Symantec Pre-Earnings: Deferred Revenue Guidance, Higher Value Product Rollouts In Focus

SYMC: Symantec Corp logo
SYMC
Symantec Corp

Symantec (NASDAQ:SYMC) is scheduled to report first quarter fiscal 2015 earnings on August 6. (Fiscal years end with March.) In recent quarters, the revenue performance of the company has been impacted by lapsed execution of its Go-to-Market strategy. Symantec realigned its product offerings and then reorganized its sales team to align with the changed business structure. However, this reorganization  impacted revenue as sales personnel performed sub-optimally in their new positions.

Content, subscription and maintenance revenues accounted for 89% of overall revenues in Q1FY14, with the remaining 11% contributed by new license sales. User Productivity & Protection was the company’s largest revenue contributor, amounting to 43%, and also had the highest operating profit margin at 35%. On the flip side, the company’s smallest revenue contributor, the Information Security division (20% of revenues), was also the weakest margin performer with an 8% operating profit margin.

For the first quarter of fiscal 2015, revenues are expected to range between $1.65-$1.69 billion compared to $1.71 billion in the year-ago period. Comparable sales for the year-ago quarter should be high because of the standalone sales incentive activity before the sales team reorganization.

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In the current earnings call, we intend to focus on the company’s divisional margin performance in detail.

See our complete analysis of Symantec

Focus on 5-Point Strategy and its Impact

Towards the end of CY2013, Symantec announced its plan to expand its product portfolio across all three divisions over the next 6-24 months. According to the company, these products in the pipeline were higher-value generators which included mobile workforce productivity suites, information security services, content-aware security gateways and information management & information fabric software. These offerings not only have the potential to expand addressable market and accelerate revenue growth but also drive margins higher over the long term. In the Q1FY15 earnings call, we expect to hear about the company’s 5-point strategy and its impact on business turnaround so far.

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 2014 results, Enterprise product offerings in mobile security grew 76% on a year-on-year basis. [1] Cash required for the rollout of these new products was to be serviced from the mature business lines of Norton and other Information Availability businesses.

Additionally, cost reductions in the mature business lines are expected to unlock savings that could be funneled into new product lines. This way, excess cash from mature product lines gets diverted into niche product areas that could contribute to the company’s long term revenue growth. And cost reductions from mature business lines would drive margins higher in the near term, with long term margin performance shouldered by these higher-value products.

Deferred Revenue Guidance Should Portray Recovery Progress

Following the sales team reorganization, Symantec’s deferred revenue reserves dropped 4% to $3.9 billion last quarter, from $4.1 billion in Q4FY13. Although part of the decline in deferred revenue is due to the completion of orders and subsequent recognition of revenue, Symantec’s management guides that a build-up in deferred revenue balance would take several quarters for the company given the weak renewal activity that has resulted from the disruption within the sales team. [2]

One reason for limited revenue growth from deferred revenue conversion going forward is related to unbilled deferred revenues in the company’s pipeline. Unbilled deferred revenues are off-balance sheet items which include deals and partnerships that have been contracted, but have not been invoiced yet. We believe the sales team restructuring caused a severe disruption in customer relationships, leading to a reduction in deal and partnership inflow. The company suggested as much on the Q3FY14 conference call.

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Notes:
  1. Symantec’s (SYMC) CEO Michael Brown on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, May 2014 []
  2. Symantec’s CEO Discusses F3Q 2014 Results – Earnings Call Transcript, Seeking Alpha, January 2014 []