Symantec's (NASDAQ:NLOK) second-quarter report, released on Nov. 1, has set the cat among the pigeons. Shares of the cybersecurity specialist have sunk over the past month after its earnings came short of expectations, and a tepid outlook prompted some investors to sell.
The fact that Symantec had to scale back its full-year guidance despite a spate of acquisitions and recent cybersecurity events that should've boosted its performance didn't sit well with Wall Street. But there's more to Symantec's results than what meets the eye, and investors' knee-jerk reaction to the latest quarterly report could be overblown. Let's see why.
Looking past the guidance
Symantec has scaled back its full-year revenue guidance from a range of $5.16 billion-$5.26 billion to a range of $5.0-billion to $5.1 billion. The midpoint of its earnings guidance now sits at $1.71 per share as compared to the prior forecast of $1.84 per share.
However, the weakness in Symantec's guidance isn't because of weak demand for its products and services, but because of the divestiture of its Website Security business to DigiCert for $950 million. The acquisition was completed on Oct. 31, and Symantec has now adjusted its full-year guidance to reflect the same.
The divested business contributed $203 million in revenue to Symantec in the first six months of the latest fiscal year, down from $214 million in the prior-year period. Therefore, the company seems to have done the right thing by getting rid of a shrinking line of revenue that'll now allow it to focus on fast-growing areas such as cloud security where it is strengthening its presence.
Trying to capture a bigger market
Symantec reported $0.40 in earnings per share (EPS) last quarter. Though this was a big improvement over last year's $0.30, it fell short of consensus analyst estimates by $0.03. What alarmed investors was that Symantec missed the forecast despite completing its $400 million cost reduction program ahead of schedule, as well as $150 million in synergies from the Blue Coat acquisition.
However, Symantec stepped up its marketing efforts last quarter. The company's sales and marketing expenses shot up 28.4% year over year to $434 million, accounting for 35% of its revenue. By comparison, Symantec had spent 34% of its revenue on sales and marketing in the prior-year period.
The higher outlay on marketing might have hurt Symantec's short-term performance, but it should have positive long-term implications since a larger budget helped it land more customers for its LifeLock product. LifeLock is an identity theft protection package that has seen a terrific spike in demand after the Equifax data breach that affected 143 million Americans last quarter.
However, this massive attack could be a blessing in disguise for Symantec in the long run as sales of LifeLock jumped tenfold after the breach. Symantec executive Fran Rosch explained that LifeLock added 100,000 new clients in the span of just one week after the breach was revealed in early September. What's more, most of the customers chose to go for the expensive plan costing $29.99 a month instead of the discounted subscription of $9.99 per month.
More importantly, Symantec's gains from the Equifax breach look like they won't be limited to the short run as the majority of the customers buying the LifeLock identity protection service are from a younger demographic. So they could be customers for a long time.
Increased cross-selling opportunities
Additionally, the increased sign-ups for LifeLock are rubbing off positively on the other services sold by Symantec, which could increase demand for the company's end-to-end cybersecurity platform. The cybersecurity specialist recently announced an integrated platform that brings together a variety of prevention and detection security solutions in a single product.
This platform uses machine learning to learn about new threats and secure customers against the same. More importantly, this integrated solution can be deployed in a cloud computing environment, allowing enterprises to protect employees across a variety of devices.
This allows enterprises to lower their operational costs thanks to a streamlined security architecture that's always evolving itself to fight new threats. The good news is that Symantec's integrated cyber defense platform and stronger marketing push has led to an increase in cross-selling, creating a positive margin impact. According to CEO Greg Clark (via Seeking Alpha's earnings call transcript):
We've also delivered 11 points of operating margin improvement in the Enterprise segment from a year ago, moving us toward our longer-term margin targets. Our cross-selling strategy is working. More and more customers are choosing to standardize on our Integrated Cyber Defense platform because of our superior protection, cross-product integration, and lower overall cost of ownership.
In all, the cloud-enabled endpoint security solution will help Symantec tap into the fast-growing cloud security market. Markets and Markets expects this space to at least triple in size over the next five years, hitting $12.7 billion in revenue by 2022.
Finally, the growing number of data breaches is opening up a big opportunity for Symantec to grow its client base. Cybersecurity Ventures forecasts that global cybersecurity spending will exceed $1 trillion from 2017 to 2021, so Symantec is pulling the right strings to benefit from this massive revenue opportunity by upgrading its services and increasing its marketing outlay.