- While Symantec continues to display strong opex discipline, revenue growth is finally picking up, giving confidence in the FY15 guidance.
- Former CEO Bennett was on the right track. We believe that the Board fired him to push for a sale of the company.
- Symantec is a perfect target for private equity firms: it offers a low valuation (12.5x 2015 EPS) and generates significant cash-flows.
- Symantec appears as a defensive tech play in these tough market conditions, with significant upside potential if M&A materializes.
Another quarter, another beat
For the third time in a row, Symantec (NASDAQ:SYMC) beat revenues and EPS expectations (+4% and +5% respectively) when it released its Q1 earnings report last week, confirming our view that the company's turnaround plan is well on track (please see our previous article "The Turnaround Is Still On Track"). The Q2 guidance was a bit light (EPS of $0.40-0.44 vs. consensus of $0.45) but we would highlight that it's now pretty usual for the company to provide conservative quarterly guides.
Importantly, Symantec left unchanged its FY15 guidance, in line with the Street ($6.63-6.77bn revenue vs. consensus of $6.69bn and $1.84-1.92 EPS vs. consensus of $1.88). While some investors have voiced concerns about the company's ability to reach this guidance (which implies roughly flat revenues year-on-year), there are reasons to be optimistic: Symantec's revenue growth picked up recently (+2% in Q1 and flat at constant currency vs. -6% in FY14 H2) and new product introductions (24 new products in the last two quarters and 24 more by the end of the fiscal year) will clearly help.
The Board probably fired Bennett to push for a sale of the company
Back in March, we were pretty surprised by the dismissal of CEO Steve Bennett. Bennett is believed to have been fired because of his product strategy and failure to ignite short-term revenue growth. But the above-mentioned figures and interim CEO Michael Brown's comments during the Q1 conference call make it hard to accept as true that theory. Indeed, Symantec has been delivering in line to slightly above expectations for several quarters, revenue growth is finally picking up and is "ahead of our entire internal plan" according to Brown. And it looks like the sales force reorganization initiated last year is bearing fruit as Brown commented that "our separation of the sales force into new business and renewals teams has led to improved performance."
In all, this suggests in our view that the Board probably fired Bennett to seek a sale or breakup of the company, keeping in mind that Bennett did not undertake a single disposal following his strategic review of the company two years ago. Interestingly, just a few days after Bennett's firing, Bloomberg and Reuters reported that Symantec hired an investment bank to explore its options.
The perfect candidate for a breakup/LBO scenario
With the Board's support, the odds of a breakup/LBO are pretty good:
1/ The valuation is particularly low for a software company, around 12.5x 2015 EPS vs. Check Point (NASDAQ:CHKP) at 17.5x.
2/ Despite top-line issues, margins and cash-flows are pretty healthy with a free cash-flow yield close to 10% (i.e. more than $1bn a year).
3/ Symantec has two main businesses, security software and storage, that could be relatively easily broken up.
4/ There is no real captain on board given that the interim CEO Mr. Brown expressed his wishes not to be considered for the permanent role.
In conclusion, we believe that against the current choppy trading backdrop, M&A speculation and low valuation levels are likely to sustain Symantec's outperformance vs. other tech names.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.