SUMMARY. Risk Level *

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1 February 06, 2015 Symantec Corporation Current Recommendation Earnings Update: Symantec Reports Q3 Results SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 04/14/2013 Current Price (02/05/15) $25.97 Target Price $ Week High $ Week Low $18.20 One-Year Return (%) Beta 0.92 Average Daily Volume (sh) 3,635,827 Shares Outstanding (mil) 690 Market Capitalization ($mil) $17,923 Short Interest Ratio (days) 2.78 Institutional Ownership (%) 90 Insider Ownership (%) 0 Annual Cash Dividend $0.60 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 3.3 Earnings Per Share (%) 7.6 Dividend (%) N/A P/E using TTM EPS 15.0 P/E using 2015 Estimate 15.2 P/E using 2016 Estimate 14.4 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page SUMMARY Risk Level * (SYMC-NASDAQ) Symantec delivered tepid third-quarter fiscal 2015 results as year-over-year comparisons were unfavorable for both earnings and revenues. Moreover, the company has lowered its fiscal 2015 outlook. Continued investments to launch new and innovative products could impact margins in the near term. Furthermore, the uncertainty over PC sales further adds to its woes. Nonetheless, investing in growth areas such as enterprise backup, storage management and security businesses will boost Symantec s longterm performance. These, along with restructuring actions are positives and support margins. Share buybacks and dividends are other positives for investors. Thus, we reiterate our Neutral recommendation on Symantec. Below Avg., Type of Stock Large-Blend Industry Comp-Software Zacks Industry Rank * 158 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Jun) (Sep) (Dec) (Mar) (Mar) ,668 A 1,699 A 1,791 A 1,748 A 6,906 A ,709 A 1,637 A 1,705 A 1,625 A 6,676 A ,735 A 1,617 A 1,638 A 1,635 E 6,658 E ,682 E 1,630 E 1,704 E 1,688 E 6,704 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Jun) (Sep) (Dec) (Mar) (Mar) 2013 $0.39 A $0.41 A $0.38 A $0.40 A $1.58 A 2014 $0.39 A $0.47 A $0.48 A $0.42 A $1.77 A 2015 $0.41 A $0.43 A $0.47 A $0.44 E $1.71 E 2016 $0.43 E $0.44 E $0.48 E $0.45 E $1.80 E Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 RECENT NEWS Symantec (SYMC) Beat on Q3 Earnings Estimates; Down Y/Y Feb 5, 2015 Symantec reported tepid third-quarter fiscal 2015 results as year-over-year comparisons of both the top and bottom line were unfavorable. However, earnings surpassed the Zacks Consensus Estimate but revenues missed the same. The company s reported adjusted earnings (excluding amortization, restructuring and other one-time items but including stock-based compensation) of $0.47, which beat the Zacks Consensus Estimate of $0.43. However, quarterly adjusted earnings were a penny lower than the year-ago comparable quarter mainly due to weak top-line results. Revenues Symantec reported revenues on a non-gaap basis of $1.638 billion, which lagged the Zacks Consensus Estimate of $1.671 billion and declined 3.9% year over year. Increased revenues from License segment (up 15%) was more than offset by lower revenues from Content, Subscription and Maintenance segment (down 6%). Now coming to the company s realigned business segments, which includes Consumer Security, Enterprise Security and Information Management. Symantec s Consumer Security segment revenues were down 11% year over year primarily due to the exit of certain OEM contracts which were not profitable and rearrangement of certain retail channels. Revenues from Enterprise Security were also down 4% from the year-ago quarter due to the continued softness in Endpoint Management and Mail and Web Security, which more than offset the improvement in Endpoint Protection and DLP products. Information Management revenues increased 1% year over year, primarily due to improvement in the NetBackup Appliances and software business. Operating Results Symantec s adjusted gross margin (excluding amortization, restructuring and other one-time items but including stock-based compensation) were down 50 basis points (bps) on a year-over-year basis to 83.7%, while in dollar terms, gross profit of $1.371 billion were down 4.5%, primarily due to lower revenue base. Adjusted operating margin (excluding amortization, restructuring and other one-time items but including stock-based compensation) contracted 60 bps to 27.3% from the year-ago quarter, primarily due to lower gross margin. Symantec reported adjusted net income (excluding amortization, restructuring and other one-time items but including stock-based compensation) of $323.8 million or 47 cents compared with $339.5 million or 48 cents reported in the year-ago quarter. Balance Sheet & Cash Flow Symantec exited the quarter with cash, cash equivalents and short-term investments of $2.76 billion compared with $3.79 billion in the last quarter. Long-term debt decreased to $1.75 billion from $2.09 Equity Research SYMC Page 2

