Symantec Q2FY15 Earnings: Revenues Decline on Consumer Security Product Consolidation, Margins Expand Strongly

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SYMC
Symantec Corp

Symantec (NASDAQ:SYMC) reported strong margin expansion in its recent second quarter earnings despite some weakness on the top line. Quarterly sales in Q2FY15 declined 1% to $1.617 billion, depressed largely by the product line restructuring announced in the Consumer Security software business. Sales from the Consumer Security software segment declined 6% to $485 million while Enterprise Security software sales declined marginally to $511 million in Q2FY15. Sales from Symantec’s third operating division, the Information Management software business, registered a modest 3% expansion to $621 million in Q2FY15.

However, margins posted a strong surge on the back of the product line refresh and consolidation. Operating profit margins for the Consumer Security segment expanded nearly ten percentage points to 53% in Q2FY15, after Symantec announced to consolidated about 9 different Norton offerings into a single suite and exited unprofitable OEM deals. [1] Enterprise Security also registered an uptick on margins, increasing from 15% in Q2FY14 to 17% in Q2FY15, supported by a lower expense base. Margins from the Information Management software line declined percentage points during the quarter to 20% due to an increase in sales of its low margin appliance products.

Total consolidated operating income on a GAAP basis increased by approximately $100 million, to $348 million in Q2FY15. Non-GAAP operating profits, which includes excludes certain non-cash and one-time charges, recorded a more subtle expansion from $450 million in Q2FY14 to $464 million in Q2FY15. Non-GAAP earnings however were slightly under pressure due to an increase in income tax provisions, with per share earnings falling from $0.51 in Q2FY14 to $0.48 in Q2FY15.

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For the upcoming third quarter, Symantec expects sales to range between $1.650 – $1.690 billion. Margins however are likely to contract in Q3FY15 following the exit of certain OEM deals in the Consumer Security business. [1] Also, the proposed spin-off of the Information Management business into a separate entity is likely to weigh on overall margins. The company expects restructuring charges of $100 – $120 million in relation to the spin-off, with half of these costs coming in FY15. [1] The company also expects a separation cost ranging between $80 – $100 million over the next 5 quarter that should impact margins and earnings. [1] Non-GAAP operating profit margins are likely to range between 28.3% – 29.3% while non-GAAP EPS is expected to range between $0.47 – $0.50 for Q3FY15.

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Consolidation in Security Software Offerings to Weigh on Short Term Sales

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. [2] Margins have certainly registered a strong surge in the last quarter, supported by streamlining 9 core products from Norton into a single security offering and also exiting unprofitable deals with Original Equipment Manufacturers (OEMs). [1] Additionally, Symantec also exited certain retail channel arrangements to focus more on a new e-commerce direct-to-customer channel.

The shutdown of unprofitable OEM deals and the exit from certain retail channels is expected to weigh on revenues ancod billings from the Norton business over the next 4 quarters. [1] However, the company expects to mitigate this decline in revenue by improving online customer acquisitions, enhancing customer experience, transitioning Norton to a subscription service and providing a virus removal guarantee to customers opting for an auto-renewal.((ref:1)) Over a longer timeframe, a subscription model generates more revenues than a perpetual license, and the lower price point of the subscription model could expand renewal rates for its security software suites.

Spin-off Could Boost Performance for Information Management Business

The Information Management division posted the highest revenue growth rate during the quarter, buoyed by strong demand for its NetBackup appliance product. Sales growth for NetBackup appliances accelerated from 35% in Q1FY15 to 45% in Q2FY15, leading to a 22% expansion in sales from the overall Purpose Built Backup Appliance (PBBA) product category to $108.5 million. [1] The PBBA category accounts for nearly 18% of Information Management revenues, and given the double-digit growth rate in the segment, is an important business category for the division. Symantec currently holds a 14% share in the PBBA market, well below market leader EMC’s 64% share as of Q2FY15. [3]

However, the company holds a much larger share, at nearly 36%, in the enterprise-grade backup appliance market. [4] The company recently announced the NetBackup 5330 appliance in October which delivers twice the capacity, at 229TB, and four times the recovery performance of prior models, which could contribute to a faster market share expansion going forward. [1] Also, the company intends to retire its struggling Backup Exec line of products intended for consumer-level data storage, archiving, and recovery to renew its focus on the larger and more profitable enterprise PBBA market.

The spin-off of the segment, slated for December 2015, should result in quicker product realignments and headcount reductions. Symantec has already announced headcount reductions of nearly 10% as part of the restructuring process, and intends to reinvest these savings into R&D programs focused on mobile, Data Loss Prevention, Advanced Threat Protection, Backup and Backup appliance products. [1] These reinvestments, coupled with the nimbler structure of the spun-off company, could accelerate revenue growth rate and expand margins.

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Notes:
  1. Symantec’s (SYMC) CEO Michael Brown on Q2 2015 Results – Earnings Call Transcript, Seeking Alpha, November 2014 [] [] [] [] [] [] [] [] []
  2. Symantec’s (SYMC) CEO Michael Brown on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, May 2014 []
  3. Worldwide Purpose-Built Backup Appliance (PBBA) Market Revenue Increases 8.5% in the Second Quarter of 2014, IDC Press Release, September 2014 []
  4. Investor Presentation, Symantec Investor Relations []