Symantec Fixing What Was Never Too Badly Broken

By Stephen D. Simpson, CFA | June 25, 2013 AAA

If you're going to repair and turn around a business, it certainly helps to start with one that wasn't too badly broken to start off. While Symantec (Nasdaq: SYMC) had certainly seen revenue growth and operating leverage stagnate, the company was still generating strong cash flows and maintained solid (if not leading) market share in multiple markets. With the company's new plan targeting commonsense expense reductions and a greater focus on customer value, these shares could be meaningfully undervalued today.

Strip It Down And Rebuild It Better
CEO Steve Bennett has been on the job for about one year now, and it has been about six months since the big unveiling of his strategic plan for Synamtec. Key to the plan is a comprehensive expense reduction program. The sales force will be reorganized (creating a separate renewals team) and a lot of the middle management will be winnowed out.

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At the same time, the company will look to sell some non-core assets, and redesign some of its offerings to deliver more value to customers. I realize that's classic “business-speak” and the company has been short on details here (other than to say that it will take about a year or two to reach fruition), but I expect some of this to involve more bundling and integrated services into packages.

All told, Bennett is looking to get organic growth back into the mid single-digits, with a non-GAAP operating margin of 30% (against 24% in the last quarter).

Rebuilding From A Position Of Strength
Importantly, Symantec is not looking to fundamental alter its core market focus, which is a good thing given the company's market share.

Symantec is far and away the leader in consumer security, with double the share of Intel's (Nasdaq: INTC) McAfee and a major lead on others like Trend Micro. Symantec isn't so dominant in enterprise, but it's no also-ran either. The company has an estimated third of the enterprise backup/recovery market, with almost double the share of EMC (NYSE:EMC) and IBM (NYSE:IBM), and the company is likewise strong in enterprise endpoint security (despite a lack of network security products). The company's share isn't quite as strong in core storage management or availability/clustering, but the company holds its own with EMC, NetApp (Nasdaq:NTAP), Microsoft (Nasdaq:MSFT), IBM, and Hewlett-Packard (NYSE:HPQ).

Can The Company Change With The Times?
It's not unreasonable for Symantec to restructure its salesforce, as it no longer looks like the right structure for the times. What I hope, for the company's sake, is that management takes a similar view of the company's products and positioning.

While I just said that the company shouldn't alter its core market focus, it does need to adapt with the times. EMC and NetApp have both made the software sides of their business significant growth priorities. Elsewhere, Amazon's (Nasdaq:AMZN) AWS conceivably threatens the whole concept of selling discrete enterprise software packages. Although I think sell-side analysts are overselling the “game overedness” of AWS for the enterprise sector, the reality is that Symantec cannot simply just keep rolling out updated versions of existing packages (and/or better-integrated combo versions) and expect to be relevant in five or 10 years.

The Bottom Line
Given that management's goals for the new Symantec seem relatively attainable, I like the odds that this restructuring will deliver the advertised benefits. The good news, from a valuation perspective, is that the company doesn't have to achieve all that much for the cash flow valuation to look bad. The bad news will probably familiar to regular readers of mine – tech stocks rarely trade on the basis of their discounted cash flow, so investors will have to be patient to see the delivery of that value.

I'm looking for about 3% to 4% long-term revenue growth, with nearly double the rate of free cash flow growth (helped in large part by the lower starting point provided by the last fiscal year). All told, I believe Symantec is worth over $30 today and well worth a look for patient investors.

Disclosure - As of this writing, the author owns shares of EMC.

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