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What's Wrong With Symantec Corp. Today?

By Anders Bylund - Aug 3, 2018 at 12:07PM

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As enterprise customers sit down for long and complicated talks before signing multiyear license and support deals, the security expert is spinning its wheels.

Data security specialist Symantec (NLOK -0.17%) reported first-quarter results after the closing bell on Thursday. At first glance, the company met Wall Street's expectations. But there's more to Symantec's report than those glossy headline figures, and the stock plunged 14% in early trading Friday.

Symantec's second quarter by the numbers

Metric

Q1 2018

Q2 2018

Year-Over-Year Change

Revenue

$1.16 billion

$1.18 billion

(2%)

Net income

$221 million

$221 million

0%

Adjusted earnings per diluted share

$0.33

$0.33

0%

Data source: Symantec.

These results were right in line with analyst expectations. In order to make apples-to-apples comparisons to the year-ago quarter, I'm using Symantec's rundown of results under the outdated ASC 605 accounting standard, which is giving way to the newer ASC 606 rules. Under the 606 regime, Symantec would have recognized another $5 million of revenue and $10 million of additional net income, pushing the adjusted earnings per share $0.03 higher.

So from the ASC 606 perspective, Symantec did just fine and exceeded Wall Street's expectations by a slim margin.

That didn't stop the stock from crashing.

Rough waters ahead

Looking ahead, Symantec's second-quarter guidance came in way below expectations.

With the guidance midpoints sitting at $1.45 billion for revenue and $0.33 for earnings per share, the official projections stopped short of Wall Street's consensus estimates across the board. On the bottom line, the very top of Symantec's guidance only matched the lowest analyst view among 24 firms offering a third-quarter forecast.

The effects of this upcoming slow quarter spilled over into Symantec's full-year guidance as well. Targeting adjusted earnings of approximately $1.52 per share on revenue in the neighborhood of $4.7 billion, Symantec is basically giving up on year-over-year growth for both of these key metrics in this fiscal year.

A closer look at guidance

The weak guidance figures spring from disappointing billings in Symantec's North American enterprise security operations.

"We experienced a number of deals that did not close as expected," said CEO Greg Clark in a conference call with analysts. "I think the fundamentals of it is that we are involved in larger, more complex platform deals with our enterprise customers, and due to the size of these transactions, they generally require a little more of an approval cycle and as a result we believe our sales cycles, these types of deals, are getting longer."

In other words, Symantec is signing longer-term contracts than it used to. Locking down customers for years and years of committed payments is obviously nice for the company's long-term revenue visibility but the effort comes with some downsides as well. In this case, the more complex nature of the deal talks pushed a few expected closings out of the quarter. Rather than collecting large clumps of unsigned contracts in the next period, management expects this trend to continue.

A black-gloved hand reaches out from a laptop screen to steal a credit card from a nearby wallet.

Image source: Getty Images.

What's next for Symantec?

The stock has now taken a 38% haircut over the last 52 weeks and is trading at 12 times the new full-year earnings guidance. You might expect data security tools to be an easy sell these days, given events in recent years, but Symantec is making it look difficult. There's no business growth to speak of, just an attempt to stabilize the sinking ship through cost-cutting programs.

I'm quite content to watch Symantec's turnaround effort from the sidelines. Call me when the longer billing cycles start to produce stronger sales, which doesn't appear to be in the cards for this year.

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