Blockbuster Veritas Sale Claims Symantec’s Q1 Revenues as Collateral Damage

SYMC: Symantec Corp logo
SYMC
Symantec Corp

Leading security software vendor Symantec Corp. (NYSE:SYMC) announced its fiscal first quarter earnings on August 11th (fiscal years end with March), highlighting the release with a major announcement.  Set to return to its roots  as a security software company, Symantec annoinced that it is selling its Information Management business, Veritas, to the private equity firm Carlyle. The $8 billion cash sale, which comes on the heels of a long-drawn out split off process for Veritas, is expected to close by January 1, 2016. The sale comes as a breather for beleaguered investors as Symantec intends to return about 40% of the after-tax cash proceeds from the transaction to shareholders. With this  deadweight business out of the way, Symantec now hopes to revive its product pipeline, so as to boost its struggling core security software business. [1]

Symantec’s posted weak revenue growth in the first quarter, a performance management attributed to the Veritas transaction.  Management’s focus was diverted by the separation of not only the sales and marketing organization, but the development and administrative teams and the accompanying infrastructure in advance of the split.  In addition, management was engaged in teh due diligence of multiple potential buyers (including Carlyle). Consequently, the company’s revenues remained flat in the first quarter compared to the same period previous year (after adjusting for one extra week in fiscal 2015 first quarter).  Non-GAAP operating margin was the sole silver lining as it expanded by 240 basis points to reach 27.4% in the first quarter. [2]

Symantec expects revenue growth to pick up in the second half of fiscal 2016 on the back of the strong product pipeline. Over the long term, we believe that Symantec’s revival rests upon rapid upgrades and innovation in its enterprise as well as consumer segments. The company has made a few notable strides since shifting its focus to the enterprise segment last year, the most significant being the entry into the fast-growing Advanced Threat Protection (ATP) market. However, the outlook still remains relatively unclear on the consumer end, since the company has not detailed any major plans for its Norton suite other than the ongoing exit from OEM and channel arrangements. [1]

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Our price estimate of $26 for Symantec Corp. is about 20% higher than its current market price.

See our complete analysis for Symantec Corp. here

Veritas Sale: Symantec and Its Shareholders Both Come Out Ahead

The Veritas sale rids Symantec of a struggling business that it had acquired in 2005 for $13.5 billion. [3] The acquisition failed to take off and remained as a burden for the company, dragging down whatever little growth Symantec’s security business achieved. Its market share in the information management industry has also been on a steady decline over the last few years. This led to the decision to split the information management business into a separate, publicly traded company, which was scheduled to take effect from January 2016.

Now, the sale provides Symantec with much-needed $6.3 billion in cash after footing a 20% tax bill. The company intends to return about 40% of it to shareholders in the form of share repurchases and dividends over the next 18 months. The balance is likely to be utilized in both acquisitions and organic investment to bolster Symantec’s position in the security software industry. The company hinted that it is not interested in entering areas outside of its core strength, like Network security, but may instead use the cash to strengthen its market share in the sectors it already competes in. [1] One such potential area for acquisition may be big data analytics, a sector in which Symantec has made notable moves in recent months. (Read: Symantec Acquires Boeing’s Cybersecurity Unit in a Bid to Boost Big Data Capabilities)

Strong Product Pipeline May Revive Short Term Growth, But Long Term Strategy Needed

Separation activities pertaining to the Veritas sale detracted Symantec from achieving meaningful revenue growth in the first quarter. The company believes that, with the bulk of the separation activity accomplished, it is on track to revive growth from the second quarter onwards. It expects the Enterprise Software Security division to benefit from the strong product pipeline in the second half of fiscal 2016. However, Symantec seems to be grasping for concrete growth plans for reviving its Norton consumer software security suite, revenues from which have remained sluggish in the last few years. The company intends to capitalize upon the increasingly frequent incidents of new vulnerabilities to offer solutions, but hasn’t made much progress so far.

Even if the string of products set to be released in the coming quarters may revive growth, concerns remain regarding Symantec’s long term strategy. Software security is a highly dynamic and constantly evolving field, but that does not excuse the company from having a defined long-term strategy. Symantec indicated in the first quarter conference call that it intends to leverage big data analytics and expand its cybersecurity services to provide a full suite of services. [1] Nevertheless, there is no clear indication regarding the progress the company has made towards this end.

It is possible that Symantec may provide a clearer roadmap upon completion of the Veritas sale, following which Symantec will return to its roots of a pure-play software security company. It may also be in the process of leveraging the benefits from its acquisition of Boeing’s Cybersecurity unit, which is known for its big data analytics. Still, when such benefits and end goals will translate into revival of revenue growth remains unclear for now.

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Notes:
  1. Symantec Fiscal 2016 First Quarter Earnings Call Transcript, Seeking Alpha, August 11, 2015 [] [] [] []
  2. Symantec Fiscal 2016 First Quarter SEC Filing []
  3. Symantec to Buy Veritas Software, The Wall Street Journal, December 17, 2004 []