Expense Management Compensates Weak Revenue Showing From Symantec In FY14

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Security software developer Symantec (NASDAQ:SYMC) reported fourth quarter and full year fiscal 2014 results on May 08, 2014. Symantec’s Q4FY14 revenues were down 7%. Subscription sales were 6% lower from a comparable Q4 period in fiscal 2013, while license sales were 14% lower in constant currency terms compared to Q4FY13. For full FY14, the company’s revenues declined 3.3% compared to FY13, primarily impacted by sizable 19% reduction in license sales.

FY14 revenues stood at $6,676 million, with subscriptions and licenses accounting for 89% and 11% of overall revenues respectively. Although subscription sales for the full fiscal were down just 1% comparably, the year-on-year fall in revenues from this segment was steep in Q4FY14. The 6% decline in subscription sales this quarter was a result of a headcount reduction in relation to the reorganization of its sales team into new license and renewals units.

Despite the weak performance on the top line, the company managed to contain costs significantly. Overall gross margins were marginally down this fiscal year, at 82.8% compared to 83% last fiscal, due to a two percentage point contraction in gross margin on new license sales. Reduced operating expenses contributed to a 1.7% expansion in operating profit margins. As a percent of revenues, sales and marketing expenses were down 4.5%, partly benefited by the new Go-to-Market structure in place for the sales team. This boost in operating income translated into a 2.5% increase in net income margins. The company’s $500 million share repurchase program further enhanced per share performance for the company, boosting diluted EPS by 20% on a year-on-year basis to $1.28.

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Strategic Execution Key For Symantec’s Success

Symantec placed out a 5-point strategy to arrest declining sales and turnaround its business performance. Firstly, the company plans to utilize cash generated from its more mature business lines such as Norton and other Information Availability businesses. Norton alone generates approximately $2 billion in revenues for Symantec and is the company’s largest and most mature business line. [1] However, the decline in PC sales has led to a reduction in sales from the Norton business line. Symantec plans to streamline this mature business line to cut down redundant costs as prospects of top line growth continue to fall for Norton. This optimized cost structure through a revamped Go-to-Market approach should result in margin expansion in a declining sales environment.

Cost savings from these optimized business lines are expected to drive innovation for newer business lines and fuel top line growth going forward. The company believes areas such as Enterprise backup and Storage Management & Security should drive future sales growth for the company. In the recently reported fiscal quarter, Enterprise product offerings in mobile security grew 76% on a year-on-year basis. [1] Sales of the company’s NetBackup Appliance, which is a purpose-built backup appliance (PBBA), grew 27% compared to fiscal 2013. [1] In comparison, the overall PBBA market grew 9.7% on a year-on-year basis in Q4FY13 to reach $962.4 million. [2]

Going forward, we expect Symantec’s business to stabilize as a result of the new management in place, with a slowdown in revenue declines and margin expansion. The exit of ex-CEO Steve Bennett was a factor that could have delayed the company’s turnaround process. However, the new management under interim CEO Michael Brown has done a decent job in reducing the impact of the Go-to-Market structure.

Symantec’s new sales structure, which includes a centrally-managed renewals team and a specialized direct sales team, should be the primary source of margin expansion for the company. Symantec saved approximately $300 million by eliminating duplicate sales channels and efforts last fiscal, and expects to achieve its operating profit margin target of 30% in fiscal 2015. [1] Although there is a significant change in its turnaround strategy in terms of product offerings from the change in senior management, Symantec’s interim CEO Michael Brown looks committed to utilizing the company’s mature product line to drive innovation and sales growth.

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Notes:
  1. Symantec’s (SYMC) CEO Michael Brown on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, May 2014 [] [] [] []
  2. Worldwide Purpose-Built Backup Appliance (PBBA) Market Posts 9.7% Year-Over-Year Revenue Growth in Fourth Quarter of 2013, According to IDC, IDC Press Release, March 2014 []
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