Symantec Corp.
/(SYMC - NASDAQ)
/$29.38
Note: More details to come; changes are highlighted. Except where highlighted no other sections of this report have been updated.
Reason for Report: Flash Update: 2Q18 Earnings
Prev. Ed.: Aug 22, 2017; 1Q18 Earnings Update
FLASH UPDATE [Earnings update in progress; to follow]
Symantec Corporation reported lower-than-expected results for 2Q18. Furthermore, revenues matched the mid-point of the company’s guidance range, while non-GAAP earnings came in at the lower end. The company noted that its booking mix is shifting faster than expected toward more “ratable revenue recognition”, which resulted in lower-than-expected revenue growth.
Per the company, “Adoption of our Integrated Cyber Defense platform is leading to an increase in the number of larger and multi-product deals, which is a strong validation that customers are designing Symantec into their future security architectures. These trends are however also affecting our in-period revenue recognition. The mix of our bookings is shifting towards more ratable revenue recognition as customers are increasingly adopting our cloud, subscription and virtual appliance products in multi-product deals.”
Quarter in Detail
Symantec’s revenues of $1.240 billion jumped 26.7% y/y and came in line with the mid-point of its guidance range of $1.225-$1.255 billion (mid-point $1.240 billion). The robust top-line result was mainly driven by acquisitions. On a constant currency adjusted for acquisitions basis, revenues were flat y/y.
On a non-GAAP basis, the company generated revenues of $1.276 billion, up 26% from $1.015 billion reported in the year-ago quarter. The figure also came in at the mid-point of management’s projection of $1.260-$1.290 billion (mid-point $1.275 billion).
Segment wise, the Consumer Digital Safety and Enterprise Security divisions witnessed a 42% and 14% y/y increase, respectively. However, on constant currency adjusted for acquisition basis, Consumer Digital Safety registered 1% growth, while the Enterprise Security division’s revenues were flat y/y.
Symantec’s non-GAAP gross profit of $1.075 billion was up 26.3%, primarily attributable to a higher revenue base. However, as a percentage of revenues, gross margin contracted 20 basis points (bps) on a y/y basis to 86.7%, as the benefit of increased sales was more than offset by elevated cost of goods sold.
Furthermore, non-GAAP operating income surged 47% y/y to $435 million, while margin expanded 490 bps to 35.1%. Moreover, non-GAAP operating margin was approximately at the mid-point of the company’s guidance range of 34-36%. The y/y increase was mainly driven by strong revenue growth, and benefited from better execution of the company’s cost-saving initiatives and synergies from acquisitions.
Per Symantec, it has realized over $580 million of cost through its cost-restructuring initiatives and cost synergies from the acquisitions of Blue Coat and LifeLock, which is way ahead of its planned time of the end of fiscal 2018. Till fiscal 2017, the company has achieved more than $300 million in net cost efficiencies.
Non-GAAP net income for the reported quarter came in at $268 million compared with $192 million recorded in the year-ago quarter. Non-GAAP earnings per share climbed 33.3% y/y to 40 cents and came at the lower-end of the company’s projected range of 40-44 cents.
Balance Sheet & Cash Flow
Symantec exited the fiscal second quarter with cash, cash equivalents and short-term investments of $2.026 billion compared with $2.306 billion recorded in the prior quarter. It should be noted that the company had repaid $2 billion of its debt during the fiscal first quarter, as a result of which its cash, cash equivalents and short-term investments had declined to $2.306 billion in the previous quarter from $4.247 billion reported at the end of fourth-quarter fiscal 2017. Long-term debt (including current portion) was $6.079 billion at the end of the fiscal second quarter.
During the first half of FY18, Symantec generated operating cash flow of $390 million. It paid $114 million as dividend during the period.
Guidance
Considering the effect of faster-than-expected booking mix shift toward more “ratable revenue recognition”, the company lowered its revenues and non-GAAP earnings outlook for FY18.
For the fiscal, Symantec now expects GAAP revenues in the range of $4.877-$4.977 billion (mid-point $4.927 billion) and non-GAAP revenues in the range of $5-$5.1 billion (mid-point $5.05 billion), down from the previous guidance ranges of $5.037-$5.137 billion (mid-point $5.087 billion) and $5.160-$5.260 billion (mid-point $5.210 billion), respectively. Non-GAAP earnings per share are now projected to come between $1.66 and $1.76, down from the earlier forecast of $1.79-$1.89.
