Symantec (SYMC) Down on Dismal Q2 Earnings, Tepid FY18 View

Shares of Symantec Corporation SYMC dipped nearly 9% during yesterday’s after-hour trade after the company reported lower-than-expected results for second-quarter fiscal 2018. 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.”

Notably, over the past year, Symantec has returned 26.4%, significantly underperforming the industry’s gain of 39.3%, to which it belongs to.

Quarter in Detail

Symantec’s revenues of $1.240 billion jumped 26.7% year over year 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 year over year.

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).

However, quarterly revenues, on a GAAP and non-GAAP basis both, fell short of the Zacks Consensus Estimate of $1.278 billion.

Segment wise, the Consumer Digital Safety and Enterprise Security divisions witnessed a 42% and 14% year-over-year 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 year over year.

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 year-over-year 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% year over year 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 year-over-year 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% year over year 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 fiscal 2018, 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 fiscal 2018.

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. The Zacks Consensus Estimate for the fiscal is pegged at $5.19 billion.

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 Zacks Consensus Estimate is pegged at $1.81.

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. The Zacks Consensus Estimate is pegged at $1.34 billion.

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. The Zacks Consensus Estimate is pegged at 51 cents.

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 GOOGL Google which has accused it for mis-issuing over 30,000 of web certifications.

Our Take

We predict that the faster-than-expected booking mix shift toward more “ratable revenue recognition” will continue to drag down the company’s near-term results. However, over the long run, this initiative will result in higher number of large and multi product deal wins, thereby boosting its top-line performance.

Furthermore, we consider that although the sale of its certified authority business will avoid conflicts with Alphabet, the high margin of the sold business may depress Symantec’s near-term profitability.

Additionally, smaller companies like Kaspersky are constantly launching comparable products. These, along with competition from the likes of Microsoft MSFT, remain headwinds.

Currently, Symantec carries a Zacks Rank #4 (Sell).

A better-ranked stock in the same industry is Adobe Systems Inc. ADBE, which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The stock has a long-term expected earnings growth rate of 17%.

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