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Symantec (SYMC) Q3 Earnings Beat, Shares Fall on Sales Miss

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Symantec Corporation's (SYMC - Free Report) third-quarter fiscal 2018 earnings came ahead of the Zacks Consensus Estimate and the guidance. Non-GAAP revenues however missed the consensus mark and also fell short of the company’s expectations.

Management attributed the dismal revenue performance to a faster-than-expected shift to ratable and subscription-based revenue model, wherein revenues are recognized at a later date. However, management is optimistic about the shift as it promises long-term growth opportunities for the company.

The company’s dismal top-line performance sends it shares down 2.3% during yesterday’s after hour trade. Notably, the stock has significantly underperformed the industry to which it belongs to in the last one year period. Symantec has lost 0.1% of its value in the said period while the industry is up 42.2%.

 


Quarter in Detail

On a non-GAAP basis, Symantec generated revenues of $1.234 billion, up 13% on a year-over-year basis. The figure also fell short of the mid-point of management’s projection of $1.250-$1.280 billion (mid-point $1.265 billion).

Symantec’s revenues of $1.209 billion on a GAAP basis jumped 16% year over year but could not meet the mid-point of its guidance of $1.227-$1.257 billion (mid-point $1.242 billion).

Moreover, revenues, both on a GAAP and non-GAAP basis, fell short of the Zacks Consensus Estimate of $1.278 billion.

Notably, with a move toward a “more ratable product mix” in the Enterprise revenue model, the company is focusing on implied billings and deferred revenue growth as it provides better predictability as revenues are not recognized upfront.

Segment wise, Consumer Digital Safety witnessed an increase of 4% while Enterprise Security division declined 1% from the year-ago quarter. Nevertheless, deferred revenues, adjusted for acquisitions and divestitures for Consumer Digital Safety grew 5%. Enterprise Security segment increased 23% on a year-over-year basis.

Non-GAAP implied billings grew 32.1% on a year-over-year basis.

Symantec’s non-GAAP gross profit of $985 million was up 15.5%. However, as a percentage of revenues, gross margin increased 140 basis points (bps) on a year-over-year basis to 79.8%.

Furthermore, non-GAAP operating income surged 40% year over year to $463 million, while margin expanded 710 bps to 37.5%. Moreover, non-GAAP operating margin was above the high end of the company’s guidance range of 36¬¬–37%. The year-over-year increase was mainly driven by increasing operational efficiency “including the completion of the net cost reduction and synergy programs.”

Non-GAAP net income for the reported quarter came in at $328 million compared with $209 million recorded in the year-ago quarter.

Notably, as a result of the recent tax reforms, the effective tax rate for fiscal 2018 was reduced from 29.5% to 26.8% and the year-to-date tax rate was adjusted accordingly.

Management noted that the company received a tax benefit of around $1.6 billion, pertaining to certain “adjustments to previous deferred tax liabilities related to foreign earnings and re-measurement of U.S. deferred income taxes.” However, it was partially counterpoised with a one-time transition tax of $800 million.
    
The company reported earnings of 49 cents per share that came ahead of the Zacks Consensus Estimate of 44 cents per share and increased 53.1% on a year-over-year basis. The figure was positively impacted by elevated operating margins and the changes in effective tax rate.

Balance Sheet & Cash Flow

Symantec exited the fiscal third quarter with cash, cash equivalents and short-term investments of $2.532 billion compared with $2.026 billion recorded in the prior quarter. The company ended the third quarter with gross debt of $5.7 billion. Long-term debt was $5.587 billion at the end of fiscal third quarter.

During the quarter, Symantec generated operating cash flow of $294 million.

Guidance

Considering the effect of faster-than-expected booking mix shift toward more “ratable revenue recognition”, the company lowered its revenue and non-GAAP earnings guidance for fiscal 2018.

For the fiscal, Symantec now expects GAAP revenues in the range of $4.790-$4.820 billion (mid-point $4.805 billion) and non-GAAP revenues in the range of $4.915-$4.945 billion (mid-point $4.930 billion), down from the previous guidance of $4.877-$4.977 billion (mid-point $4.927 billion) and $5 -$5.1 billion (mid-point $5.087 billion), respectively. The Zacks Consensus Estimate for the fiscal is pegged at $5.04 billion.

Non-GAAP earnings per share are now projected to come between $1.60 and $1.64, down from the earlier forecast of $1.66-$1.76. The Zacks Consensus Estimate is pegged at $1.68.

For the fourth quarter of fiscal 2018, Symantec anticipates GAAP and non-GAAP revenues in the range of $1.164-$1.194 billion (mid-point $1.179 billion) and $1.175-$1.205 billion (mid-point $1.190 billion), respectively. The Zacks Consensus Estimate is pegged at $1.28 billion.

Non-GAAP operating margin is projected in the range of 33-34%. However, on a GAAP basis, it expects to report an operating margin between (1%) to break-even. Further, management estimates earnings between 37 cents and 41 cents on a non-GAAP basis for the fiscal fourth quarter. The Zacks Consensus Estimate is pegged at 50 cents.

Bottom Line

The company’s cross selling strategies are proving to be worthy. Realignment of the sales force increased deals worth above $1 million from 37 in the first quarter to over 100 in the third quarter. The accelerated adoption of the company’s Integrated Cyber Defense Platform and cloud proxy solution is a major tailwind for the company.

Notably, Symantec’s acquisition of BlueCoat, which assisted the company in winning a deal with a prominent construction company during the quarter, is encouraging. The addition of a Fortune 500 financial services company to its clientele is yet another positive.

However, management slightly disappointed as it was not able to properly assess the faster-than-expected booking mix shift toward more “ratable revenue recognition”. Nevertheless, management is extremely optimistic about the long-term performance of the company due to the shift in the subscription-based revenue model as customers are increasingly preferring the same.

Zacks Rank and Stocks to Consider

Symantec has a Zacks Rank #4 (Sell).

Some of the better-ranked stocks in the broader technology sector are Micron Technology, Inc. (MU - Free Report) ,  The Trade Desk Inc. (TTD - Free Report) and Lam Research Corporation (LRCX - Free Report) , all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term EPS growth rate for Micron, The Trade Desk and Lam Research is projected to be 10%, 25% and 14.9%, respectively.

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