Security software maker Symantec (NASDAQ:SYMC) is expected to report its Q2 FY14 results on October 23. In the current quarter, we expect strong growth in revenues from its Information Security and Management segments to offset a decline in sales from its consumer security segment. Additionally, we expect margins to improve due to the company’s focused restructuring program.
Q1 FY14 Recap
Revenues for the first quarter of fiscal 2014 were approximately $1.71 billion, beating management guidance of $1.61-$1.65 billion. Revenue growth in the past quarter was mainly driven by growing concerns of hacking among corporate businesses. The Information Security business grew 7% q-o-q in Q1 to reach $336 million while revenues from the Information Management business stood at $641 million, growing 3.9% over Q1 2013.
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- Symantec’s Q1 Earnings Review: Cost Savings Hold the Bottomline As Threat Protection Drags The Revenues
However, the User Productivity & Protection segment, Symantec’s largest contributor with a revenue share of 43%, saw downward pressures which resulted in 0.67% decline in q-o-q revenues. The User Productivity & Protection segment consists personal computer software such as Norton Antivirus & Internet Security products and Mobile Antivirus products. Although sales in the mobile product sub-segment saw gradual uptick in the previous quarter with increasing smartphone user base, a 10% decline in PC sales in the June quarter contributed to the decline in consumer software sales in Q1 FY14.
An improvement in the macroeconomic conditions in developed markets should increase spending on IT products and infrastructure which leads to a growth in overall revenues. However, we believe that the declining PC sales’ numbers will impact Symatec’s consumer business and expect overall revenues to continue to be driven by the Information Security and Management businesses.
Information Security and Management Segments Should Mask Weakness In PC Software Sales
The digital universe, which represents the size of the entire data stored across the world on the internet and various intranets, was approximately 2.8 zettabytes in 2012 and is expected to double every two years to reach 40 zettabytes (40 trillion gigabytes) by 2020. The rapidly expanding size of machine-generated data resulting from an increase in business process automation is contributing to this enormous growth rate. Additionally, IDC reports that growth in data needing protection is outpacing the growth in the digital universe itself, indicating the shifting needs of businesses to have robust security services. 
Data protection and recovery software as well as storage & device management software are the two fastest growing sub-markets as companies look for new features that enable modern data protection and efficient storage and device management. Prospects of high growth in cloud based services combined with a faster growth in storage and security software market should act to the advantage of Symantec. The company has a 15% market share in storage software and a 28% market share in the security software market. We expect Symantec to continue increasing revenues and gain market share in these divisions going forward as companies expand their security requirements.
However, personal software sales are expected to be subdued due to the weakness in consumer spending on IT and the continued shift from personal computers to smartphone mobile devices and tablets. Global sales for PCs in the June quarter dropped 8.6% q-o-q in the September quarter according to Gartner.  However, U.S. shipments grew for the second consecutive quarter, posting a growth rate of 3.5% q-o-q in the quarter. Symantec derives approximately 58% of its revenues in the User Productivity & Protection segment from the U.S., and a positive growth in U.S. PC shipments could increase sale of new licenses and renewal of existing licenses for Norton. However, we believe it is still early days in the recovery of the PC market and expect flat sales from the segment this quarter.
Favorable Conditions In Developed Markets, Restructuring Initiatives Could Improve Revenues & Margins
Sequentially, revenues for the second quarter grew 1.9% and 1.7% over Q1 2013 and Q1 2012. A similar growth trajectory would produce revenues amounting to $1.74 billion in Q2 2014. However, Symantec provided revenue guidance in the range of $1.65 – $1.69 billion due to the weak spending in the global IT industry. In the six months so far this year, Symantec generated approximately $3.46 billion in revenues, up 3.22% over the same period in 2012. The last six months of 2012 and 2011 have seen a sequential revenue growth between 2.1%-4.2%, and we expect this trend to continue this year as well. This would put revenues for the July-December 2013 period between $3.53 billion to $3.60 billion.
Restructuring initiatives from last year contributed to an improvement in operating margins. For the three segments namely User Productivity, Information Security and Information Management, operating margins in Q1 FY14 were 35%, 8% and 23%. Margins for the Information Security business improved by 11% q-o-q while Information Management business margins declined 4% during the same period. The restructuring initiatives from the past year contributed to the consolidation of margins across segments. We could see further improvement in Information Security margins as the company expects full impact of the restructuring to be evident in FY 2015.
We will be revising our $29 Trefis Price Estimate for Symantec once the company files its results with the SEC.
- New Digital Universe Study Reveals Big Data Gap: Less Than 1% of World’s Data is Analyzed; Less Than 20% is Protected, EMC Newsroom, December 2012 [↩]
- Gartner Says Worldwide PC Shipments in the Third Quarter of 2013 Declined 8.6 Percent, Gartner Newsroom, October 2013 [↩]