Strategic Updates in Focus in Symantec’s Third Quarter Earnings

SYMC: Symantec Corp logo
SYMC
Symantec Corp

Leading security software vendor Symantec (NYSE:SYMC) reported its fiscal 2016 third quarter earnings on February 4th. [1] (Fiscal years end with March.)  Now that the dust has settled, we will take a close look.  The highlight of the earnings had less to do with the third quarter performance itself than the strategic updates provided by the company. These updates included a $500 million investment by Silver Lake Partners, as well as unconfirmed reports of a significant stake purchased by Elliott Management. [2] Symantec also announced that it will return all the cash from the Veritas sale to shareholders. Since some of the cash from the sale is parked outside the US, the cash return may be partially funded by debt – a less desirable though necessary outcome. [3] It also raises questions on how the company will fund potential acquisitions in the enterprise software security market.

Symantec’s financial performance in the third quarter was along the expected lines. Enterprise security software revenue continued the recent trend of low-single digit growth year on year in constant currency terms, driven by double-digit growth in information protection. Consumer security software revenue contracted by 6% year on year in currency neutral terms, due to weak demand for PC’s. This trend is likely to continue in the near term with a slightly upward tick as fiscal 2017 progresses. Further, non-GAAP diluted EPS contracted by 21% year on year as the TSA (Transition Service Agreement) and stranded costs pertaining to the Veritas sale dragged down the bottom line in the third quarter.

Symantec fiscal 2016 third quarter performance snapshot:

  • Revenues declined by 6% year on year to $909 million. In constant currency terms, the decline was 2%.
  • Non-GAAP operating margin contracted by 610 basis points year on year to 27.9%
  • Non-GAAP diluted EPS was $0.26, compared to $0.33 in the prior year period
Relevant Articles
  1. Will Johnson & Johnson Stock Rebound To Its Pre-Inflation Shock Highs of $185?
  2. Should You Pick Eli Lilly Stock After A 4x Rise In Three Years?
  3. Down 9% This Year, What’s Next For Lululemon’s Stock Past Q4 Results?
  4. Down 14% In The Last Trading Session, Where Is Adobe Stock Headed?
  5. Will Higher Federal Government Spending, Gen AI Drive Digital Security Stocks Like CrowdStrike Higher?
  6. Up 30% In A Year Is FedEx Stock A Better Pick Over UPS?

We are currently updating our price estimate for Symantec to reflect the third quarter results and the sale of the Veritas information management business.

See our complete analysis for Symantec here

New Investor(s) in Focus

Symantec used the third quarter earnings to announce a $500 million strategic investment by private equity outfit Silver Lake Partners. The relatively low size of the investment and Symantec’s existing considerable cash pile suggests that the transaction may be intended to show a vote of confidence in the company. Symantec did not disclose the terms of the investment and the plans for utilization of the cash.

Separately, unconfirmed reports indicate that the hedge fund, Elliott Management has taken a substantial stake in the company and become one of Symantec’s biggest shareholders. Elliott Management is known for its activist investments, wherein the fund takes a substantial stake in companies in return for a board seat. If Elliott Management has indeed acquired a major stake in Symantec, what its potential activist demands may be remains unclear.

Entire Cash from Veritas Sale to be Returned to Shareholders

Symantec may be eschewing investment and growth opportunities in favor of short term appeasement of shareholders. As we reported earlier, Symantec netted $5.3 billion in after-tax cash proceeds from the sale of its Veritas information management business. The company plans to return $5.5 billion cash to shareholders by March 2017 through a special dividend amounting to $2.7 billion and share repurchases worth $2.3 billion. The corollary is that Symantec will not have any cash left over from the sale to funnel into its R&D program and for future acquisitions. In fact, the entire $5.5 billion will not even be available for returning to shareholders since part of it is held outside the US. Symantec acknowledged that it may take on additional debt to fund the share repurchases. [3]

We believe that not retaining any of the Veritas cash for R&D investments and acquisitions is a poor strategy. Following the Veritas sale, Symantec intends to focus on solidifying its product portfolio in the enterprise software security sector. The cash from the Veritas sale is a windfall that the company could have utilized towards this end. Returning the entire cash to shareholders suggests that Symantec does not have any immediate opportunities for its better utilization. Valuation multiples in the cybersecurity space are indeed sky-high at the present, which does limit meaningful acquisition opportunities. Nevertheless, Symantec could have still earmarked some of the cash proceeds for organic R&D investments. Instead, it will now have to rely upon its cash flow from operations, or worse, even more debt.

Revenues Declined; Separation Costs Ate Into Margins

Symantec’s GAAP revenues declined by 6% year on year in the third quarter, primarily due to the continued weakness in the consumer security software division. The consumer segment accounted for 45% of Symantec’s revenues. Its poor performance continued in the third quarter due to the continued softness in PC demand. Symantec’s consumer security software business is not expected to return to positive revenue growth in the medium term. Sustained weakness in the PC market and Symantec’s nearly exclusive focus on the enterprise segment are likely to result in continued weak performance of the consumer business.

The enterprise security software segment accounted for the remaining 55% revenue share and declined by 3% year on year in as-reported terms. In constant currency terms, revenues from this division expanded by a nominal 1% year on year primarily due to the double digit growth in DLP and user authentication. Endpoint protection grew by low-single digits and could pick up in fiscal 2017 due to the product updates recently released by Symantec. The growth in these segments was partially offset by a 4% contraction in threat protection. [3]

On the bottom-line front, Symantec’s non-GAAP operating margin declined sharply by 610 basis points year on year in the third quarter. This was primarily due to TSA and separation costs totaling $130 million involved in the Veritas sale. The company set an ambitious target of achieving $400 million in cost savings over the next two years. Most of the potential benefits from this cost savings program are expected to be realized in fiscal 2018, by when Symantec hopes to achieve a 30% non-GAAP operating margin. [3]

View Interactive Institutional Research (Powered by Trefis):

Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. Symantec Investor Relations []
  2. Symantec Gets $500 Million Investment From Silver Lake, The Wall Street Journal, February 4, 2016 []
  3. Symantec Fiscal 2016 Third Quarter Earnings Call Transcript, Seeking Alpha, February 4, 2016 [] [] [] []