Symantec Earnings Preview: How Severely Will Revenue Declines Impact Profits?

by Trefis Team
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Symantec (NYSE:SYMC) is scheduled to announce its fiscal first quarter 2019 earnings on Thursday, August 2.The company reported a strong set of results in the fiscal year ended March, with a 19% increase in net revenues to almost $5 billion. Revenues growth was driven by additional revenues from the $4.7 billion Blue Coat acquisition in mid-2016 and the acquisition of Israeli company Fireglass for an estimated $250 million in mid-2017. This further helped Symantec enhance its portfolio in the ransomware, malware and phishing threat domains. The company also improved its presence in 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. In addition, expense synergies led to 6 percentage point improvement in non-GAAP operating margin to 34.7% for the full year. Resulting EPS rose 43% over FY’17 to $1.69 per share for FY’18.

However, at the end of the most recent quarter, Symantec’s management gave a mixed outlook for FY’19, particularly the first half. Revenues through the fiscal year are expected to be slightly lower on a y-o-y basis to $4.83 billion. Enterprise security revenues are expected to decline 2% for the year while consumer security revenues are expected to increase 3% to offset the decline. The company attributed the expected decline in revenues to two main factors. The first is the increase in the contract duration of license agreements in FY’18 to three years from mainly 1-year contracts as a part of the company’s attempt to integrate offerings post acquisitions. Secondly, the adoption of new accounting and revenue recognition standards are expected to impact certain key metrics. Furthermore, management expects its operating margin to be in the 30-32% range, which is around 3 percentage points lower over FY’18 levels at the mid-point of the range. Subsequently, Symantec’s stock price dropped from $29 to $20 after its Q4’18 earnings were announced.

For the fiscal first quarter ended June, we expect Symantec’s consumer security revenues to be around 2% lower on a y-o-y basis to $550 million, while enterprise security revenues are forecast to be almost 10% lower than Q1’18 at $605 million. We forecast non-GAAP operating margin of around 27%, which is in line with the company’s guidance. Despite a 15% decline in operating income, we expect net income and EPS to be only around 6% lower on a y-o-y basis due to a lower expected tax rate for the quarter. Our EPS forecast of $0.31 per share is close to the lower end of consensus estimates. We have created an interactive earnings preview dashboard for Symantec where you can change expected segment revenue and margin figures to gauge how it will impact expected EPS for the quarter.

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