Symantec’s Revival: The Security Business Holds the Key

by Trefis Team
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The year 2014 was eventful for Symantec (NASDAQ: SYMC). The company’s senior management underwent a major reshuffle during the year, followed by the announcement of a plan to split its security and information management (storage software) businesses into separate companies. However, the company is going through a financial slump and stands the risk of losing ground to its competitors. Revenue growth fell by 3% in fiscal 2013 (ended with March 2014), and 2014 has not been much better so far. Revenues recovered in the first quarter and accelerated by 2% year on year, but declined by 1% in the second quarter. The only silver lining was operating profit, which expanded by as much as ten percentage points in the second quarter. Nevertheless, the company’s shares have gained 12% in the year so far and touched a new 52-week high of $26.64 on December 26th, primarily due to the restructuring plans.

In this article, we will provide a brief overview of the major events during the year and examine why Symantec’s security business is the key to its revival in the post-restructuring era.

We have a price estimate of $24.59 for Symantec, which is about 4% lower than the current market price.

See our complete analysis of Symantec

A Year of Restructuring

The highlight of the year was Symantec’s announcement of its plan to split its security and information management businesses into two separate, publicly traded companies. The security segment will retain the company’s name, while the information management segment will be spun off into a new company. The present leadership will be retained in the security business. The market response to the strategy has been positive and the company’s shares have gained 9% since the announcement.

The year also saw a string of new appointments to the C-suite, including CEO, CFO, CIO and CAO, while the role of COO was altogether eliminated. Appointment of Michael Brown as the new CEO follows the firing of the previous CEO in March this year. This was the second time in two years that Symantec fired a CEO, and the market reaction was swift and overwhelmingly negative. The company’s shares have since recovered in the aftermath of the announcement to split the company.

In contrast to the string of high level executive appointments, the company expects a headcount reduction of approximately 10% as a result of the restructuring [1]. The company has not clarified whether the layoffs will be in the security segment or the information management segment.

On the products front, Symantec demonstrated its adaptability to the changing security landscape by releasing new security products for mobile, enterprise as well as consumer segments. However, it was a relatively quiet year for the company’s information management business with no new offerings and just one upgrade.

The Future Lies in Information Security

Symantec’s apparent focus on its security business is no accident, even though the information management business comprises a substantial 38% of its total revenues. The global storage software market of $15.7 billion [2] is far exceeded in size by the global information security spending of $71.1 billion [3].

Perhaps more importantly, storage software is a mature market which grew at a moderate 5% in calendar 2013. On the other hand, the burgeoning information security market is teeming with emerging technologies which are set to push its growth to 8% in calendar 2014. The enormous disparity between the size of the two markets magnifies the impact of even three percentage points difference in growth rates. To illustrate, at a 5% growth rate, in three years the storage software market will reach $18 billion from the current $15 billion. On the other hand, at a 8% growth rate, the information security will balloon to $90 billion in the same time.

Restructuring Benefits

Splitting off the information management business into a separate company will yield several advantages that will allow Symantec to efficiently capitalize upon the opportunities in the information security business. Crucially, this restructuring will allow it to focus exclusively on its core strength, security software. Although the company is widely considered to be a pioneer in anti-hacking technologies, it has failed to keep pace with the evolving cybersecurity requirements in recent times.

Further, inter-segment incompatibilities ranging from resource allocation to client management will be eliminated. Finally, financial performance of the standalone company will not be dragged down by the lower growth potential of the information management business.

Consumer Information Security Remains Strong, But For How Much Longer?

Symantec is a longstanding market leader in consumer information security thanks to its Norton Antivirus. With a 43% share of revenues, consumer security software forms the company’s largest revenue stream. However, the slump in PC’s has subdued growth in antivirus sales. A senior executive at Symantec has gone so far as to say “antivirus is dead”, although he concedes that the company has no plan to abandon its Norton Antivirus suite [4].

Instead, Symantec has fortified its Norton offerings to include detect-and-respond capabilities as well as cloud support [5]. In other words, instead of disregarding Norton Antivirus, the company is adding new features to existing products in order to combat evolving cyber threats.

This implies that the company is well positioned to adapt itself to the changing landscape in consumer information security. Nevertheless, revenue growth from this segment declined by 4% in fiscal 2013 due to collapsing PC sales. Therefore, it follows that the company must look elsewhere to achieve revenue growth.

Enterprise Information Security is the Next Frontier

Corporate data breaches jumped by 62% in 2013 [6], while 2014 saw some of the biggest data breaches in history like those of Sony, JP Morgan Chase, Apple and Target. The increasing instances of data breaches resulting from cyber-attacks indicate a failure on the part of information security providers.

This failure may be interpreted as an opportunity for security software vendors to develop and market advanced security solutions. Further, such cyber-attacks will force more and more organizations to evaluate their information security systems. As a result, not only existing customers will want to upgrade their information security systems to face the latest threats, small businesses which had so far considered themselves out of harm’s way will be forced to reconsider their position. This twofold change in perception directly translates to a significant market opportunity for security software providers.

Late to the Party but Catching Up

Symantec’s smaller and nimbler competitors have already taken cognizance of the fact that existing security solutions are not strong enough to prevent attacks. Thus, companies like Juniper Networks and FireEye have led the charge in introducing detect-and-respond capabilities rather than the currently popular prevention mechanisms.

Currently, enterprise information security is Symantec’s smallest business segment and accounts for only 19% of its total revenues. However, recognizing the need of the hour, it has acknowledged willingness to adapt to the changing landscape [4].

Accordingly, the company announced its intention to create response teams for cyber-attacks and sell intelligence briefings on specific threats. In May 2014, it released a new cybersecurity solution for small business. It also plans to extend its Advanced Threat Protection (ATP) and Data Loss Prevention (DLP) capabilities in the near future, with the first offering in this series expected to be released by the end of the current fiscal year. Lastly, it plans to grow its ‘managed security services’ segment – a nascent sector set to grow at 30% to reach $10 billion by 2018.

These steps underscore Symantec’s newfound focus on enterprise security solutions in an attempt to ride the forthcoming wave in information security market. The success or failure of this strategy may well define the future of the company.

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Notes:
  1. Symantec cutting 10% of workforce as breakup looms, Seeking Alpha, November 6 2014 []
  2. Market Share Analysis: Storage Management Software, Worldwide, 2013, Gartner, May 7, 2014 []
  3. Gartner Says Worldwide Information Security Spending Will Grow Almost 8 Percent in 2014 as Organizations Become More Threat-Aware, Gartner, August 22, 2014 []
  4. Symantec Develops New Attack on Cyberhacking, Wall Street Journal, May 4, 2014 [] []
  5. Next Generation Norton Products Go Beyond Antivirus, Symantec Press Release, July 9, 2014 []
  6. New Era of ‘Mega Breaches’ Signals Bigger Payouts and Shifting Behavior for Cybercriminals, Symantec Press Release, April 8, 2014 []
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