Symantec Beats Q3 Guidance On Strong Realignment Progress But Top Line Risks Remain
Jan. 30, 2014 4:23 PM ET | 1 comment | About: SYMC
Symantec (NASDAQ:SYMC) surprised the market by posting Q3 results that beat industry estimates on both the top line and the bottom line. In addition, the company raised its fiscal 2014 outlook, citing better-than-expected progress on its business realignment.
Revenues for the quarter stood at $1.70 billion, beating its Q3 guidance of $1.63-$1.67 billion, and ahead of our estimate of $1.68 billion for the quarter. Lower sales and marketing expenses due to the sales team restructuring resulted in GAAP operating margin of 23.8% for the quarter, against Symantec’s guidance of 17%-17.6%. The lower sales and marketing expenses also lifted the company’s bottom line to 40 cents/share compared to its Q3 guidance of 26-28 cents/share.
For fiscal 2014, Symantec expects revenues between $6.66 billion and $6.70 billion. Furthermore, GAAP operating margin for FY14 is expected to be 17.6%-17.9%, while net income on a per share basis is expected to be $1.25-$1.27, higher than our FY14 estimate of $1.22.
We have a revised price estimate of $28 for Symantec, against its current market price of $24.
Margins Expand On Lower Sales & Marketing Expense
Operating margins for Symantec’s User Productivity and Information Security divisions expanded by 6% and 12% respectively during Q3FY14, compared to a year ago period. This expansion in margin was facilitated by lower sales and marketing expenses resulting from the restructuring of its sales force. During Q2FY14, Symantec bifurcated its sales team into two groups for its licensing and renewal businesses, to better position its sales team and consolidate marketing spend worldwide. The decrease in sales and marketing spend is visible in the figures for the nine months in FY14. As a percentage of revenues, sales and marketing expenses decreased from 40% in fiscal 2013 to 37% so far in fiscal 2014.
Going forward, we expect a further reduction in sales and marketing expenses for the company due to a realignment in its sales force. Symantec also looks to expand its e-commerce business, which typically has higher margins, which should elevate overall operating margins. Additionally, the company is revamping its product portfolio with new product delivery capabilities such as cloud infrastructure platforms, hardware supply chain, information fabric and a global security information network.
Cloud infrastructure platforms should have higher margins in comparison to an on-premise offering within the Information Security division. The Information Fabric offering on the other hand involves protecting, managing and deriving value from data stored across private, public and hybrid cloud deployments for businesses. A unified security product such as the Information Fabric is generally deployed in data centers that host cloud environments to map and securely manage information flow and should have a higher price point with higher margins, which should push overall margins for the company.
Top Line Risks Remain With Weak Deferred Revenue Guidance
The company-wide restructuring of its sales force was very disruptive to the company, resulting in a 31% drop in license revenues last quarter. This disruption in its sales team continued to impact license revenues in Q3FY14, which were 27% lower than the same revenues from Q3FY13. In addition, deferred revenues for the company have declined from $4 billion in March 2013 to $3.6 billion in December 2013. Although this decline in deferred revenues is due to the completion of orders in its pipeline, Symantec’s management guides that a build-up in deferred revenue balance would take several quarters for the company.
We believe the reason for limited revenue growth from deferred revenue conversion going forward is related to unbilled deferred revenues in the company’s pipeline. Unbilled deferred revenues are off-balance sheet items which include deals and partnerships that have been contracted, but have not been invoiced yet. We believe the sales team restructuring caused a severe disruption in customer relationships, leading to a reduction in deal and partnership inflow. The company suggested as much on the call. We expect Symantec’s revenues to increase at an annualized rate of 3.4% between CY2013 and CY2017, reaching approximately $7.8 billion. However, a deeper reduction in deferred revenues could reduce our price estimate for Symantec.
Disclosure: No positions.
Just bought in hoping close to bottom -- will be watching carefully.