Symantec Benefits From Hacking Concerns And Data Backup Appliance Demand

by Trefis Team
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Symantec (NASDAQ:SYMC) announced its Q1 fiscal 2014 results on July 30, where it reported revenues of $1.71 billion, up 3% (constant currency) on a yearly basis. [1] While a sluggish PC market did hurt sales of its key Norton anti-virus software, growing hacking concerns are leading to higher demand for security software worldwide, thus providing some cushion. Revenue growth was mainly driven by continued strength in its information security business which includes offerings like mail & web security and data center security. The business, which represented almost 20% of total revenues, grew by 9% year-over-year (y-o-y).

Information management (previously referred as storage and server management) business, which contributes to over 35% of the total revenue, grew by 4% on continued adoption of NetBackup and other data loss protection software. NetBackup, one of the largest products in Symantec’s portfolio, continued to grow at a double digit rate and helped the company gain market share. [2] Geography-wise, while the Americas business continued with steady growth, the European region surprised with a strong 6% growth despite economic weakness. The Asia-Pacific region saw meager 1% growth as the significant depreciation of the Japanese yen weighed on revenues.

A decline in non-GAAP gross profit margin was not unexpected as Symantec continues to focus on its subscription model. This was evident from the fact that total subscriptions now account for 45% of the total revenue compared to 44% in the year-ago period. Despite a 59 basis point decline in non-GAAP gross profit margin, non-GAAP operating margins improved slightly as lower fees to OEM and recent restructuring initiatives offset higher expenditure on R&D and marketing. Cash flow from operations, however, declined by 8% due to higher capital expenditure on operational improvements and ongoing ERP implementation.

For the Q2 fiscal 2014 quarter, Symantec provided revenue guidance in the range of $1.65 -$1.69 billion compared to $1.7 billion in Q2 fiscal 2013. Non-GAAP operating margin are expected to decline slightly to the range of 25.8% – 26.4% compared with 27% in the year earlier period, as the full impact of restructuring becomes evident in fiscal 2015. Below we take a look at key growth drivers for the company.

Check out our complete analysis of Symantec

Backup Appliance Driving Growth In The Storage Software Business

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 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. [3] Data protection and recovery software as well as storage & device management software are the two fastest growing sub-markets, where Symantec has a strong presence. As aforementioned, its NetBackup has been doing extremely well in the market. We therefore expect Symantec to outpace the overall market growth and gain some market share. We discussed our detailed view in a recent note Symantec: A Look At The Storage Software Division.

User Productivity & Protection To Pick Up Growth

Dwindling PC sales have hurt Norton sales as PCs constitute the largest market for security software. However, the comforting factor is that despite this pressure, Q1 fiscal 2014 revenues from the User Productivity & Protection segment grew at about 1% (on a constant currency, revenues declined 1% after currency fluctuations). Rising incidents of hacking and data theft have prompted consumers and several companies to opt for security software solution. A wide crackdown on piracy may have also helped to some extent. While we expect soaring tablet sales to continue to weigh on PC demand, PC sales are expected to improve in the second half of 2013 as enterprises and retail users upgrade computers once spending recovers.

The U.S. and European economies are showing early signs of an improvement in the economy and users who have been delaying purchases due to weak consumer sentiment and economic uncertainty could start spending more as the economy recovers. This should drive sales of Norton as it continues to enjoy consumer loyalty in developed markets. Further, with the bring-your-own-device (BYOD) trend, the use of anti-virus software in mobile devices is gaining pace. The management mentioned that it recently won a $1.4 million mobile deal from a very large retailer. As demand for security software from smartphone and tablet users grows, we expect Symantec to benefit from it.

We are updating our $29 Trefis price estimate for Symantec to reflect earnings.

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  1. Symantec Reports Record June Quarter Revenue and Non-GAAP EPS, Symantec, July 30 2013 []
  2. Symantec Management Discusses Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, July 30 2013 []
  3. Forecast: Storage Software Markets, Worldwide, 2009-2016, 4Q12 Update, Gartner, Feb 6 2013 []
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