California-based Symantec Corporation (SYMC, Financial) is a company that provides Internet security technology, with a wide range of application and software products of content security solutions and information back-up solutions such as firewall, virtual private network (VPN), virus protection, vulnerability management, intrusion detection and other services, offered to individuals and enterprises. Best known for Norton products which provide antivirus protection, identity protection and online backup, Symantec operates in more than 50 countries, and has recently realigned its business into three divisions: User Productivity & Protection, Information Security and Information Management.
User Productivity & Protection segment comprises the company’s endpoint security and management, encryption and mobile businesses; Information Security segment comprises Symantec’s authentication, mail and web security services, data center security, managed security services (MSS) and data loss prevention (DLP) offerings; Information Management covers backup and recovery-related services and products. Revenue is generated from two segments: Content Subscription and Maintenance Revenues, segment which generated 87.0% of total revenues for fiscal 2013, and License Revenues, delivering 13.0% of total revenues for the same period.
Since latest chief executive officer Steve Bennett, who took over the company’s control during 2012, initiated several organizational changes to improve sales and profitability, Symantec has been facing difficult times, and sales force reorganizations are yet to yield the desired results. Analysts think Symantec has been poorly managed, and lacked a coherent strategy. Underperforming peers, it recently decided to remove CEO Steve Bennett and now the company is attracting activist investors and private equity firms. Under some rough conditions, activist investors and private equity firms are gathering for a sale or split of the business, though these meetings haven’t resulted in any confirmation yet. The company is searching for a new CEO with public company experience, but still the departure of Bennett has been rather disruptive, leaving the company without leadership, within a difficult moment. Still, the company delivered better than expected results for last quarter. Adjusted earnings were $0.48 per share for third quarter 2014, increasing 15.7% year over year. Revenues were above estimations, reporting $1.71 billion, but still declined 4.8% versus 2013, because of a drop in demand, primarily within the Content, Subscription and Maintenance segment.
Between the Market
The dynamic environment and competitive market of security software manufacturing puts companies in a difficult position regarding innovation and investment. Given the decline in the PC market, and increase usage of mobile devices, Symantec is seeking to develop cloud and mobile products, and provide add new solutions and functions to their current products. However, the new product diversification positions the company in direct competition with big firms such as Microsoft Corporation (MSFT, Financial), Intel Corporation (INTC, Financial)’s McAfee Inc., EMC Corporation (EMC, Financial), Hewlett-Packard Company (HPQ, Financial), IBM Corp. (IBM, Financial), and VMware Inc. (VMW, Financial), among others.
Indeed poor management hasn’t contributed much to strengthening this position amid the competitive software development market, but still Symantec is market leader with great technology assets, and a company with strong fundamentals. Despite the fierce competition, Norton products are still desirable, and the information security segment is growing, fueled by endpoint sales and emerging security businesses such as data loss prevention, mobile management and cloud solutions. These new cheaper and easier solutions are expected to attract customers, increasing revenues in the near future, targeting an organic revenue compound annual growth rate over 5% and operating margins above 30% in fiscal 2017.
New Opportunities
Symantec has large installed base and high recurring revenue. The industry’s high switching costs associated with its enterprise security and storage solutions have allowed the company to reach 135 million consumers of Norton security products. The company is continuously developing new products in order to keep competitors at bay. Adjusting to the industry’s variable trends is a key to keep a competitive position and secure customers. Reorganization is on track, with a new go-to-market strategy and operating structure. The recent changes within management have opened the possibility for Symantec to introduce new leadership and strategic guidance and drive the company towards a more consistent operational improvement, with more positive performance forecasts.
Bottom Line
Symantec's Global Intelligence Network covers more than 200 countries and provides rapid global threat detection which gives users faster prevention and resolution. Despite the company’s lack of a network security offering, Norton is the dominant brand in the consumer market. Indeed the shift towards mobile devices from PC has led to a dismal top-line performance. Nevertheless, the company is developing new products and restructuring its internal business. Moreover, analysts think its increase in net income, reasonable valuation levels, growth in earnings per share, expanding profit margins and solid financial, put the company in an interesting place for investors. Yet, the change in office is still to show some definition.
Disclosure: Damian Illia holds no position in any of the stocks mentioned.