The company provided guidance for the third quarter as well. For the quarter, Symantec anticipates GAAP and non-GAAP revenues in the range of $1.227-$1.257 billion (mid-point $1.242 billion) and $1.250-$1.280 billion (mid-point $1.265 billion), respectively.
Non-GAAP operating margin is projected in the range of 36-37%. However, on a GAAP basis, it expects to report negative operating margin in the range of 2-3%. Further, management predicts reporting earnings between 42 cents and 46 cents on a non-GAAP basis for the fiscal third quarter.
Website Security Business Divestment Completed
Symantec announced that it has completed the sale of its Website Security and related PKI business to privately owned DigiCert Inc. The company received $950 million in cash and approximately a 30% stake in DigiCert’s business. Symantec’s Website Security solution verifies the identity of websites.
We believe the recent move is an effort by Symantec to end the ongoing dispute with Alphabet’s Google which has accused it for mis-issuing over 30,000 of web certifications.
MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON SYMC
Portfolio Manager Executive Summary [NOTE: Only highlighted material has been changed]
Symantec Corp. (SYMC) is one of the largest publicly traded vendors of security products and services, with leading share in both consumer and enterprise security. Symantec has broadened its focus through merger and acquisitions (M&As) and internal development to include storage/backup software, systems management and desktop virtualization, and is currently positioned as a broad provider of infrastructure software and services.
Key factors for determining an investment strategy in Symantec are as follows:
· The company has solid fundamentals and a strong product pipeline and is improving its execution.
· Symantec’s product basket includes Altiris 7.0 and Norton products, which are likely to enhance sales, going forward.
· Symantec continues to reward its shareholders with repurchase programs and cost-efficient strategies.
Competition: Symantec’s Norton franchise is the leading security application in both consumer and enterprise end markets, but the company faces intense competition. The company’s enterprise businesses, Data Center Management and Security & Data Management compete in several market niches within the broader storage and network management software space. The company’s major competitors include Intel, EMC (RSA Security), Trend Micro Inc., IBM, Oracle and Microsoft.
Firms’ Opinion: About 60% of the firms in the Digest group following Symantec were neutral, 35% were positive while the remaining 5% had a negative outlook. Target prices provided by the firms range from a low of $19.00 to a high of $40.00, with the average being $31.47. The firms’ expected return over the current share price is 9.4%.
Neutral Stance (Neutral or equivalent ratings) – 12 firms or 60% – This group of firms favors Symantec’s fundamentals, its strong product pipeline, improving execution, and acquisition and buyback plans. However, the firms are concerned as Symantec is a victim of the economic downturn and not likely to see a cyclical recovery in the next few quarters. The firms still remain concerned due to conversion and adoption rates, distribution strategies and contract dynamics. As the organic revenue growth rate is slowing down, they believe that further market share losses in legacy divisions could jeopardize overall revenue growth. They also remain concerned about cannibalization in the PC market and lingering macroeconomic headwinds. These firms prefer to remain on the sidelines unless Symantec shows consistent growth.
Bullish Stance (Buy or equivalent ratings) – 7 firms or 35% – The firms with a positive stance on Symantec’s shares believe the company has the ability to perform consistently even during macroeconomic weakness. With its leading position in security, solid sales execution, a steady management team and repurchase programs, the company has enough share price drivers for the coming quarters. Further, factors like Symantec’s healthy cash flow, strategic acquisitions (most recently Blue Coat), solid partnerships, new product cycle and cost control make the firms bullish on the stock.
Bearish Stance (Sell or equivalent ratings) – 1 firm or 5% – The firm has a bearish stance on Symantec as lingering macroeconomic weakness could affect the company’s near-term profitability and delay sales cycles. In addition, increasing competition from bellwethers like Microsoft and Intel, tepid IT spending and loss of focus on product development could negatively impact growth of the company and adoption rates of new products.
General Long-Term Outlook: Management remains confident about the long-term prospects of the company, given its focus on helping customers secure and manage their information and identities in an increasingly mobile, cloud-based and virtualized world; various cost-saving initiatives, international presence and pipeline of products.
Aug 22, 2017
Overview [NOTE: Only highlighted material has been changed]
Symantec Corp., based in California, is a global leader in information security across both the enterprise and consumer segments. It supplies products and services to consumers as well as enterprise customers. Symantec is known for some of the popular brands in security and utilities, including Norton Anti-Virus, Norton Internet Security and Norton System Works. It provides a broad range of software, appliances and services designed to help individuals, small- and mid-sized businesses and large enterprises to secure and manage their IT infrastructure, including virus protection, firewall/VPN, intrusion detection, anti-spam solutions, Internet content and e-mail filtering, vulnerability assessment, risk management and security services. For more information on the company, please visit www.symantec.com.
