Symantec 2016Q3 Earnings Preview: Enterprise Security Software in Focus

SYMC: Symantec Corp logo
SYMC
Symantec Corp

Security software giant Symantec (NYSE:SYMC) is slated to report its fiscal 2016 third quarter results on February 4th. [1] (Fiscal years end with March.)  The company’s performance is expected to benefit from the sale of the flailing Veritas information management business, which was hitherto a drag on its overall performance. Last month, Symantec provided an update on the expected third quarter results. It anticipated reporting GAAP revenue, non-GAAP operating margin and non-GAAP diluted EPS above the guidance provided with the second quarter results. [2]

This will be the first earnings report which will include the Veritas information management business as a discontinued operation. Symantec completed the sale of Veritas to The Carlyle Group on January 29th, almost a month behind the original target of January 1st. [3]

We are currently in the process of updating our price estimate for Symantec to reflect the sale of the Veritas information management business.

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See our complete analysis for Symantec here

Impact of Veritas Sale

After stumbling on a few roadblocks along the way, Symantec finally closed the sale of the Veritas information management business on January 29th. The after-tax proceeds of the sale were revised to $5.3 billion in the month leading up to the sale, $1 billion less than the original $6.3 deal originally agreed upon. Shareholders’ displeasure with the handling of the deal clearly reflected in Symantec’s share price, which fell 12% from $21.37 on December 30th to $18.82 by January 20th. It has since recovered slightly to $19.75 following the update on anticipated earnings provided by Symantec on January 19th.

With the burdensome information management business finally accounted as discontinued operations with effect from the third quarter, Symantec’s overall performance is likely to improve gradually. Perhaps more importantly, the closure of the sale will infuse some much-needed cash in the company. Symantec intends to return a little under 40% of the $5.3 billion cash receipts to shareholders by March 2017. The remaining cash will be utilized for organic R&D investments as well as acquisitions in the cybersecurity space. Thus, not only will shareholders benefit from a return of capital, Symantec’s growth prospects appear to be markedly better provided that it utilizes the newfound extra cash judiciously. (Read: With Veritas’ Operational Separation Complete, What’s Next for Symantec?)

Enterprise Security Software in Focus in Q3

Symantec’s enterprise security software business is likely to remain in focus in the fiscal 2017 third quarter results. Short term prospects of the consumer security software business do not appear to be good in light of the prolonged slump in PC sales. (Read: Declining PC Demand Could Deal a Blow to Symantec’s Already Weak Consumer Division) With the Veritas business out of the way, this leaves Symantec with just the enterprise security software business to drive its growth.

In the second quarter earnings call, Symantec guided the enterprise security software business to grow by 0.5% year on year in the third quarter. On the other hand, the consumer security software business was guided to contract by 6% to 8% year on year. We expect this trend of low growth in the enterprise business and contraction in the consumer business to continue in the near term. However, performance of the enterprise business is likely to improve gradually as Symantec is expected to devote the bulk of its attention towards it going forward. Performance of the consumer business will depend upon PC sales, which are expected to remain soft in the near term with a recovery expected no sooner than calendar 2017. [4]

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Notes:
  1. Symantec Investor Relations []
  2. Symantec Provides Update on Expected Third Quarter Results, Symantec Investor Relations, January 19, 2016 []
  3. Symantec Completes Sale of Veritas, Now Singularly Focused on Cybersecurity, Symantec Investor Relations, January 29, 2016 []
  4. Worldwide PC Shipments Will Continue to Decline into 2016 as the Short-Term Outlook Softens, IDC, December 4, 2015 []