Symantec Q2FY15 Preview: Spin-off Of Storage Management Software Division In Focus

SYMC: Symantec Corp logo
SYMC
Symantec Corp

Security software vendor Symantec (NASDAQ:SYMC) is scheduled to report Q2FY15 results on November 05. The company reported a 2% year on year increase in quarterly revenues last quarter 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, benefiting from lower amortization of intangibles and business restructuring expenses. This also resulted in a 50% increase in quarterly net income to $236 million on the back of reduced restructuring and amortization expenses.

Below, we highlight key trends that we expect from the upcoming quarterly results for Symantec. We have recently revised our Trefis price estimate to $25 for Symantec, marginally ahead of its current market price.

See our complete analysis of Symantec

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Storage Software Spin-off and Business Realignment Could Expand Revenues, Margins

For the upcoming quarter, we expect a strong performance from Symantec, buoyed by its restructuring initiatives and the spin-off of its storage management software business. Recently, the company announced to separate its storage software business from its security offerings to further accelerate top line growth and expand margins. [1] The world’s largest security software vendor entered the storage management software market in 2004 with the acquisition of Veritas Software for approximately $13.5 billion, the largest software industry merger up to that date, in an all-stock deal.

Symantec reasoned that the combined entity would be uniquely positioned to deliver information security and availability solutions across all platforms, from the desktop to the data center, from consumers and small businesses to large organizations and service providers. [2] However, Symantec has failed to gain leverage on any synergies between its core business and Veritas after the acquisition. Over the last five fiscal years, sales from storage software registered a paltry 1.5% annualized growth rate, increasing from $2.30 billion in FY08 to $2.48 billion by FY13. During the same time frame, Symantec’s remaining business units registered an annualized growth rate of nearly 4.4%, from $3.57 billion in FY08 to $4.43 billion in FY13.

We believe spinning off the storage management business could re-accelerate sales growth for its core security software business, and expect to hear more on this development during the earnings conference call on November 5th. The company is already reinvesting cash profits from mature product lines such as Norton into niche product areas such as mobile security, enterprise and data center security, business continuity and information fabric solutions. By separating these two entities, Symantec could emphasize on its core business segments of consumer and enterprise security solutions, wherein it has a market leading position, and enhance value contribution from these segments.

Notes:
  1. Symantec Announces New Strategy to Fuel Growth and Plans to Separate into Two Public Industry-Leading Technology Companies, Symantec Press Release, October 2014 []
  2. Software Industry Leaders Symantec and VERITAS Software To Merge, Symantec Press Release, December 2004 []