Key investment considerations as identified by the firms are as follows:
Key Positive Arguments / Key Negative Arguments· Acquisition Synergies: Symantec’s acquisition of PGP Corporation and GuardianEdge added encryption capabilities for smartphones, full-disk, email, file, folder and removable media to Symantec’s security portfolio.
· Future Investments: On a long-term basis, Symantec will have significant financial resources to invest in new combined products for the enterprise market.
· Spyware: Symantec’s anti-spyware product is expected to spur growth in the near future.
· Norton: Symantec is shipping its anti-virus solution,
Norton across multiple devices and platforms such as Android, Windows and Mac.
· Symantec has made a big play in the endpoint security market. The company has unveiled a new method for advanced threat protection (ATP), thereby delivering more complete attack-prevention solutions. / · Loss of Market Share: The consumer security market, which has driven the company’s results over the last three years, faces pressure from Microsoft.
· Competitive Threats: Symantec encounters challenges from its competitors like McAfee, Check Point, Trend Micro, ISS, as well as Computer Associates, Cisco, Juniper and Microsoft from outside the sector.
· Fluctuation in Demand: Symantec faces fluctuations in demand due to economic conditions, competition, product obsolescence, technological change, shifts in buying patterns, financial difficulties and budget constraints of customers, levels of broadband usage and security threats to its IT systems.
Note: Symantec’s fiscal year ends on Mar 31.
Aug 22, 2017
Long-Term Growth [NOTE: Only highlighted material has been changed]
Symantec has been a long-time leader in the security software market and is best known for its market-leading Norton anti-virus product. Through acquisition and internal development, Symantec has expanded its security platform to include capabilities such as firewalls, intrusion prevention, anti-spyware, e-mail security, content filtering and policy compliance. With the Veritas Software acquisition, Symantec positioned itself as a broad infrastructure software provider, selling key value proposition to ensure data availability and security. With the nature of security breaches evolving from viruses and pranks to data theft, intrusion and business disruption, the stakes in ensuring computing security have clearly increased. As enterprises assess their vulnerabilities to security breaches and gauge their potential financial impact (in the form of business outages, data theft, network downtime, customer service disruption and potential litigation), the firms believe software companies will need to increase their spending for infrastructure security to capture a larger portion of IT budgets.
Months of hard work and negotiations paid off in early 2016 when Symantec finally completed the sale of its information management division – Veritas to the Carlyle Group. Selling Veritas to the Carlyle Groupreflects the company’s strategy of refocusing on the security market while lowering its dependence on antivirus. Hiring 65 engineers and data scientists from Boeing Co.’s Narus security division earlier this year was also in line with this strategy. These engineers and scientists specialize in network-monitoring technologies used by the U.S. government. The firms believe that the divestment is likely to streamline Symantec’s operations and maximize shareholders’ value. Renewed focus on the core business can also revive the company’s operational performance.
Symantec is making continuous efforts to attract small and mid-sized businesses (SMBs) by introducing enhanced versions of storage management and Internet security solutions. Symantec had unveiled Norton Anti-virus software for small businesses. These solutions are expected to secure and manage their information-driven businesses. According to Research and Markets, the worldwide SMB IT spending market will grow at a CAGR of 5.54% from 2013 to 2018. A survey conducted by Symantec revealed that SMBs (with 1 to 250 employees) are now adopting the highest standard IT security measures to protect their sensitive information. The survey also revealed that SMBs are now spending a huge amount of money every year and are engaging two-thirds of the IT staff’s time on activities such as information protection, which includes operations like computer security, backup, recovery and archiving, as well as disaster preparedness. Since Internet security is a growing concern, this initiative will help Symantec win more customers.
The firms are of the opinion that Symantec is poised for growth over the long term through improved execution, leveraging its broad product portfolio and margin expansion. Moreover, continued execution, strong cost controls and new product growth will help Symantec benefit over the long term. In the near term, some firms expect the company to focus on the consumer business, software as a service (SaaS) solutions and better channel relationships. However, they think that mobile, virtualization and cloud computing areas could prove to be key long-term opportunities for Symantec that could lead to potential double-digit core revenue growth. Symantec continues to adapt its current offerings to deliver innovative security solutions for these new markets.