Symantec Starts FY15 On A Strong Note With A 50% Jump In Earnings As Restructuring Benefits Kick In

SYMC: Symantec Corp logo
SYMC
Symantec Corp

Security software developer Symantec (NASDAQ:SYMC) reported first quarter fiscal 2015 results on Wednesday, August 6th. (Fiscal years end with March.)  Quarterly revenues increased by about 2% on a year-on-year basis to $1,735 million. The content, subscription and maintenance business had revenues of $1,574 million, 4% higher from the year-prior period. However, revenues from its licensing business fell 15% to about $161 million.

More significantly, operating profits jumped 44% on a year-on-year basis to $322 million, benefitting from lower amortization of intangibles and business restructuring expenses. In terms of divisional performances, a strong margin surge from the Information Security business line was offset by a steep decline in margins from the Information Management business. This curbed overall segmental operating profits at $427 million compared to $430 million from Q1FY14. Quarterly earnings rose 50% to $236 million on the back of reduced restructuring and amortization expenses.

Symantec had a good first quarter of fiscal 2015, barring the weak performance from its license business. Although more work needs to be done, the company’s five point strategy looks to be working as revenue declines have been arrested across business divisions. For the second quarter, the company provided a revenue guidance range of $1,600 million – $1,640 million. Overall operating profit margins are also guided to increase by 3.6-4.4 percentage points to reach 18.7%-19.5%.

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See our complete analysis of Symantec

Restructuring and Simplification of Norton Offerings Boosts Operating Margins

In the Q4FY14 earnings call, Symantec reported its plan to separate the Norton brand from other consumer products with the objective of enhancing the brand’s franchise value and improving margin and cash generation. [1] The company plans to optimize the e-commerce direct-to-customer channel in order to expand operating profit margins in the high profitable antivirus software market. [1] Because of theconsumer nature of the Norton product line, the e-commerce channel presents a lower cost alternative to the retail channel and should lead to reduced sales and marketing expenses and increased operating profit margins.

The company has also actively pursued various cost management strategies such as exiting high-cost geographies and OEM deals.  And it intends to further reduce the number of product offerings to simplify user experience. Simplified beta releases of Norton Security and Norton Security with Backup offerings were rolled out last quarter and a new offering for small business launched in June as well. These moves should aide further margin growth with scale. [2] Following the strong growth in operating margins this quarter (Q1FY15), Symantec announced it would report the consumer business as a separate segment, allowing greater visibility into the company’s turnaround going forward.

Chinese Governmental Ban on Symantec Software Could Marginally Affect Overall Revenues

The recent news about the Chinese Government banning the use of security software from International software developers such as Symantec and Kaspersky, although not officially confirmed, could have a marginal impact on Symantec’s revenues. [3] Geographically, the U.S. is Symantec’s largest market with a revenue contribution of about $832 million this quarter. International markets including the Asia-Pacific, EMEA and Latin America regions contributed revenues of about $903 million. Within these International geographies, the Asia-Pacific region accounted for about $300 million in revenues this quarter. This represents a revenue share of about 17% of overall revenues for the entire Asia-Pacific region.

Symantec’s loss in revenues from China, should the ban from the Chinese Government actually materialize, is marginal at best. The domestic market for security software in the U.S. is beginning to accelerate, and its new technologies such as Advanced Threat Protection (ATP) and Data Loss Prevention (DLP) should witness stronger adoption rates going forward. The more comprehensive nature of threat detection from ATP by utilising Symantec’s Endpoint Protection suites along with third-party network security products could resonate with the market demand for holistic security products. [4]

Additionally, the extension of DLP functionality into the Endpoint, email and data center security should provide customers with complete visibility and enhanced governance over their information across network barriers. [4] We believe both the ATP and DLP technologies cater to the present market demand for unified security solutions with threat detection protocols over threat elimination. And as these technologies build scale, they should offset any decline in demand from the Chinese Governmental ban.

Trefis is in the process of updating its price estimate of $24 for Symantec to reflect the recent Q1FY15 earnings.

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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 (SYMC) CEO Michael Brown on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha, August 2014 []
  3. Symantec and Kaspersky blocked from providing software to the Chinese government, The Guardian, August 2014 []
  4. ref:1 [] []