It has been about a month since the last earnings report for Symantec (SYMC). Shares have added about 7% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Symantec due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Symantec Reports Q1 Results
Symantec’s first-quarter fiscal 2020 non-GAAP earnings per share (EPS) of 43 cents topped the Zacks Consensus Estimate of 32 cents and came above the guided range of 30-34 cents. The figure also increased 26.5% year over year. Cost reduction initiatives aided bottom-line growth.
On a non-GAAP basis, Symantec generated revenues of $1.25 billion, which beat the consensus estimate of $1.19 billion. Moreover, revenues were up 7.8% from the year-ago quarter. Notably, the top line came above the guided range of $1.18-$1.21 billion.
The company benefited from strength in both Enterprise Security and Consumer Cyber Safety segments.
Notably, the company also announced that it has entered into a definitive agreement to sell its Enterprise security business to Broadcom (AVGO) for $10.7 billion in cash.
Quarter in Detail
Consumer Cyber Safety revenues for the quarter were $636 million, up 6% year over year in constant currency, and flat on a reported basis. Revenues from this segment were driven by 5% higher partner revenues and strong subscription revenues. Direct average revenue per user (ARPU) of $8.83 per month grew 2% year over year. Moreover, for this segment, reported billings of $593 million grew 9.2%.
Enterprise Security revenues of $615 million grew 11% year over year in constant currency and 4% on a reported basis. This segment accounted for approximately 50% of total revenues. Higher mix of sales yielding upfront revenues, and higher-than-expected ratable revenues drove this segment’s top line. Enterprise Security reported billings of $497 million, up 10% year over year.
In the Consumer Cyber Safety business, the company is witnessing improvement in ARPU on the back of successful cross-sell and improvement in retention rate (85% currently) for its direct customer base.
During the quarter, the company launched Integrated Solution memberships on the Norton and LifeLock websites in the United States. Moreover, in Canada, the United Kingdom and Germany, the Norton.com website now offers integrated offerings that include secure backup, VPN and privacy controls.
Symantec reported non-GAAP operating income of $379 million, which declined 15.5% from the year-ago quarter. Non-GAAP operating margin contracted 200 basis points (bps) to 30%.
Enterprise Security Operating margin was 7% and that of Consumer Digital Safety was 53%.
Balance Sheet & Cash Flow
Symantec exited the fiscal first quarter with cash, cash equivalents and short-term investments of $1.69 billion compared with $2.04 billion in the previous quarter. The company ended the quarter with long-term debt of $3.96, flat sequentially.
It generated operating cash flow of $325 million compared with $547 million in the prior quarter.
During the fiscal first quarter, the company repurchased $541 million worth of shares. Symantec recently increased its share repurchase program by $1.6 billion and is expected to raise its quarterly dividend by 67% to $12.05 per share or 50 cents annually after the transaction closes.
As Symantec expects the sale of its Enterprise Security business to close in the fiscal third quarter, it did not provide a fiscal 2020 guidance.
For the second quarter of fiscal 2020, Symantec anticipates non-GAAP revenues in the range of $1.16-$1.21 billion. The Zacks Consensus Estimate for revenues stands at $1.19 billion, indicating 2.62% growth from the year-ago reported figure.
Non-GAAP operating margin is projected to be 31-33%. Further, management estimates earnings between 40 cents and 44 cents on a non-GAAP basis.
Enterprise Security revenues for the fiscal second quarter are expected to be between $565 million and $600 million, and for Consumer Digital Safety in the $590-$605 million range.
As part of its restructuring plan, the company expects to downsize and shut down several data centers and units worldwide. Approximately 7% of net global headcount is expected to reduce. This restructuring is expected to last the entire fiscal 2020.
Increased investment in direct customer acquisition programs is expected to be an overhang on margins in the fiscal second quarter. These investments are expected to be funded by reductions in infrastructure and G&A costs. However, positive impact on subscriber growth is expected to take some time to show.
Management is optimistic that after the 12-month transition period as a standalone company, the Consumers Cyber Safety business can generate annual EPS of $1.50.
The divestment will allow the significant cash generation from operations to fund growth and continue innovation within Norton LifeLock.
For the long term, Symantec expects the Consumer Cyber Safety business to witness revenue growth in the mid-single digits with operating margins of approximately 50%, and earnings growth above revenue rise. This, in turn, is expected to generate free cash flow of approximately $7 million annually.
How Have Estimates Been Moving Since Then?
Fresh estimates followed a downward path over the past two months.
Currently, Symantec has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Symantec has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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