Symantec Earnings Preview: Business Realignment In Focus

by Trefis Team
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Symantec (NASDAQ:SYMC) is expected to report its Q3 FY14 results on January 29, 2014. Revenues for the company witnessed a sharp contraction sequentially following restructuring and realignment activities as part of Symantec’s new Go-to-market strategy. In relation to these activities, Symantec reduced its headcount and further bifurcated its sales team into a business renewals’ team and a new license team. This resulted in a 31% drop in new license revenues, leading to a 4% decline in overall revenue in Q2FY14.

For Q3FY14, we expect revenues of approximately $1.68 billion, which stands marginally ahead of the higher end of Symantec’s Q3 guidance of $1.63 billion – $1.67 billion. Comparatively, Q3FY13 revenues were $1.79 billion, indicating the impact weak global IT spending and declining PC shipments had on the company. We have a GAAP operating profit margin estimate of 17%, in-line with the company’s guidance for the quarter.

Despite the prospects of weak performance for the company in the next few quarters, we believe the current stage indicates a transitional phase for Symantec and expect the company to bounce back to positive top line growth by CY2014. Furthermore, new areas of focus such as data center security licensing and mobile security solutions could offset revenue weakness in its Antivirus segment, as well as provide an expansion on the margin front. We will be updating our $34 Trefis Price Estimate for Symantec after the company files its Q3 results with the SEC.

See our complete analysis of Symantec

New, High Margin Products Key To Symantec’s Future Revenue

Growth in cloud computing, mobile and tablet devices, and big data have contributed to a tectonic shift in the security software industry in a very short time span. Sales of on-premise software solutions such as consumer security software suites are declining due to decreasing PC shipments globally. On the other hand, demand for Enterprise unified security solutions offered as a service is on the rise because of the option of collapsing the customer’s hardware requirements onto the service provider’s data center. These unified solutions provide complete integration of security solutions for all endpoints into a single module.

Technology research firm Gartner expects the market for these niche, ‘cloud-based security’ software modules to expand from $2.1 billion presently to $3.1 billion by 2015. [1] An increase in encryption needs from businesses is expected to strongly support this market expansion, arising from the recent NSA snooping activities and security breaches on data centers globally. In resonance with market demand, Symantec plans to expand its product portfolio across all three divisions over the next 6-24 months with various higher-value offerings such as mobile workforce productivity suites, information security services, content-aware security gateways and information management and information fabric software. [2]

We believe these new product offerings would expand Symantec’s addressable market and lend support to the declining top line growth for the company. Additionally, this increase in encryption needs from businesses bodes well with its Secure Sockets Layer (SSL) Certificate business that it acquired from VeriSign. SSL is a security protocol that is considered an International standard for exchanging privileged and sensitive information between a website and a communicating client by providing encryption services between the host server and the browser. We expect the number of SSL certificates installed to reach 2.5 million by 2020, from 1.66 million presently.

New Go-to-Market Strategy To Expand Margins And Plug Revenue Decline

Symantec has seen an erosion it its business in recent times, with declining revenues and falling margins. A majority of this erosion is attributable to its earlier “everyone-sells-everything” strategy, which resulted in sales channel conflicts among its representatives. Symantec simplified its Go-to-Market strategy to plug the decline in margins and top line by having a combination of direct sales and channel-led sales with dedicated Symantec team support for Commercial, Enterprise and Global Businesses. While this change in strategy should induce an increase in both sales and marketing charges and restructuring charges in the short term, we believe the results over time will outweigh these short term expenses. Symantec expects to register greater than 5% organic top line growth (constant currency terms) along with 30% in non-GAAP operating margin in FY15-FY17. [2] This is well up from the present levels of  3% and 26%, respectively.

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Notes:
  1. Gartner Says Cloud-Based Security Services Market to Reach $2.1 Billion in 2013, Gartner, October 2013 []
  2. Symantec Corporate Presentation, Investor Relations, October 2013 [] []
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