In technology, old dogs have to learn new tricks, or the market is all too willing to send them on that unfortunate one-way trip to the vet. That is a challenge, then, for Symantec (Nasdaq:SYMC). Once a hot tech growth stock, nobody cares about that history today. What investors do care about is evidence that the company has a real future in enterprise security and storage/server management.
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A Solid Close to the Fiscal Year
Symantec ended its fiscal year on a relatively solid note, at least on a relative basis. Revenue rose 9% in the fourth quarter, and surpassed the high end of the analyst estimate range (a surprisingly narrow range, by the way). The company's consumer business rose 6%, the storage/server business grew 8% and the security/compliance business rose 24%. The real laggard was the company's tiny (5% of revenue) service business, where revenue dropped 21%. (For more, see The Data Storage Gold Rush - Who's Left?)
Other encouraging details related to future business prospects - deferred revenue rose 19%, and bookings increased 23%. License revenue rose 11% this period, while maintenance/subscription revenue rose about 9%. Symantec had mixed performance on profitability. Gross margin (on a GAAP basis) improved by almost two points, while operating income fell 3% on much higher sales and marketing expenses.
Where Is the Consumer Going?
On the plus side, Symantec owns the Norton brand - a popular and valuable brand in the consumer security market. On the downside, the consumer market is changing and changing rapidly. Companies like Apple (Nasdaq:AAPL) and Samsung have launched a serious threat to PCs (particularly laptops), and Symantec really hasn't established a major presence for itself on mobile devices like smartphones and tablets.
Unless Dell (Nasdaq:DELL) and Hewlett-Packard (NYSE:HPQ) can breathe new life into the PC market (and neither seem to be planning for this), that's a risk factor. On top of that, consumers have more and more options for computer protection from various online offerings that charge little or nothing. So the Norton brand is valuable, and the market seems to be shifting under its feet.
Uncertainty in Storage and Server
Whereas Symantec has a consumer business that has a moat around it (even if it is narrowing), the company has not proven itself to the same extent in the storage and server management business. The company's historical Oracle/Sun (Nasdaq:ORCL) relationship has changed significantly, and Symantec really has not proved that it can go head to head with the likes of CA Technologies (NYSE:CA), EMC (NYSE:EMC), IBM (NYSE:IBM) or Hewlett-Packard and really thrive.
Likewise, the enterprise security and compliance business is a challenging one. There is still the risk that Intel (Nasdaq:INTC) will imbed McAfee security technology on its chips, and that would be difficult for Symantec to answer. Likewise, companies like Checkpoint (Nasdaq:CHKP), Sourcefire (Nasdaq:FIRE), Microsoft (Nasdaq:MSFT) and Google (Nasdaq: GOOG) all have their own plans and technologies, and it is not obvious that Symantec has the wherewithal to gain a lot of business against them.
The Bottom Line
Symantec has a few important things going for it. The consumer business may not have the future it once did, but it's a great cash generator. Moreover, the right acquisition, handled properly, can radically change a company's fortunes (consider the EMC acquisition of VMware (NYSE:VMW), which was not exactly hailed as revolutionary at the time).
Still, absent a clear growth trajectory, it is hard to get excited about Symantec. If the company can keep showing this kind of growth in the security/compliance business, that concern goes off the table. In the meantime, Symantec is a little bit undervalued, but probably not enough to make it a truly compelling buy, given the risks. (For related reading, see Check Point Still On Point.)
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