Symantec (SYMC) Down On Q4 Earnings Miss And Tepid View

Shares of Symantec Corporation (NASDAQ:SYMC) plunged in yesterday’s after-hour trade after the company reported dismal fourth-quarter fiscal 2017 results, wherein the company’s top and bottom lines, both fell short of our estimates. Moreover, lower-than-expected revenue guidance for the June quarter adds concerns to the company’s long-term prospects.

The company’s adjusted earnings (excluding deferred revenues fair value, amortization, restructuring and other one-time items but including stock-based compensation) of 5 cents per share came significantly lower than the Zacks Consensus Estimate of 20 cents. On a year-over-year basis also, the figure plummeted 68.8% mainly due to higher operating expenses.

Due to overall tepid performance and poor first-quarter fiscal 2018 revenue outlook, shares of Symantec fell over 7% in yesterday’s after-hour trade. Nonetheless, the stock has outperformed the Zacks categorized Computer-Software industry in the year-to-date period. Symantec’s shares gained 38.7% in the said period, while the industry’s gain was just 15.9%.

However, on a non-GAAP basis, Symantec’s earnings came in at 28 cents per share, which was at the mid-point of its own guidance range of 27–29 cents, but also marked a year-over-year increase of 27.3%.

Quarter in Detail

Symantec’s revenues of $1.115 billion jumped 27.7% year over year, mainly driven by strong performance at the company’s Enterprise Security segment, as well as benefit from the acquisitions of Blue Coat and LifeLock businesses. However, the figure fell short of the Zacks Consensus Estimate of $1.165 billion.

Excluding the benefit of LifeLock acquisition, the company’s revenues came in at $1.076 billion, which was below the mid-point of its guidance of $1.070–$1.090 billion (mid-point: $1.080 billion). Notably, Symantec’s guidance for the fiscal fourth quarter provided on Feb 1 did not include the contribution from the LifeLock acquisition which was completed on Feb 9. LifeLock contributed $100 million to the company’s total revenue.

Segment wise, the Consumer Security division witnessed a 21% year-over-year increase in non-GAAP revenues, while non-GAAP revenues at Enterprise Security surged 49% on a year-over-year basis.

Symantec’s adjusted gross profit of $910 million was up 24.3%, primarily attributable to a higher revenue base. However, as a percentage of revenues, gross margin contracted 220 basis points (bps) on a year-over-year basis to 81.6%, as the benefit of increased sales was more than offset by higher cost of goods sold.

Furthermore, adjusted operating income slumped 74.1% year over year to $44 million, as the benefits from increased revenues were more than offset by higher cost of goods sold and a 54.1% jump in adjusted operating expenses. Consequently, adjusted operating margin declined to 3.9% from 19.5% in the year-ago quarter.

On a non-GAAP basis, operating income grew 47% year over year to $314 million, while margin improved 220 bps to 26.7%. However, non-GAAP operating margin was lower than the company’s guidance range of 27–28%.

As per Symantec, it remains on track to realize over $550 million of cost savings by the end of fiscal 2018 through its cost-restructuring initiatives and synergies from the recently acquired businesses, Blue Coat and LifeLock. Till fiscal 2017, the company has achieved over $300 million in net cost efficiencies.

Adjusted net income for the quarter came in at $32 million compared with $105 million recorded in the year-ago quarter.

Balance Sheet & Cash Flow

Symantec exited the quarter with cash, cash equivalents and short-term investments of $4.247 billion compared with $5.575 billion last quarter. Long-term debt was $6.875 billion, down from $6.358 billion in the previous quarter.

During fiscal 2017, Symantec used operating cash flow of $220 million. Moreover, it paid $222 million as dividend and repurchased $500 million worth of common stocks during the period.

Guidance

The company initiated guidance for the first-quarter and fiscal 2018. For the fiscal, Symantec expects GAAP revenues in a range of $4.977–$5.077 billion (mid-point $5.02 billion) and non-GAAP revenues in the range of $5,100–$5,200 billion (mid-point $5.150 billion). The Zacks Consensus Estimate for the fiscal is pegged at $5.27 billion which is higher than the company’s guidance ranges on GAAP and non-GAAP basis both.

Non-GAAP operating margin is anticipated in a range of 36–37% (previously 26–28%). Non-GAAP earnings per share are projected to come between $1.75 and $1.85. The Zacks Consensus Estimate is pegged at 25 cents.

For the fiscal first quarter, Symantec anticipates GAAP and non-GAAP revenues in the range of $1.133–$1.163 billion (mid-point $1.148 billion) and $1.185–$1.215 billion (mid-point $1.20 billion), respectively. The Zacks Consensus Estimate is pegged at $1.28 billion.

Non-GAAP operating margin is projected in a range of 27–29%. However, on a GAAP basis it expects to report negative operating margin in the range of 8–10%. Further, management predicts reporting loss between 21 cents and 25 cents on a GAAP basis for the fiscal first quarter. However, on a non-GAAP basis, it estimates earnings between 28 cents and 32 cents.

Our Take

Symantec reported dismal fourth-quarter results, wherein the top and bottom lines lagged the respective Zacks Consensus Estimate. In addition, adjusted earnings marked a significant year-over-year decline. Apart from this, the company’s fiscal first quarter and fiscal 2018 revenue guidance were also disappointing, as both fell short of our estimates.

Smaller companies like Kaspersky are consistently launching comparable products. These, along with competition from the likes of Microsoft (NASDAQ:MSFT) , remain headwinds. The uncertainty over PC sales adds to its woes.

Nonetheless, investment in growth areas such as Enterprise Backup, Storage Management and Security businesses are likely to boost Symantec’s long-term prospects. Additionally, restructuring initiatives and synergies from acquisitions are expected to support the company’s bottom line.

Currently, Symantec carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the computer software space are Aspen Technology (NASDAQ:AZPN) and DST Systems (NYSE:DST) , both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Aspen and DST Systems have long-term expected earnings growth rate of 13% and 10%, respectively.

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