Restructuring Initiatives Dent Symantec’s Revenues But Margins Improve

SYMC: Symantec Corp logo
SYMC
Symantec Corp

Symantec (NASDAQ:SYMC) posted mixed Q2 FY14 results on October 23. In our pre-earnings note, we expected the strength in the company’s enterprise security business, as discerned during Q1 FY14, to offset any weakness in the consumer security segment. However, revenues from all its operational divisions (User Productivity, Information Security and Information Management) witnessed negative y-o-y growth rates.

Q2 FY14 Overview

The second quarter featured revenues at approximately $1.64 billion, slightly below the lower end of $1.65 – $1.69 billion guidance provided. This is in stark contrast to what the company reported a quarter ago, beating its own guidance by quite a margin. The company reduced its sales force and further bifurcated it into a new license team and a renewal team. [1] This reduction and bifurcation of its sales force resulted in a 31% decline in license revenues and a 4% decline in Symantec’s overall revenues.

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Operating margin however recovered to 15.1% from 13.1% in the previous quarter and was better than the estimate of 13.6% – 14.2%. Net income was also stronger from a year ago, supported by lower tax expenses. In view of the changes made to its organizational structure, Symantec reduced its fiscal revenue forecast from a growth of 0 – 2% to a decline of 3 – 4%. Non-GAAP operating profit margin forecast was decreased to a 30-60 bps expansion over the 200 bps expansion provided at the end of Q1 FY14.

See our complete analysis of Symantec

Revenues See Sharp Contraction On Headcount Reorganization

Sale of products in User Productivity & Protection segment such as Norton Antivirus and Norton Internet Security, which represents 44% of overall revenues, continued to decline further. Revenues for the segment stood at $719 million in Q2 FY14, compared to $743 million from the same period a year ago and $732 million in Q1 FY14. The Information Security and Information Management businesses, which saw strong growth patterns in the first quarter waned in the second quarter, with negative y-o-y growth rates.

Revenues from the Information Security segment, which stood at $324 million in Q2 FY13 and $336 million in Q1 FY14, declined to $316 million this quarter. The much larger Information Management business, representing 37% of Symantec’s revenues, reported revenues of $602 million compared to $641 million in Q1 FY14 and $632 million in Q2 FY13. Deferred revenues, which represent the payments received upfront for product deliveries, declined in the quarter. Sequentially, deferred revenues declined from $3.81 billion to $3.5 billion due to a 17% reduction in order bookings. [1]

We believe that the reduction in revenues as well as deferred revenues for the company is a result of the reduction in headcount as part of its restructuring program. Symantec’s management expects positive y-o-y revenue growth to begin in Q1 or Q2 FY15, which translates to a decline in revenues for the entire fiscal 2014. For the December quarter, Symantec expects a 7 – 9% y-o-y reduction in revenues of which 75% is estimated to come from its balance sheet in deferred revenues. [1] In calendar year terms, we expect revenues in CY2013 to remain between $6.45-$6.6 billion compared to $6.8 billion in CY2012, implying a 4-6% decline.

Margins Continue To Expand Strongly From Tough Restructuring Measures

Operating expenses during the quarter were flat compared to Q2 FY13, with an increase in severance expenses from restructuring initiatives offset by a decrease in sales and marketing expenses. This is an indication of strong corporate governance measures taken by the management in not eroding the bottom line due to the restructuring process. Operating margins increased to 15% from 13% in Q1 FY14, positively impacted by the restructuring measures, but were lower than the 17.5% seen in Q2 FY13. For its three operating segments, margins continued to improve in the quarter, standing at 36%, 16% and 24% compared to 35%, 8% and 23% in the first quarter, respectively. We believe margins could see further expansion originating from the restructuring program in subsequent quarters.

We are in the process of updating our $29 Trefis Price Estimate for Symantec to reflect the latest Q2 FY14 earnings.

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Notes:
  1. Symantec Management Discusses Q2 2014 Results – Earnings Call Transcript, Seeking Alpha, October 2013 [] [] []