3 billion in the previous quarter. During the first three quarter of fiscal 2015, the company generated operating cash flow of $824 million. During the quarter, Symantec paid dividends worth $104 million. Moreover, the company spent $125 million to repurchase 4.9 million shares at an average price of $ The company has nearly $283 million remaining under the current stock repurchase plan. Concurrent with its earnings release, the company s board of directors approved a new $1.0 billion share repurchase program. Therefore, Symantec has a total of approximately $1.283 billion under its stock buyback plan. Guidance For the fourth quarter of fiscal 2015, the company expects revenues in the range of $1.525 to $1.585 billion. Moreover, non-gaap operating margins are expected in the range of 26.5% to 27.5%. Management expects non-gaap earnings per share between $0.42 and $0.45. Symantec lowered the fiscal 2015 revenue guidance to a range of $6.515 to $6.575 billion from $6.715 to $6.795 billion. For fiscal 2015, the company now expects operating margin within 27.5% to 27.7% (earlier forecast of 28.3% to 28.6%). Moreover, non-gaap earnings per share are now expected in the range of $1.87 to $1.90 (earlier forecast $1.94 to $1.99). Equity Research SYMC Page 3

4 VALUATION Symantec s shares are currently trading at 15.0X TTM earnings, a discount to the industry average of 37.4X and the S&P 500 average of 18.8X. Moreover, this is trading above the mid-point of its historical range of 9.6X to 16.9X TTM earnings, which indicates possibility of a downward movement from current levels. However, the shares are trading at a discount based on our 2015 forward estimates. The current 65.2% discount to the industry average for 2015 is less than the average discount for the historical period of 72.4%, which indicates possibility of downward movement. Nonetheless, Symantec s investments in the growth areas such as enterprise backup, storage management and security businesses will boost its long-term performance. These, along with restructuring actions are positives that should support margins. Share buybacks and dividends are other positives for the investors. Thus, we reiterate our Neutral recommendation on Symantec and set a price target of $ Key Indicators P/E F1 P/E F2 Est. 5-Yr EPS Gr% P/CF P/E P/E 5-Yr High P/E 5-Yr Low Symantec Corporation (SYMC) Industry Average S&P SAP SE (SAP) Oracle Corporation (ORCL) VMware, Inc. (VMW) salesforce.com, Inc. (CRM) N/A TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Symantec Corporation (SYMC) Industry Average S&P N/A 2.1 N/A Equity Research SYMC Page 4

5 Earnings Surprise and Estimate Revision History NOTE THIS IS A NEWS-ONLY UPDATE; THE REST OF THIS REPORT HAS NOT BEEN UPDATED YET Equity Research SYMC Page 5

6 OVERVIEW Symantec Corporation, a world leader in Internet security technology, provides a broad range of solutions for content security and information back up to individuals and enterprises. Based in California, Symantec has operations in more than 50 countries. Symantec offers a wide range of application and software products for firewall, virtual private network (VPN), virus protection, vulnerability management, intrusion detection and security services. Beginning in the first quarter of 2014, Symantec realigned its business segments into three divisions namely, User Productivity & Protection, Information Security and Information Management. The following products and services are included in the aforementioned business units: User Productivity & Protection: This segment comprises Symantec s Endpoint Security and Management, encryption and mobile businesses. Information Security: This segment includes Symantec s authentication, Secure Socket Layer ( SSL ) certificates, mail and web security, hosted security services, data center security, managed security services (MSS) and data loss prevention (DLP) offerings. Information Management: Symantec s information management segment comprises backup and recovery-related services and products. Other offerings include archiving and e-discovery under information intelligence. This segment also offers information availability services (previously known as storage management). Symantec recognizes its revenues under two main segments. Content, Subscription and Maintenance Revenues (89% of fiscal 2014 revenues) includes revenues from software maintenance and technical support for its products, content and subscription services primarily derived from security products, coordination of managed security services and Software-as-a-Service (SaaS) offerings. The segment also includes fees earned from professional services, such as consultancy and educational services. Fiscal 2014 revenues from this segment came in at $5.96 billion, down 1% on a year-over-year basis. License revenues (11%) are generated from the licensing of several products and technologies. The revenues are recognized upon product delivery. Fiscal 2014 revenues from this segment came in at $716.0 million, down 19% from the year-ago period. Equity Research SYMC Page 6

7 The company conducts its business across three geographic regions namely: Americas, which includes the United States, Canada and Latin America (54% of 2014 revenues); Europe, the Middle East and Africa (EMEA) (28%) and Asia-Pacific Japan (APJ) (18%). The company operates in a highly competitive market, which is dynamic and witnesses rapid technological changes. It faces direct competition from big security software manufacturing companies. Apart from this, Symantec faces indirect or potential competition from retail, application providers, operating system providers, network equipment manufacturers and other original equipment manufacturers that may provide various solutions and functions in their current and future products. Symantec is moving out of end point security and toward cloud and mobile. This is partly due to the secular decline in the PC market and increase in the usage of handheld mobile devices. The companies that offer direct or indirect competition to Symantec are McAfee, Inc., Microsoft Corporation, Trend Micro Inc., EMC Corporation, Hewlett-Packard Company, IBM Corp., Oracle, and Veeam Software. REASONS TO BUY Symantec provides a broad range of content security and information backup solutions to individuals and enterprises. Moreover, the company s mobile and cloud security products are gradually gaining market acceptance. The storage and server management business provides recovery solutions and heterogeneous storage-end server platforms. We believe these innovative products and solutions will help Symantec to win customers, thereby increasing business volume. Symantec has realigned its organizational structure by eliminating several mid-level management positions to create a leaner operating structure. It also outlined a go-to-market strategy, which involves reorganization of its sales force into specialized groups to look after functional areas of security and information management. The company has also created a renewal team, which remains focused on customer relationships and contract renewals. In addition, Symantec is refining its channel and partner programs to augment reseller sales. These initiatives will improve the company s margins, while generating funds that can be reallocated to research and development. Equity Research SYMC Page 7

