Symantec Delivers a Strong 2Q

Symantec Corporation (SYMC - Analyst Report) reported second quarter fiscal 2011 earnings per share of 34 cents, exceeding the Zacks Consensus Estimate of 25 cents.This apart, the quarter’s revenue of $1.48 billion also exceeded the Zacks Consensus Estimate of $1.45 billion.

Revenue

Symantec reported second quarter fiscal 2011 GAAP revenue of $1.480 billion, up 2% compared to $1.474 billion reported in the year-ago quarter. The increase in revenue may be attributed to solid performance by the Backup and Archiving segment, as well as good momentum in hosted services and data loss prevention.

Moreover, the company also witnessed growth in the public sector, attributable to the strength across all product lines registered by both the civilian and defense agencies.

Coming to business segments, the Consumer segment contributed 32.0% to total revenue, up 5.0% from the year-ago quarter. Security and Compliance contributed 24.0% to total revenue, up 7.0% from the year-ago quarter. Storage and Server Management accounted for 38.0% of total revenue, down 1.0% from the year-ago quarter.Services contributed 6.0% and declined 11% on a year-over-year basis.

International revenue comprised almost 50.0% of the total revenue in the second quarter and increased 3.0% on a year-over-year basis. The EMEA (Europe, Middle East and Africa) region generated 28.0% of total revenue in the quarter and declined 9.0% year over year. The APJ region (Asia-Pacific/Japan) generated 17.0% of total revenue, up 11.0% year over year. The Americas (which includes the United States, Latin America and Canada) generated 55.0% of revenue and increased 3.0% year over year.

Operating Results

Gross margin on a GAAP basis was 83.4% in the second quarter, up from 82.4% reported in the year-ago quarter. Excluding special items, such as stock compensation and amortization of acquired product rights, the non-GAAP gross margin in the quarter remained almost flat year over year at 85.2%, compared to 85.9% reported in the year-ago period. Gross margin increased as the total cost of revenue decreased substantially by 11.0%.

Operating margin on a GAAP basis was 14.7% in the second quarter, compared to 17.4% for the same quarter last year. Excluding special items, non-GAAP operating margin was 25.1%, down from 29.0% reported in the year-ago quarter.

Net income on a GAAP basis in the second quarter was $136.0 million compared to $155.0 million for the same quarter last year. This resulted in GAAP earnings per share of $0.17 compared to $0.19 in second quarter fiscal 2010.

Excluding special items like operating expense adjustment, non-cash interest expense, loss on extinguishment of debt, gain on sale of assets and amortization of intangibles, the non-GAAP net income was $266.0 million, compared to $295.0 million reported in the year-ago quarter, resulting in a non-GAAP earnings per share of $0.34, compared to earnings per share of $0.36 in the year-ago quarter.

Balance Sheet & Cash Flow

The company generated cash flow from operating activities of $310.0 million in the second quarter compared to $335.0 million in the previous quarter and ended the quarter with cash, cash equivalents and short-term investments of $2.26 billion, down from $2.74 billion in the previous quarter. This apart, the company’s GAAP deferred revenue balance stood at $2.725.

Guidance

For the third quarter of fiscal 2011, revenue is estimated at between $1.57 billion and $1.59 billion, up 2.0% to 3.0% compared to the year-ago quarter. GAAP diluted earnings per share are estimated at between $0.23 and $0.24. The company expects non-GAAP diluted earnings per share of between $0.32 and $0.33.

Conclusion

Symantec delivered encouraging second quarter results and provided a decent third quarter fiscal 2011 outlook. The company’s strong product portfolio, growth prospects in all its served markets, acquisitions, customer win momentum and strong cash generation ability are positives.

On the other hand, we are a bit concerned about the intense competition that the company faces from big and small players, as well as hardware and software manufacturers entering the IT security business. Moreover, the security offered by the new Windows operating systems also poses some challenges.

Symantec has a Zacks #3 Rank, which translates into a short-term Hold recommendation.

Read the full analyst report on SYMC