Symantec Beats in 3Q, Plans Layoffs

Zacks

Symantec Corporation (SYMC) reported earnings per share (EPS) of 40 cents in the third quarter of 2013, comfortably beating the Zacks Consensus Estimate of 33 cents.

Revenues

Symantec reported revenues of $1.79 billion in the quarter, up 4.4% year over year from $1.72 billion and above the Zacks Consensus Estimate of $1.73 billion.

Year over year, revenues from Consumer segment grew 2.0%, Security and Compliance grew 4.0%, while Storage and Server Management and Services segment revenues increased 9.0% each. Consumer revenue improved due to up-selling of premium and new suites to existing customers. Security and Compliance revenue grew owing to strength in managed security services and encryption businesses. Higher sales of archiving and net back-up products led to growth in Storage and Server Management segment. Higher business critical services unit sales pushed up the Services segment.

The company generated around 52.0% of total revenues from the International market, up 6.0% from the year-ago quarter. Moreover, the Europe, Middle East and Africa region (28.0% of revenues) grew 6.0% on a year-over-year basis. Asia Pacific/Japan revenue (contributing around 19.0% of the total revenue) registered growth of 7.0% on a year-over-year basis. The Americas, which include United States, Latin America and Canada, represented around 53.0% of total revenues, and witnessed year-over-year growth of 3.0%.

Operating Results

Gross margin in the quarter was 83.3%, down 90 basis points (bps) from 84.2% in the year-ago period. The decline in gross margin was due to higher costs associated with the company’s businesses.

Operating margin was 16.6%, down 90 bps from 17.5% in the year-ago quarter. Operating margin decreased as a result of higher operating expenses.

Net income in the reported quarter was $212.0 or 30 cents per share compared with $240.0 million or 32 cents per share in the year-ago period.

Excluding special items like operating expense adjustment, non-cash interest expense and related tax adjustments but including stock-based compensation expenses, adjusted net income in the quarter was 40 cents per share compared with 39 cents per share in the year-ago period.

Balance Sheet & Cash Flow

Symantec registered cash, cash equivalents and short-term investments of $4.3 billion, slightly up from $4.0 billion in the prior quarter. Long-term debt of the company remained unchanged at $2.09 billion. Cash flow from operating activities was $463.0 million versus $178.0 million in the prior quarter.

During the quarter, the company repurchased 11 million shares for an average price of $17.94, totaling $200.0 million.

The company also announced plans to return 50.0% of free cash flow through share buybacks and dividend payouts over a period. For this, Symantec authorized a $1.0 billion share buyback program and initiated dividend payment of 25 cents a share. The first dividend will be paid in Jun 2013.

Guidance

There was no explicit guidance disclosed during the earnings call. But management mentioned that it expects revenues and deferred revenues for the fourth quarter 2013 to grow 1%–3% year over year on a constant currency basis.

The company also appointed a new CEO, Steve Bennett, who had been associated with Intuit Inc. (INTU) and General Electric Co. (GE).

The new chief announced plans to layoff managers and staff across certain operating divisions in order to boost operating margins. But on the other hand, management stated that research and development expenses would rise on account of new product launches.

Conclusion

Symantec has delivered decent third quarter 2013 results with EPS and revenue surpassing the Zacks Consensus Estimates. The company also witnessed good geographical as well as segmental revenue performances.

Reduction in tech spending by different government and private organizations, new/improved offerings from Kaspersky and McAfee -- (acquired by Intel Corp. (INTC)) -- as well as the prevailing economic turmoil in Europe, and weak PC market will likely dampen the company’s business prospects.

However, we remain overly positive on Symantec given its restructuring initiatives (that would boost margins and eventually earnings), appointment of a new CEO and continuous share buybacks.

Currently, Symantec holds a Zacks Rank #1 (Strong Buy).

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