Symantec (NASDAQ:SYMC) announced its Q2 results on October 24. It reported slight growth in revenues as GAAP revenue was $1.7 billion, up 1% y-o-y or 5% after adjusting for currency. The company showed an improvement in margins as operating margin was 18% compared with 17% for the same quarter last year. Net income was up 6% y-o-y to $193 million and EPS was up 13% at $0.27 compared with $0.24 last year. This was mainly due to the share repurchase program led by the company. It bought back 12 million shares for $200 million at an average price of $16.48 and has $483 million remaining in the current board authorized stock repurchase plan. The company went through restructuring and transitions last quarter which led to lower cash flows of $178 million compared with $308 million last year.
With the adoption of Windows 8 operating system, we expect increased security spending for 2013 which will help drive revenues. Norton Insight, which uses the Big Data approach to make a smarter anti-virus, is also expected to boost revenues. Norton 2013, which has been optimized to work with the touch interface of Windows 8, is also a potential revenue driver. Storage software, the biggest division of Symantec, is likely to benefit from the company’s strategic investment in cloud backup provider Backupify.
Business Segment Performance
The consumer segment, which accounted for 31% of total revenue, decreased 1% y-o-y mainly on deferred expenditure as customers awaited the release of Windows 8 OS. The security and compliance segment accounted for nearly 30% of total revenue and increased 6% y-o-y. The storage and server management segment, which is the largest division in terms of revenues, represented 35% of total revenue and decreased 2% y-o-y while services, which is the smallest division and accounts for 4% of total revenue, increased by 2% y-o-y. We expect the consumer segment to pick up as PC shipments improve this year.
Outlook For Q3
Symantec assumes an exchange rate of $1.30 per euro for the December 2012 quarter and expects GAAP revenue in the range of $1.72 to $1.75 billion in its guidance. It also expects diluted EPS of $0.17 to $0.19, which is much lower than that of previous quarters, due to expected investments in the coming quarters.
Changing Business Model To Affect Revenues
Symantec has been facing declining license sales but increased subscriptions as customers prefer to pay for security software as a subscription. License sales declined 12% y-o-y to $201 million this quarter. Symantec is changing its focus to security Software as a Service (SaaS) model with some limited success as content, subscription and maintenance services grew 3% y-o-y to $1.49 billion. For the users, it is cheaper to pay for security on an ongoing basis while Symantec benefits from reduced costs, resource pooling and lower revenue losses from piracy. Security software sales follow the business cycle of PC sales, which is facing competition from tablets.
Mobile Security To Drive Business
The bring-your-own-device (BYOD) revolution is driving demand for security on mobile devices. Symantec has a range of software including mobile anti-virus that helps prevent theft of data from lost or stolen mobile phones. This is an added feature over the standard security measures to prevent viruses and malware and is also a big growth opportunity as smartphones are expected to grow at 55% or so and reach a yearly shipment size of one billion phones by 2015.  The biggest issue with the BYOD revolution is its inability to support multiple devices with multiple operating systems and architectures while providing all necessary facilities.
Symantec’s technology is built from scratch to solve some of these issues and plugs directly into management platforms that allow mobile devices to be added without server-side complications. The technology is based on know-how obtained from the acquisition of Nukona earlier this year and will be be driven by mobile virtualization. This offering puts Symantec in direct competition with VMware (NYSE:VMW), a pioneer in virtualization and who has its own BYOD offerings. This presents a large growth opportunity for Symantec and is likely to contribute meaningfully to its revenues in the next few quarters.
We currently have a $27.61 Trefis Price Estimate for Symantec, which is about 50% above the current market price.Notes: