CEO Termination Could Hinder Symantec’s Turnaround

SYMC: Symantec Corp logo
SYMC
Symantec Corp

After the announcement of the termination of CEO, Steve Bennett, Symantec‘s (NASDAQ:SYMC) shares sank 14% Friday, March 21, to reach their 52-week low of $17.95 before improving marginally to end the day at $18.20. Although the company reaffirmed its outlook for the fourth quarter, there could be significant deterioration in the company’s financials in the short term should there be a change in strategy from the new CEO.

This was the second such termination of its CEO from Symantec’s board in less than two years. [1] Following the termination of the contract of Steve Bennett, the board appointed Michael Brown as the interim president and CEO of Symantec effective immediately. Mr. Brown joined Symantec’s board after the company’s merger with VERITAS software in July 2005. [2]

See our complete analysis of Symantec

Change In Strategy Should Erode Financial Performance

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Symantec has seen an erosion in its financials in recent quarters, with declining revenues and falling margins. Much of this erosion is attributable to its earlier “everyone-sells-everything” strategy, which resulted in sales channel conflicts among its representatives. To contain these channel conflicts, 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. [3] The company reduced its existing sales force and bifurcated the remaining team into two groups, a business renewals team and a new license team to contain sales channel disruption.

This headcount reduction and sales team bifurcation resulted in a 21% drop in license revenues for the nine months in fiscal 2014. Since license sales account for roughly 10% of revenue, the hit to revenue was less severe.  The decline in license revenues on a year-on-year basis were 2%, 31% and 27% approximately for each of the three quarters in fiscal 2014. Despite this steep drop in license  revenues in Q2FY14 and Q3FY14, we believe the bifurcation should unlock higher value for Symantec going forward. The company states that the decline in new license sales is a result of the deployment of the new sales team. Going forward, this decline in revenue should abate as the new sales team builds critical relationships that fuel revenue growth. Additionally, the separation of its sales teams into new license and renewals should reduce the conflicts in its sales channels and contribute to a lower marketing spend. On a longer term, we expect revenues and margins to expand strongly due to successful implementation of the new Symantec 4.0 strategy.

Still, the sudden termination of Mr. Bennett suggests continued a continuing disruption in the company’s turnaround. Symantec’s success depends on the company adapting to changes in industry trends and through the Symantec 4.0 strategy.  Increased product innovation and improved execution are key to reversing revenue trends. Given recent turnover, greater stability in management should allow and increase focus on the business, as well.  We believe Symantec has made considerable progress in terms of aligning its sales force to reduce cannibalization in sales. We are of the view that the upcoming Q4FY14 results should present key insights on Symantec’s business.

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Notes:
  1. Symantec fires CEO, reaffirms fourth-quarter outlook, CNBC, March 2014 []
  2. Symantec Announces CEO Transition, Investor Relations, March 2014 []
  3. Symantec’s Strategic Direction Presentation, Symantec Presentations, January 2013 []