Why Symantec is benefiting from its strong financials

Market Realist

Must-know: Symantec Corp's 1Q15 earnings review (Part 12 of 13)

(Continued from Part 11)

Overview of Symantec

With a $16.8 billion market cap, Symantec (SYMC) is a leading security software developer. It derives a majority of its revenues from content, subscription, and maintenance revenue, while licensing contributes a miniscule 9% towards its consolidated revenues. The changing IT environment has forced Symantec into a transition mode. It’s taking umpteen measures, like its 4.0 strategy, to adapt to technological changes brought on by mobile and cloud computing.

Segment’s performance

The company derives a majority of its revenues from the user productivity and protection segment that comprises of endpoint security and management, encryption, and mobility, with a revenue share of 43%. It’s followed by the information management segment that consists of backup and recovery, data archiving, and e-discovery, which contributes 37% of revenues. The information security software contributed 20% to total revenues. The previous chart shows the various operating expenditure components for the leading players in the software industry.

Among all the leading players—which includes Microsoft (MSFT), Oracle (ORCL), IBM (IBM), SAP (SAP), and Symantec—Symantec spent the maximum on sales and marketing, at 40% of its revenues. IBM spent the lowest, at 1%. Symantec’s net margins have averaged ~13% over last five years.

Cash and debt position

Symantec reported that it has $4.04 billion worth of cash, cash equivalents, and short-term investments. As of June 2014, it carried $2.1 billion total debt on its books. Due to its subscription-based business, Symantec has a negative cash conversion cycle, highlighting the fact that the company manages its working capital efficiently.

The previous chart shows Symantec’s net margins and free cash flow margin growth over the years.

Cash flows and investment in R&D

Firms that generate a free cash flow (or FCF) margin above 5% are, in the usual circumstances, considered “cash cows.” During the last five years, from 2010–2014, Symantec’s free cash flow margin has averaged at about 20%, although it has consistently experienced a fall since 2013. Symantec’s cash flow generation, as is evident, is relatively strong. As a part of its 4.0 strategy, Symantec has increased research and development (or R&D) expenditure from 14% of its revenue in 2013 to 16% by 2017 on account of new product launches.

Concerns

In its strategy, the company disclosed its plans to launch eight to ten new products across all its operating segments. The successful acceptance and adoption of these new offerings have a significant bearing on the company’s operations, as it could reduce its customer base and weaken the “high switching costs” associated with the company. Reduced IT spending, new and improved offerings by peers like Kaspersky and McAfee (INTC), economic turmoil prevalence, and a weak PC market are the key factors that can dampen the company’s future prospects.

Continue to Part 13

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