Symantec Beats Q2 Earnings, Misses Rev

Symantec Corporation (SYMC) reported adjusted earnings (excluding amortization, restructuring and other one-time items but including stock based compensation) of 47 cents in the second quarter of 2014, comfortably beating the Zacks Consensus Estimate of 40 cents. On a year-over-year basis, adjusted earnings increased 16.7% from the year-ago quarter.

Revenues

Symantec reported revenues of $1.64 billion, which was down 3.7% year over year and lagged the Zacks Consensus Estimate of $1.68 billion. During the quarter, Symantec’s revenues from content, subscription and maintenance (92% of total revenue) segment remained flat on a year-over-year basis at $1.49 billion while license revenues (8% of total revenue) plummeted 31.3%.

Revenues from the User Productivity & Protection segment moved down 3.0% year over year, primarily due to softness in the Endpoint Management segment. Information Security segment revenues decreased 2.0% on a year-over-year basis, primarily due to weak mail, web and data center security businesses, which more than offset the improvement in authentication and MSS businesses.

Information Management revenues decreased 5% year over year primarily due to Backup Exec and information availability business which offset the increase in NetBackup appliances.

International market revenues decreased 3% from the year-ago quarter. Moreover, the Americas, which includes the United States, Latin America and Canada, witnessed year-over-year revenue decline of 3%. The Europe, Middle East and Africa region’s revenues grew 4% on a year-over-year basis. Asia-Pacific/Japan revenues registered a decline of 14% on a year-over-year basis.

Operating Results

Symantec’s adjusted gross margin (excluding amortization, restructuring and other one-time items but including stock-based compensation) in the quarter was down 96 basis points (bps) on a year-over-year basis to 83.5% primarily due to a lower revenue base and higher mix of appliance and hosted solutions business.

Adjusted operating margins expanded 86 bps to 25.2% from the year-ago quarter, primarily due to lower operating expenses as a percentage of revenues. Operating expenses as a percentage of revenues declined 193 bps.

Symantec reported adjusted net income (excluding amortization, restructuring and other one-time items but including stock-based compensation) of $330.3 million or 47 cents compared to $283.4 million or 40 cents reported in the year-ago quarter.

Balance Sheet & Cash Flow

Symantec exited the quarter with cash, cash equivalents and short-term investments of $3.83 billion, which was up from $3.78 billion in the previous quarter. Long-term debt for the company remained flat at $2.09 billion. Cash flow from operating activities was $191 million.

During the quarter, Symantec spent $125 million to repurchase 5.2 million shares at a price of $24.99. The company has nearly $908 million remaining under the current stock repurchase plan. The company also paid dividends worth $105 million.

Guidance

For the third quarter of 2014, the company expects GAAP revenues in the range of $1.63 billion to $1.67 billion, down from $1.79 billion reported in the year-ago period. Moreover, non-GAAP operating margins are expected in the range of 25.6% to 26.2% compared to 25.9% last year.

The company also expects non-GAAP earnings per share between 41 cents and 43 cents compared to 45 cents in the year-ago period. The Zacks Consensus Estimate stands at 47 cents.

Our Take

Symantec has delivered mixed second-quarter 2014 results, with earnings per share surpassing the Zacks Consensus Estimate but revenues lagging the same. Revenue declines across all its segments were witnessed due to lower-than-expected demand. However, operating margins expanded due to lower expenses.

Moreover, the uncertainty over PC sales is going to affect its User Productivity & Production throughout the year. Additionally, as smaller companies like Kaspersky are consistently bringing comparable products to the market, competition continues to intensify. Reduction in tech spending, stiff competition from McAfee, Intel Corp. (INTC) and Microsoft (MSFT) as well as the prevailing economic turmoil in Europe may have some dampening effect on Symantec’s business prospects. Furthermore, the company provided a tepid guidance which is expected to remain an overhang on the stock.

Currently, Symantec carries a Zacks Rank #3 (Hold). Investors can also consider Apple (AAPL) which carries a Zacks Rank #2 (Buy) for investing.

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