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Should Investors Be Worried About Symantec’s Gloomy Outlook?

August 08, 2014 | About:

Security software maker Symantec (NASDAQ:SYMC) reported an impressive first-quarter 2015 beating the street’s expectations for both the top and bottom lines. Despite reporting year over year growths in the revenue and earnings, the company projected a soft second quarter result. Should investors be concerned? Here’s what we think.

Revenue growth resumed

Earlier Symantec had been a device-centric software solutions provider focusing only on protecting the end-points. But the company announced its plans to cater to a broader circle beginning 2013. The company started implementing changes in three areas – simplifying organizational structure, redesigning Go-To-Market (GTM) strategy and changing product offerings through the fiscal 2014. Although revenue in the first quarter 2014 improved, rest of the quarters witnessed revenue decline. Symantec expected revenue for the first-quarter 2015 to drop in the range of 1.2%-3.5% year over year.

But the first-quarter revenue grew 2% year over year to $1.74 billion, handily beating the analysts’ aggregate expectation of $1.67 billion, and the company’s guided range of $1.65-$1.69 billion. The improvement was on account of new product introductions, strong renewals due to higher demand for security software solutions to fight cyber crime, and an extra operating week. Notably, the improvement indicated that the company’s effort to boost revenues started paying off.

Among the three broad segments, Information Security revenue grew 3% while Information Management and User Productivity & Protection segment revenues grew 1% each. Geographically, U.S.’s contribution remained flat (although North America performed well) while International revenue grew 3%.

The company also reported 3% year over year growth in billings, marking continuous improvements in past consecutive three quarters. The improvements were driven by solid contributions from backup appliances, Trust Services and data loss prevention businesses.

Earnings momentum maintained

Symantec’s earnings per share (EPS) have outperformed the analysts’ expectations in all the four quarters of fiscal 2014. The momentum was retained during the first quarter when the adjusted EPS of $0.45 outshone the street’s average of $0.42. The quarter’s results grew 2% from the year ago quarter and was better than the company’s expectation.

The earnings improvement was because of revenue growth and cost containment efforts. Symantec seems to be on track to attain its goal in cost savings in the current fiscal. During the quarter, total operating expenses dropped 7% year over year to $1.1 billion. But total expenses grew as a percentage of revenue, due to higher research and development expenses. Continued investments in launching new and innovative products lowered operating margin slightly for the quarter.

However, lower tax rate and share count provided added support. Tax rate for the quarter was 22.6%, down from 28.2% in the year ago quarter. Shares outstanding in the quarter were 697 million, compared with 707 million in the prior year quarter.

What’s in store for Symantec?

As per IT research firm Gartner, global spending on security software and hardware could grow 9.1% in 2014, driven by the urge to secure devices from online attacks. This would prove beneficial for Symantec as it continues to launch newer products and witness better acceptance of those. Moreover, improving corporate PC purchases is a big boost for Symantec.

But, the company is facing pressure from slowing sales of some legacy products and slow revival in the PC market. Although PC shipments improved in the second quarter of 2014, experts continue to expect slowdown through 2018, particularly due to soft consumer spending. This could be the reason for a conservative guidance for the company’s second quarter.

For the second quarter, Symantec expects revenue in the range of $1.6 billion-$1.64 billion (versus $1.63 billion of analysts’ projection, and $1.64 billion in the second-quarter 2014). GAAP EPS is expected in the range of $0.29 - $0.33 (versus $0.34 in the year ago quarter) and non-GAAP EPS could be between $0.40 and $0.44 (versus $0.45 analysts’ expectation, and $0.51 in the year ago quarter).

To conclude

Symantec is the top selling security vendor globally, and it’s keen to retain its crown by making required changes within the organization and restricting expenses. It’s also introducing newer solutions enabling the users to fight malwares. The company’s efforts are showing up in the results and it’s expected that fundamentals could improve further in the long term. Hence, investors needn’t be apprehensive about any near term challenges.

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