Symantec Corporation (SYMC - Free Report) reported modest second-quarter fiscal 2017 results wherein its revenues surpassed the Zacks Consensus Estimate while its adjusted earnings (excluding deferred revenues fair value, amortization, restructuring and other one-time items but including stock-based compensation) matched the same. The company’s adjusted earnings came in at 15 cents per share.
Quarter in Detail
Symantec’s revenues of $979 million increased 8.1% year over year and surpassed the Zacks Consensus Estimate of $966 million. Moreover, quarterly revenues were above the mid-point of the company’s guidance range of $960 million to $990 million (mid-point: $975 million). The robust top-line growth was mainly driven by strong performance at the company’s Enterprise Security segment.
Furthermore, adjusted for deferred revenues fair value, revenues were $1.015 billion compared with $906 million in the year-ago quarter.
Segment-wise, the Consumer Security division witnessed a 4% year-over-year decline in revenues, while revenues at Enterprise Security increased 18% on a year-over-year basis. Moreover, adjusted for deferred revenues fair value, Enterprise Security revenues surged 26%.
Symantec’s adjusted gross profit of $851 million was up 11.5%, primarily due to a higher revenue base and lower cost of goods sold. Consequently, as a percentage of revenues, gross margin improved 270 basis points (bps) on a year-over-year basis to 86.9%.
However, adjusted operating income declined 11.3% year over year to $211 million due to higher adjusted operating expenses. Consequently, adjusted operating margin contracted 470 bps year over year to 21.6%.
On a non-GAAP basis, operating income grew 5% year over year to $296 million while margin contracted 200 bps to 29.2%. However, non-GAAP operating margin was 520 bps higher than the upper end of the guided range of 21% to 24%.
The better-than-expected margin was mainly driven by strong top-line growth and realization of cost savings ahead of time. As per Symantec, it realized $100 million of cost savings through its cost restructuring initiatives and synergies from the newly acquired business, Blue Coat.
Adjusted net income for the quarter came in at $98.7 million or 15 cents per share compared with $160.8 million or 23 cents. The year-over-year decline was mainly due to higher operating expenses, which were partially offset by increased revenues and gross profit.
However, on non-GAAP basis, the company posted earnings of 30 cents per share which was a penny higher than the year-ago quarter and also came in better than the guided range of 18 cents to 21 cents.
Balance Sheet & Cash Flow
Symantec exited the quarter with cash, cash equivalents and short-term investments of $5.619 billion, compared with $6.118 billion last quarter. Long-term debt was $6.576 billion, up from $2.605 billion in the previous quarter.
During the first half of 2016, Symantec used operating cash flow of $717 million. Moreover, it paid $120 million as dividend during the period.
The company reiterated its non-GAAP revenues guidance but raised non-GAAP operating margin and earnings per share outlook for fiscal 2017. For fiscal 2017, Symantec still expects revenues in the range of $4.040 billion to $4.120 billion (mid-point $4.08 billion). The Zacks Consensus Estimate is pegged at $4.08 billion.
Non-GAAP operating margin is now anticipated in the range of 27% to 29% (previously 26%–28%). Non-GAAP earnings per share are now expected to be $1.12 to $1.18 (previously $1.08 to $1.14).
For the third quarter of fiscal 2017, Symantec expects non-GAAP revenues in the range of $1.070 billion to $1.090 billion (mid-point: $1.080 billion). The Zacks Consensus Estimate is pegged at $1.11 billion.
Non-GAAP operating margin is projected in the range of 27%–28%. Management expects non-GAAP earnings per share of 27 cents to 29 cents.
Blue Coat Acquisition
During the first quarter of fiscal 2017, Symantec completed the acquisition of Blue Coat, Inc., a leading web security solution provider, from private equity firm Bain Capital.
Symantec and Blue Coat had entered into a definitive agreement in June this year, per which Symantec paid a cash consideration of $4.65 billion for the acquisition.
The addition of Blue Coat is expected to enhance Symantec’s capabilities significantly. As per Symantec, the acquisition will not only provide economies of scale and bolster its existing portfolio, but will also provide necessary resources to develop solutions to “protect large customers and individual consumers against insider threats and sophisticated cybercriminals”.
The transaction is anticipated to help Symantec realize approximately $150 million of cost synergies by the end of fiscal 2018. This will be in addition to cost savings of $400 million under its previously announced cost-efficiency program. Hence, the total planned cost savings and synergies aggregate to $550 million.
Symantec reported modest second-quarter results wherein its top line surpassed the Zacks Consensus Estimate and the bottom line came in line with the same. We are encouraged by the company’s overall performance as it exceeded the guidance on all metrics.
According to Thomas Seifert, Symantec CFO, “Our Q2 results exceeded guidance on all metrics including both our Consumer Security and Enterprise Security segments, and we have realized more than $100 million of our planned $550 million cost savings and synergies. With the notable progress we’re making in improving our cost structure and integrating Blue Coat, we are on track to achieve the cost efficiencies and synergies to which we guided by the end of fiscal year 2018 while maintaining a strong investment in our product road map and R&D.”
Moreover, Symantec’s guidance for the full year as well as third quarter were encouraging wherein it expects strong revenue and margin improvements. However, revenue expectation for the third quarter was below the Zacks Consensus Estimate.
Going ahead, investment in growth areas such as Enterprise Backup, Storage Management and Security businesses are expected to boost Symantec’s long-term prospects. Moreover, restructuring initiatives and synergies from acquisitions are expected to support its bottom line.
However, smaller companies like Kaspersky are consistently launching comparable products. These, along with competition from the likes of Intel (INTC - Free Report) and Microsoft (MSFT - Free Report) , remain headwinds. The uncertainty over PC sales adds to its woes.
Currently, Symantec carries a Zacks Rank #3 (Hold).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
A better-ranked stock in the computer software space is Infoblox Inc. , sporting a Zacks Rank #1. The stock has surpassed the Zacks Consensus Estimate thrice while missing the same once in the trailing four quarters. It has an average positive earnings surprise of 69.05%.
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