Symantec’s Revenues Disappoint in Q3 as Corporate Breakup Looms

SYMC: Symantec Corp logo
SYMC
Symantec Corp

Software security leader Symantec (NYSE: SYMC) reported mixed results for third quarter of fiscal 2015 on February 5th. (Fiscal years end with March.)   Symantec is going through a major transition and the ongoing implementation of new strategies exerted a drag on its top line. The company’s exit from unprofitable OEM contracts in the Consumer Security business resulted in lower revenues compared to the previous year, leading to a year on year decline of 4% in overall revenues. On the other hand, the exit from unprofitable contracts boosted Symantec’s non-GAAP operating margin by 50 basis points. However, GAAP operating margin declined by a substantial 380 basis points, as expenses related to splitting the Information Management business poured in during the third quarter. Matters were made worse for the top line as well as the bottom line by the deterioration of most major currencies against the US dollar.

Revenues in the third quarter stood at $1.64 billion, a bit lower than consensus estimates of $1.67 billion as well as Symantec’s guidance of $1.65 billion to $1.69 billion. However, non-GAAP operating margin of 30.4% exceeded the guidance of 28.3% to 29.3%. Non-GAAP EPS of $0.53 was marginally higher than $0.52 in third quarter previous year and beat the company’s guidance as well as consensus estimates.

Symantec’s near-term outlook remains bleak as the company downgraded its guidance for the full fiscal 2015 due to strong currency headwinds. Symantec guides full year revenue to range from $6.515 billion to $6.575 billion, which is a deceleration of 1.5% to 2.4% year on year. Non-GAAP operating margin is guided to be 27.5% to 27.7% compared to 29.9% in fiscal 2014. Non-GAAP EPS is expected to range from $1.87 to $1.90, down from $1.95 in fiscal 2014. [1]

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We are currently in the process of updating our price estimate of $25 for Symantec to reflect the third quarter earnings.

See our complete analysis of Symantec here

Information Management Business Outperforms as Breakup Looms

The Information Management segment, which comprises around 40% of Symantec’s total revenues, was the company’s only segment that achieved year on year revenue growth in the third quarter. Revenues of this segment expanded by 1% year on year during the quarter, while Consumer Security revenues decreased by 11% and those of Enterprise Security by 4%.

Yet on constant currency basis, the Information Management business grew by 5% year on year. This growth is attributed to double digit revenue growth in NetBackup software, NetBackup Appliances and Enterprise Vault cloud, underpinned by the launch of new high-performance products in this segment. [1]

The Information Management segment is set to be split off into a separate, publicly traded company named Veritas Technology Corporation, by October 2015. Symantec plans to re-launch the Veritas brand over the coming months, while simultaneously investing in NetBackup Appliances to sustain the growth momentum.

Hopes of Security Business Pinned on New Products

Symantec’s Consumer Security business, which accounts for about 30% of the company’s total revenues, is currently going through a strategic upheaval. Having combined all products under the Norton brand into a single offering, Symantec is now exiting from unprofitable OEM contracts. This leads to lower revenues but higher margins, which is what happened in the third quarter.

Revenues from the Consumer Security business decelerated by 11% year on year to $461 million, including a currency impact of 4 percentage points. However, non-GAAP operating margins expanded by 10.6 percentage points year on year to 53% due to the aforementioned strategy.

On the other hand, revenues from the Enterprise Security segment declined by 4% year on year to $509 million, but remained flat on a constant currency basis. This is because the growth in the newer products, Endpoint Protection and Data Loss Prevention (DLP), was offset by weak demand in Endpoint Management and Mail & Web Security. Further, GAAP margins also declined by 3 percentage points year on year to 17% due to higher support spending.

Symantec has admitted that some of its older products, like Mail & Web Security, have not gained traction and future growth will be led by Endpoint Protection, DLP and the soon to be launched Advanced Threat Protection (ATP). The company is also slowly introducing cloud-based security solutions in view of the rapid transition of businesses to cloud systems. Also, Symantec introduced the managed adversary and threat intelligence annual subscription service in December, which provides clients with specific threat warnings.

These measures are in response to the ongoing shift in cybersecurity from ‘prevent’ to ‘detect-and-respond’ solutions. Symantec was late to realize this change of trend and fell behind smaller competitors like Juniper Networks (NYSE: JNPR) and FireEye, which quickly adopted to the latest trend (Read: Symantec’s Revival: The Security Business Holds the Key). However, with the new offerings, Symantec hopes to catch up and bring revenue growth back into positive territory.

Cash Flow May Decline in Fiscal 2015, $1 Billion Buyback Launched

Cash flow from operations expanded by 9% year on year in third quarter, driven by cost savings. However, in light of the $100 million cash outflow expected from restructuring activities, Symantec expects cash flow from operations for the full fiscal 2015 to decline. Further, the corporate breakup has caused a spike in infrastructural spending for consolidation of sights and data centres. This is expected to put additional burden on cash flow in the fourth quarter of fiscal 2015.

Further, through its previous buyback policy, Symantec had spent $125 million per quarter on share repurchases. The company still had $283 million left for this buyback policy as of January 2, which the management has deemed as an inadequate buffer. [1] Therefore, in order to continue the current run rate of buybacks, Symantec has launched a second round of $1 billion share repurchase program effective immediately. [2]

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Notes:
  1. Symantec Q3 2015 Earnings Call Transcript, Seeking Alpha, February 5, 2015 [] [] []
  2. Symantec Press Release, February 5, 2015 []