Symantec Earnings: Weak PC Sales Will Hurt Norton As Backup Appliances Lend Support

by Trefis Team
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Symantec (NASDAQ:SYMC) will announce its Q1 fiscal 2014 results on July 30, and we expect it to register flat growth. A sluggish PC and notebook market will continue to weigh on revenue growth as security software sales follow the business cycle of PC sales. However, the continued growth in its storage software business, particularly backup appliances business, is expected to offset most of the pressure. Its largest product NetBackup continues to see strong demand among customers. Other information security offerings have also seen strong traction in the market. Strong growth in the mobile security business will also help lift some pressure. We expect gross margins to decline due to higher sales of low margin backup appliances and a shift towards subscription businesses. Symantec is shifting its focus from license sales to Software as a Service (SaaS) model.

Last quarter the company reported 5% growth in revenues as GAAP revenue rose to $1.75 billion. For the June quarter, revenues are expected to be in the range of $1.61-1.65 billion compared to $1.67 billion in the same period a year ago. Below we take a look at the key trends impacting Symantec’s performance.

Check out our complete analysis of Symantec


Storage Software Remains The Key Growth Driver

Cloud computing, the digitization of records and higher Internet penetration are leading to phenomenal growth in the amount of data generated and stored on data centers. This coupled with the increased focus on data backup, data resiliency, and improving operational efficiencies are driving demand for storage software and managed services. The storage software market is seeing consistent growth, and Gartner expects the worldwide storage software market to grow by 8% over the next two years. [1] Data protection and recovery software as well as storage & device management software are the two fastest growing sub-markets as companies look for new features that enable modern data protection and efficient storage and device management. Symantec is one of the largest providers of storage software and owns approximately 15% in the storage software market behind top players EMC and IBM. With EMC’s earnings pointing towards decent growth despite tough macroeconomic conditions (Read EMC Registers Steady Growth In Q2 Though Momentum Should Pick Up), we expect Symantec to continue to grow its revenues  from this business during the quarter.

Norton Facing Tough Time, Mobile Security To Offset Pressure

With Norton constituting about 30% of Symantec’s total revenues, it is a major contributor to the slowdown in sales growth. The business is going through a rough patch due to dwindling PC sales. According to the latest report by IDC, PC and notebook sales dropped over 10% in the June quarter, making it the longest period ever of a sustained decline. Weak earnings of Intel and Microsoft have also confirmed weakness in the PC market. Since Norton is primarily used in PCs and notebooks, PC sales impact Norton sales as well. Renewal of old licenses and the ongoing crackdown on piracy could help to some extent however.

Apart from weak consumer spending, the other major reason for the decline in PC and notebook sales is cannibalization from tablets and smartphones. However, the bring-your-own-device (BYOD) trend 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. The adoption of anti-virus software in mobile devices is yet to gain pace. As demand for security software from smartphone and tablet users grow, we expect Symantec to benefit from it.

We currently have a $29 Trefis Price Estimate for Symantec, which is about 20% above the current market price.

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Notes:
  1. Forecast: Storage Software Markets, Worldwide, 2009-2016, 4Q12 Update, Gartner, Feb 6 2013 []
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