Symantec’s Revenues Set to Decline in Q3 as Restructuring Continues

SYMC: Symantec Corp logo
SYMC
Symantec Corp

Security software major Symantec (NYSE: SYMC) is slated to release its third quarter results on February 5th. The company is currently in the midst of several restructuring measures in an attempt to revitalize itself. These measures are designed to improve long-term growth and profitability, but are expected to cause short term pain from declining revenues and heavy restructuring costs.

In the second quarter, revenues declined by 1% year on year to $1.6 billion, as the company exited from unprofitable OEM contracts in the Consumer Security business. On the other hand, operating margin improved by over 6 percentage points to 21.52%, thanks to product-line restructuring in the Consumer Security business and the release of a number of new products. Non-GAAP EPS was $0.48, down 6% year on year due to higher effective tax rate.

For the third quarter, Symantec is guiding revenue to be in the $1.65 billion to $1.69 billion range, which is a decrease of 1% to 3% year on year. Operating margin is expected to be 28.3% to 29.3%, resulting in an EPS of $0.47 to $0.50 for the third quarter. [1] Consensus estimates are in line with the company’s guidance, with consensus revenue estimate standing at $1.67 billion, and consensus EPS estimate placed at $0.49.

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We have a price estimate of about $25 for Symantec, which is almost level with its current market price.

See our complete analysis of Symantec here

Short Term Pressure on Revenues from Streamlining of Consumer Security Business

The ongoing streamlining of the Consumer Security business involves consolidation of the product portfolio into a single product and exiting from unprofitable OEM contracts. This streamlining will exert short term pressure on revenues and the exit from unprofitable contracts will negatively impact year on year comparisons. It is pertinent to note that the Consumer Security business comprises about 43% of Symantec’s total revenues. Therefore, any decline in revenues from this segment will have a material impact on the company’s overall performance.

To offset the above anticipated revenue decline, the company is undertaking other ancillary measures like 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 (Read: Symantec Q2FY15 Earnings: Revenues Decline on Consumer Security Product Consolidation, Margins Expand Strongly).

To add to Symantec’s revenue troubles, the company derives more than half of its revenues from outside the U.S., making it vulnerable to adverse movements in foreign exchange rates. In the third quarter of calendar 2014, the U.S. dollar strengthened against nearly every major currency in the world, ranging from the Brazilian Real to the Euro. In the second quarter, weakening of the Euro alone resulted in headwinds of $19 million on the Symantec’s revenues. [1] Given the steady deterioration of the Euro against the U.S. dollar October through December, the impact on Symantec’s performance is expected to worsen in the third quarter.

Restructuring Costs to Weigh on Margins

Last October, Symantec announced the split off of its information (storage) management business into a separate, publicly traded company. The split is expected to be completed by December 2015 and total restructuring charges arising therefrom are estimated to range from $180 million to $220 million. About half of these costs will be incurred in fiscal 2015, which implies that bottom line of the third and fourth quarters of fiscal 2015 will be dragged down by such restructuring costs. Perhaps more importantly, the company has stated that all of these incremental costs will be incurred in cash, which may put short term pressure on the company’s cash flows and impact returns to shareholders from dividends and buybacks. [1]

However, these costs may be partly offset by the benefits arising out of restructuring in the Consumer Security business. The company’s move to exit from unprofitable OEM contracts provided a significant boost to the margins in the second quarter, and the benefit is expected to continue in the near term as the restructuring continues.

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Notes:
  1. Symantec Q2 2015 Earnings Call Transcript, Seeking Alpha, November 5, 2015 [] [] []