Ongoing Transformations Take A Toll On Symantec’s Revenues, Profits

SYMC: Symantec Corp logo
SYMC
Symantec Corp

Leading cybersecurity company Symantec (NYSE:SYMC) reported fiscal 2016 second quarter results on November 5th. [1] The company’s revenues contracted across the board due to ongoing transitions including the sale of the information management business to the Carlyle Group, which is scheduled to be completed by January 1. Additionally, the exit from OEM contracts in the Consumer Security Software segment and the switch to a ratable subscription-based model further impacted revenue growth in the second quarter. [2] These transitions are expected to continue through the rest of fiscal 2106, and revenues are not likely to normalize until the next fiscal year. Symantec’s non-GAAP operating margin also declined during the quarter due to compressed gross margins as well as expenses related to the separation of the information management business, Veritas. The Veritas business will be reported as discontinued operations from the third quarter of the current fiscal year.

In the earnings call, Symantec outlined the four priorities that form the next stage of its transformation into a pure-play cybersecurity company. These priorities are: realizing the Unified Security strategy, building the Enterprise Security pipeline, improving the cost structure, and efficient capital allocation. The company also reiterated that the cash realized from the Veritas transaction will make M&A a key part of its strategy. Further, the return of cash to shareholders will begin earlier than planned, with the approval of the $500 million accelerated share repurchase program, which is to be executed “as soon as possible”. [2]

Symantec’s second quarter performance snapshot:

  • Revenues declined by 7% year on year to $1.5 billion
  • Non-GAAP operating margin contracted by 60 basis points year on year to 28.1% (50 basis points improvement in constant currency terms)
  • Non-GAAP diluted EPS was $0.44, compared to $0.48 in the prior year period
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Our price estimate of $26 for Symantec is about 20% higher than its current market price.

See our complete analysis for Symantec Corp. here

Revenues Declined in Q2, But Medium-Term Outlook Positive

Symantec’s revenues contracted across the board in the second quarter as the company’s focus turned to the ongoing transitional activities. The weakened performance of each of its three business segments was exacerbated by currency headwinds, which dragged Symantec’s revenue growth down by over 6 percentage points.

Excluding the impact of currency movements, revenues from the Enterprise Security Division expanded by 1% year on year. Growth was led by another strong quarter for Symantec’s Data Loss Prevention (DLP) products, from which revenues grew by 37% year-on-year in currency-neutral terms. Endpoint protection, which comprises a significant part of Symantec’s security software revenues, grew by 2% year on year. However, this growth was offset by continued weakness in endpoint management, mail, and data center security. [2]

The low overall growth can also be partially attributed to the ongoing transition to a ratable, annual subscription model for the company’s cloud-based products. On the flipside, the subscription model provides higher lifetime revenues with a better certainty due to the annual renewal model. Combined with Symantec’s solid enterprise security pipeline of a dozen products set to be released in the next three quarters, [2] we believe that growth may revive moderately in fiscal 2017.

In the Consumer Security business, revenues contracted by 8% year-on-year in constant currency terms. The decline was due to the current weak global demand as well as Symantec’s exit from OEM channels. The company is actively switching from OEM and retail channels to an online model. It hopes to benefit from consumers’ willingness to pay more in an online annual subscription based model, compared to the retail model which is typically populated by bargain hunters. Symantec is achieving strong adoption rates for the new online model, as underscored by the 600,000 new customers added to the online channel in the second quarter alone. [2]

As we stated previously, Symantec’s ongoing transitional phase is likely to have a significant negative impact on its revenues in the near term.(see Symantec’s Revenue Growth Likely Remained Muted in Second Quarter Due to Focus on Veritas Separation). However, we believe that Symantec is moving in the right direction with its renewed focus on the lucrative Enterprise Security business and its willingness to pursue M&A opportunities. Consequently, the company may well be able to return to meaningful revenue growth in the medium-term.

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Notes:
  1. Symantec Investor Relations []
  2. Symantec Fiscal 2016 Second Quarter Earnings Call Transcript, Seeking Alpha, November 5, 2015 [] [] [] [] []