With no letup in sight for the deluge of spam, viruses, and virus-bearing-spam that daily assaults our inboxes, it should surprise no one that Internet security company Symantec (NASDAQ:SYMC) turned in another excellent quarterly report yesterday. (We shall see next week whether rival McAfee (NYSE:MFE) can match it.) Symantec's revenue was up a full 48%, earnings a whopping 122%, and per-share diluted earnings a less whopping but still impressive 106% over last year's (fiscal) first quarter.
How did the company manage to drop so much of the additional revenue to its bottom line? Margins, baby! Symantec's gross margins remained high, inching down just a 10th of a percent to 82.6%. But the real key was operating margin strength. Symantec's operating margins simply soared -- up from 20.3% to 32.5%. That's stellar, folks.
The company's business model appears to be eminently scalable. While it increased both research and development and marketing expenditures at double-digit rates, Symantec's general and administrative costs did not rise at all. In fact, they shrank by 8%; by my calculations, that fiscal restraint alone contributed a good 2.5% to the company's operating margin.
Looking ahead, Symantec sees its future getting only brighter. The company raised per-share earnings guidance for fiscal Q2 by 6%, to $0.34, and full-year guidance by 8%, to $1.48. At Symantec's current share price of $43 and change, that gives the company a forward P/E ratio of 29 -- well below both its recent revenue and earnings growth rates.
Symantec's balance sheet contained even more good news for its shareholders. Even if a company's revenues rise, you always want to keep a lookout for increases in inventories and accounts receivable at rates exceeding the rise in revenues. Such increases can suggest the existence of accounting shenanigans, such as "channel stuffing," or an inability to sell the product, respectively. None of that appears to be going on at Symantec, however. Despite the huge rise in revenues, both Symantec's inventories and its accounts receivable fell over the past three months.
Finally, faithful Fool readers will recall that I recently took Symantec to task for excessive share dilution. Over the past three years, Symantec has diluted outside shareholders by nearly 50% (before buybacks) through a combination of share-based acquisitions and stock option issuance. The company has committed to keeping dilution in check this year, however, and targets a 3% post-buyback dilution rate for the year. To date -- and this includes a lot of dilution from last year -- Symantec's year-on-year increase in diluted shares outstanding is 5.1%.
Foolish investors will want to continue to monitor Symantec's performance on this front, and to pay special attention when (or if) the dilution rate appears to slow later this year. If dilution slows from a decrease in the creation of new shares, that would be a good thing. However, if the company just buys back some shares to mask its creation of new ones -- well, we may have to give this company another good talking-to.
Fool contributor Rich Smith does not own shares of any of the companies mentioned in this article.