8 The Internet security market is an attractive area even during recessionary times because of the increasing online traffic. Hardware and software functionality including segments like firewalls, VPNs, intrusion prevention and detection and multi-purpose security known as unified threat management, are expected to contribute to Symantec s growth. According to research firm, Research and Markets, the global IT security spending market is expected to grow at a CAGR of 9.29% ( ). Moreover, according to tech research firm Gartner, companies are projected to spend $67.00 billion on information security this year. Further, worldwide information security spending is estimated to increase 7.9% to $71.1 billion in 2014 and to increase 82% in 2015 to touch $76.9 billion. The increase in security spending is therefore likely to be beneficial for the leading vendor of solutions into the market. Symantec is making continuous efforts to attract small and mid-sized businesses (SMBs) by introducing enhanced versions of storage management and Internet security solutions. During the first quarter of fiscal 2014, Symantec unveiled Norton Anti-virus software for small businesses. These solutions are expected to secure and manage their information-driven businesses. A survey conducted by Symantec revealed that SMBs (with 1 to 250 employees) are now adopting the highest standard IT security measures to protect their sensitive information. The survey also revealed that SMBs are now spending a huge amount of money every year and are engaging twothirds of the IT staff s time on activities such as information protection, which includes operations like computer security, backup, recovery and archiving, as well as disaster preparedness. Since Internet security is a growing concern, this initiative will help Symantec win more customers. Symantec has been returning cash through share repurchases and initiated dividend payments. The company expects to return 50% of free cash flow through these shareholder-friendly initiatives. During fiscal 2014, Symantec paid dividends worth $418 million and repurchased $500 million shares. Symantec has still $658 million left under its authorized repurchase plan. Moreover, in the first quarter of fiscal 2015, Symantec spent $125 million to repurchase 6.0 million shares at a price of $ The company also paid dividends worth $104 million. These activities not only boost investor confidence but also provide support to earnings per share. Symantec has made a big play in the endpoint security market. Endpoint security refers to the security provided on network devices (endpoints) that are linked to a client server. Lately, cyber security has been a growing threat for organizations of all sizes. The growing security threats and potential hacking attacks led the company to unveil a new method for advanced threat protection (ATP), thereby delivering more complete attack prevention solutions. Symantec Managed Security Services -Advanced Threat Protection will help organizations to assess the level of vulnerabilities, detect threats and mitigate intellectual property theft. According to McKinsey and the World Economic Forum, companies are concerned about security loopholes amid growing cyber-attacks. Moreover, per a joint report from IDC and the National University of Singapore (NUS), globally enterprises are expected to spend approximately $500.0 billion to fight malware and data breaches in We believe that Symantec s expanded cybersecurity suite will meet growing business needs. Considering the increased focus on privacy and security, the introduction may lead to rapid adoption and significant revenue generation. Moreover, Symantec is investing in growth areas such as enterprise backup, storage management and security businesses (advanced threat protection solutions and mobile security), which in turn would drive the company s long-term prospects. Equity Research SYMC Page 8

9 REASONS TO SELL Sales of Symantec s security solutions have been affected by the shrinking PC market. Per the latest IDC report, PC shipments will drop 3.7% in 2014, the third consecutive year of decline. Notably, the PC market has taken a big hit and is not expected to recover over the next 2 3 years. This has affected the sale of Symantec s PC security solutions and business volume to a considerable extent. To offset this decline, the company is concentrating more on its mobile business, which enabled it to generate additional volumes. Execution risks remain on the restructuring initiatives undertaken by Symantec. If the company s revamped go-to-market strategy does not yield the desired results it will have a negative effect on its overall performance. Moreover, near-term operations could be impacted and cash flows are likely to be affected by separation costs. Roughly, a third of the restructuring expenses have been booked so far, so GAAP profits will be impacted in the near term. The company faces increased competition from bellwethers such as Microsoft and Intel. Other small and medium-sized companies like Kaspersky, Trend Micro Inc. and VMware, Inc are also gaining market share. Also, fluctuation in demand poses challenges for Symantec. The company faces fluctuations in demand due to economic conditions, competition, product obsolescence, technological change, shifts in buying patterns, financial difficulties and budget constraints of customers, levels of broadband usage and security threats to its IT systems. Equity Research SYMC Page 9

10 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of SYMC. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will underperform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1120 companies covered: Outperform %, Neutral %, Underperform 6.9%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research SYMC Page 10