Symantec's (GEN -0.37%) impressive stock market rally abruptly halted last November after a mixed fiscal second-quarter report. The cybersecurity specialist topped analysts' revenue estimate but fell short of Wall Street's earnings expectations, and weaker-than-expected guidance added to its woes.
But there was more to Symantec's results than what met the eye. The company had divested one of its underperforming business units and had stepped up its marketing efforts in a bid to take advantage of a number of high-profile data breaches. Still, the market remains unconvinced about Symantec's ability to get back on track, with the stock about where it was a year ago.
Investment banking firms Jefferies and Credit Suisse have downgraded the stock recently, stating that the company will be unable to achieve its own guidance in future quarters. But Symantec can prove them wrong when it releases its fiscal third-quarter results on Jan. 31.
The headline numbers
In February last year, Symantec paid $2.3 billion to acquire LifeLock, which provides identity theft protection, so it will enjoy a favorable revenue and earnings comparison to the prior-year period just based on that. Wall Street expects Symantec's revenue to increase 16.3% year over year to $1.27 billion, with earnings expected to go up to $0.44 per share from last year's $0.32 a share.
These estimates sit right in line with the company's own expectations, so it shouldn't have much difficulty in meeting them. But all eyes will be on the guidance, and the company needs to deliver on this front if it wants to get back into investors' good graces.
The guidance will be crucial
Symantec shares have been under pressure this month after some Wall Street analysts said that the company's guidance for the current year is unachievable. The company has already reduced its guidance once this year, but there were valid reasons for that.
Symantec completed the sale of its website security business for $950 million on Oct. 31, which falls in its third quarter. It had to adjust its quarterly guidance to account for this since this business supplied $203 million in revenue during the first six months of the year. Then again, the LifeLock identity theft protection business got a shot in the arm after the Equifax data breach.
Symantec thought it best to capitalize on this opportunity, so it boosted its sales and marketing spend by 28% in the second quarter. This hurt the bottom line in the quarter, but investors need to look beyond these short-term pains as Symantec is setting itself up to take advantage of secular trends in the cybersecurity market.
Symantec estimates that hackers stole an estimated $172 billion from 978 million consumers across 20 countries in 2017. The U.S. alone reportedly saw 143 million people fall prey to cybercrime, resulting in losses of $19.4 billion. By comparison, 15.4 million consumers were identity theft victims in the U.S. in 2016, with losses pegged at $16 billion, according to Javelin Strategy & Research.
Looking ahead, identity theft could keep increasing because of emerging tech trends such as the Internet of Things, which will allow hackers to steal data from new Internet-connected devices. As a result, demand for services such as LifeLock's will be on the rise, boosting Symantec's business and its opportunities to cross-sell more to customers.
For instance, Symantec has launched a campaign to cross-sell its Norton antivirus and spyware removal software to LifeLock customers. The good news is that this initiative has gained "solid early traction," according to CEO Greg Clark.
It makes sense to ignore the short-term noise because Symantec is capable of getting better in the long run and the earnings report will give investors a numbers-based look at how things are going.