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Summary

  • Symantec guides for flat revenues in 2015.
  • This is actually aggressive given the transition, cost cuts and current revenue declines.
  • Therefore the aggressive guidance actually leaves risks towards the downside in my opinion.

Symantec (NASDAQ:SYMC) announced a solid set of first quarter results and an upbeat outlook for the fiscal 2015, a year in which the company expects revenues to stabilize, while boosting operating margins.

Despite this comforting guidance, the fair valuation and solid balance sheet I remain cautious given the history of disappointments and what I believe are risks of this guidance towards the downside.

First Quarter Results

Symantec announced first quarter revenues of $1.62 billion which is down by 7% compared to last year as overall currency movements had no effect on reported revenues.

Yet Symantec was extremely lean in its operations as cost cuts sorted effect. Gross margins were actually up by 20 basis points to 87.6% despite the negative growth. Impressively enough, operating expenses were down by 12% as sales and marketing costs were cut sharply while research and development investments were up.

As a result of a higher effective tax rate, net earnings growth was limited. Earnings rose by 14% to $217 million, coming in at $0.31 per share.

Valuation

Symantec ended the fiscal year with $4.1 billion in cash and equivalents while holding $2.1 billion in debt, resulting in a solid net cash position of about $2.0 billion.

Full year revenues of $6.7 billion were down by 3%, while strict cost control allowed the firm to report a 19% jump in earnings towards $898 million.

At $21 per share the equity in the company is valued at $14.5 billion, which values operating assets at $12.5 billion. This values the operating assets at 1.9 times annual revenues and roughly 13-14 times annual earnings.

The quarterly dividend of $0.15 per share provides investors with a 2.9% dividend yield which is rather generous. On top of that, Symantec bought back 5.5 million shares at a cost of $125 million over the past quarter.

Looking Into 2015

Symantec focuses on cutting costs and boosting efficiency in order to report non-GAAP operating margins of 30% by the fourth quarter of 2015. To illustrate the ambitions, Symantec's full year non-GAAP operating margins for the past fiscal year of 2014 came in at 27.5%.

While trying to achieve these ambitious targets, Symantec remains committed to return capital to investors, while operating with a solid balance sheet. Symantec's current authorized repurchase program totals $658 million.

Negative revenue trends are still foreseen for the current first quarter with revenues seen between $1.65 and $1.69 billion, down from $1.71 billion last year. GAAP earnings are projected between $0.31 and $0.33 per share, up sharply from last year's $0.22 per share.

Full year revenues are seen between $6.63 and $6.77 billion, which at the midpoint is unchanged compared to 2014. GAAP earnings are seen between $1.43 and $1.51 per share.

Implications For Investors

I must say that I am quite impressed with the company guiding for flat revenue growth in its fiscal 2015 which is ought to be combined with margin expansion. To me this seems to be quite aggressive targets while the company previously already announced a 5% organic growth target by 2017 in its investor presentation.

While Symantec is a well-known and respected business, having all of the Fortune 500 businesses as its customer, as well as securing 135 million consumers through its Norton anti-virus software, the company is facing headwinds.

This might seem surprising given that we hear about data-breaches virtually every day now, including high profile breaches like that of Target (NYSE:TGT). Earlier this week, Vice President Brian Dye announced anti-virus as being dead. According to Dye Symantec's products catch less than half of total cyber attacks, yet the business makes up a huge portion of Symantec's revenues. Rather than protection, Symantec has to built solutions which detect and respond, which is quite a transition and poses a challenge.

This means that the whole user protection business of the company will need a significant overhaul. As a matter of fact the information security and information management business of Symantec need to be all combined as well to create better and more tailored product offerings. This difficult task will have to be achieved while the company is already in cost cutting mode, making the task at hand extra difficult.

While the guidance is comforting, I actually believe there are downside risks to the estimates making the story not as attractive as it sounds. On the other hand, the relative appealing valuation and strong balance sheet limit at least the short term risk.

I remain on the sidelines.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Symantec - Strong Guidance Actually Creates Risks To The Downside