Symantec Has $29 Fair Value After New Announcements And Solid Earnings

Symantec (NASDAQ:SYMC) announced its Q3 results on January 23 and reported revenues of $1.79 billion, up 4% y-o-y (5% after adjusting for currency) despite a sluggish PC market. Revenue growth was mainly driven by strength in its storage and server management business segment, which represented 37% of total revenue and grew 8% y-o-y. The services business expanded 10% y-o-y, but its impact on revenues was negligible as it accounts for only 4 percent of total revenue. While net income fell 12% on a y-o-y basis to $212 million, the company still managed to generate a healthy 15% y-o-y increase in operating cash flows to $463 million.

The anti-virus business showed the effects of a sluggish PC market as it increased by 1% to $530 million while the security and compliance business grew 3% to $527 million driven by increasing market share in authentication services and SSL certificates.

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Symantec showed broad based strength across businesses and geographies. The Americas business grew 3%, the EMEA business showed a strong 6% growth despite European weakness and the Asia-Pacific region grew by 7% this quarter.

Future Outlook

Coinciding with its earnings release, the company also unveiled some major announcements including splitting out its CEO and Chairman role. The company also provided a strategic direction for 2013-2014 with a focus on organic growth, disciplined capital allocation and growing margins as well as cash flows and will focus on trends such as growth in cloud computing, social media and the general change in the computing ecosystem. Finally the company committed to returning half of all free cash flow to investors through buybacks or dividends.

Focus On BYOD Market

Symantec plans to invest further in research and development to introduce high value products such as Norton Cloud, Mobile Workforce Productivity. The Mobile Workforce Productivity tool is aimed at the bring-your-own-device (BYOD) market as it is driving demand for security on mobile devices.

The company 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. ^[1] 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 the know-how obtained through the acquisition of Nukona in 2012 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.

The company will offer high value products in user productivity and protection, information security and information management to meet their goals of 5+% cumulative average growth rate in organic revenue with operating margins of 30% from FY 2015. It also initiated a new $1 billion share repurchase program.

We currently have a $29 Trefis Price Estimate for Symantec, which is about 30% above the current market price.

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1. IDC Smartphone Growth Estimate, IDC [↩]