only one transaction in excess of $1 million last quarter. So it was an unexpectedly strong finish the last several days of the quarter there.
As regards to ePO and its importance in regards to very large-scale enterprises, I'll let Dave comment on that.
Dave DeWalt
Yeah, I mean, John that was a good question. We, obviously, are seeing ePO as a pretty strategic tool for an enterprise. I'd mentioned that we have a number of customers call me and talk to me, I mean, most of them are calling about how strategic of an infrastructure, ePO really is to them, you know, hundreds of thousands of desktops being managed by this tool, creating a policy.
And remember our strategy here has been not only to manage the McAfee product lines, but really any type of security product line as well agnostic to our own tools, at this point we have more than 40 million nodes being managed, 40 million nodes being managed by ePO, is pretty impressive number.
We're building agents out across our product lines, so we can manage all of our own architecture, and use it as a delivery tool for just about everything that we do. So it's become a pretty interesting tool. And of course, this came from an acquisition, and it really shows it does work, and we're pretty pleased. And this is a good area for us to keep driving strategically, as it does drive large deals for us as well.
Kelsey Doherty
This will be our last question.
Operator
Your last question comes from Israel Hernandez with Lehman Brothers.
Israel Hernandez - Lehman Brothers
Hi, good afternoon everyone and congratulations. My questions were just asked, but I have one follow-up just on the margin question. Gross margin came in a little higher than we were expecting.
Can you comment on the trend line going forward, and is there any potential to move that higher over the course of the year or is this kind of where, the level where we should expect that today?
Eric Brown
Yeah, I think that in any given quarter, the gross profit margin is going to be principally a function of really two driving factors the amount of rev share related business we do with consumer partners, and the mix of pure software were ePO versus the hardware products.
Now, one of the things we have actively been doing, and will actively continue to do is as we reengineer the product lines, we're looking to build them more efficiently, and hence increase even the existing attractive gross profit margins on the hardware line. Beyond that though again it's difficult for us to guide the gross profit margins, given the mix question. So we can't give you any additional granularity.
Dave DeWalt
Okay. Israel, thank you. And thanks, everybody for the questions here. I am going to wrap up here, and thank everybody for joining the call. I can't tell you how excited I am to be here at this company. Great management team, great people, great opportunity, and it's the exciting times. We're really looking forward to driving our agenda, and winning this market place.
So that does conclude the call. Thank you so much. Look forward to meeting you all.
Operator
This concludes today's conference call. You may now disconnect.
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