Symantec Earnings Preview: Top Line Growth Expected Across Consumer And Enterprise Segments

Symantec (NYSE:SYMC) is scheduled to announce its fiscal third quarter 2018 earnings on January 31. In recent quarters, the company has reported strong growth in revenues driven by additional revenues from the $4.7 billion Blue Coat acquisition in mid-2016. In the June quarter this year, Symantec acquired Israeli company Fireglass for an estimated $250 million. This has helped Symantec enhance its portfolio in the ransomware, malware and phishing threat domains. The company has also enhanced its focus on the enterprise cloud security market. Symantec refreshed its cloud security product portfolio at the end of FY’17 to help customers secure public cloud infrastructure and Platform-as-a-Service. As a result, the company expects to continue to accelerate revenue growth. Symantec’s management has given robust guidance for Q3’18 as well as FY’18 on the back of acquisitions as well as expected product refreshes through the year.

We have a $28 price estimate for Symantec, which is slightly higher than the current stock price. Symantec’s stock price has fluctuated between $24 and $34 this year. We have created an interactive analysis where you can change expected revenue and income margin figures to gauge how it will impact expected EPS for the quarter.

See our complete analysis for Symantec

December Quarter & FY’18 Guidance

Symantec’s net revenue for Q2 FY’18 could increase by over 25% to under $1.3 billion, with the consumer segment (and acquisitions) largely driving growth. In addition, cost synergies from acquisitions are expected to drive operating income to increase almost 50% y-o-y to $446 million, as shown below. The company expects its adjusted operating profit margin to be almost 6 percentage points higher on a y-o-y basis to 36.5% for the December quarter.

For the full fiscal year ended March, Symantec expects revenue growth to continue across segments, as shown below. Enterprise security revenues are expected to increase around 4% (adjusted for acquisitions) or 23% without adjustments. Similarly, Consumer segment revenues are forecast to increase 26% to $2.1 billion, while adjusted growth is expected to be around 2% over FY’17 levels. Furthermore, expense synergies from product integration should help the company improve its non-GAAP operating profit margin by almost 6 percentage points to over 35%. Correspondingly, Symantec’s non-GAAP earnings per share is expected to be over 45% higher on a y-o-y basis to $1.71 for FY’18, which is in line with the Reuters’ consensus estimates.

Key Trends

Symantec’s enterprise segment has been a key growth driver in recent years. Enterprise revenues were up 26% y-o-y to $1.3 billion through the two quarters of fiscal 2018. We forecast Symantec to defend its share in the enterprise security market in the coming years, with revenues expected to grow at mid to high single digits through the end of our forecast period.

On the other hand, Symantec’s Consumer segment has declined by 14% on an annual basis in recent years. Revenues fell due to low PC sales, increased presence of in-built security software for consumer products, changes to Symantec’s renewal practices and lower revenues from OEM arrangements. The Consumer segment has been given a boost by the acquisition of LifeLock in February, and partially by the Blue Coat acquisition last year. Blue Coat has helped drive Symantec’s net revenues and enhance profitability over the last few quarters. Symantec successfully achieved $300 million in cost synergies from Blue Coat and expects another $150 million through FY’18.

Symantec’s Consumer Security business is typically higher-margin in nature relative to the Enterprise Security segment. However, the operating profit margin (GAAP) for the Consumer business fell considerably last year to 45% this year, from 55% in the comparable prior year period. However, adjusted gross margins were around 47%, in line with the company’s expectations.

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