Who's the king of Internet protection services? Now that Microsoft (NASDAQ:MSFT) has found "security religion," will it dominate the market? Or can former leader Symantec (NASDAQ:SYMC) find a way to survive the 800-pound gorilla's entry into this market? Tomorrow, we'll receive one more piece in our quest to puzzle this out, as Symantec releases its fiscal Q3 2006 numbers.

Wall Street Wisdom:

  • General consensus. Viruses and worms and spam (oh my!). It seems Wall Street is very interested in this sector indeed, with 37 analysts now following Symantec (that's just one suit fewer than Google rates). Three of the analysts rate Symantec a sell, with the rest split down the middle between buy and hold.
  • Revenues. At first glance, the number analysts have fixed for Symantec's fiscal Q3 2006 revenues looks highly improbable. At $1.27 billion, the estimated revenues would represent better than 80% year-over-year growth. But when you remember that this growth is not entirely organic, but includes sales from new acquisition Veritas, the estimate seems more reasonable.
  • Earnings. Profits growth is expected to be considerably less impressive. Symantec earned $0.24 last year. Analysts are looking for just a penny more than that tomorrow (pro forma). The company itself expects to report $0.10 under generally accepted accounting principles.

Margin watch:
Before it absorbed Veritas, Symantec reported consistently rising operating margins even as its gross margin weakened. Last quarter, however, Symantec incurred large expenses for depreciation and amortization, and for research and development, that sapped the strength of its operating margin. Between those operating costs, and a $284 million charge taken to write off in-process R&D from Veritas, Symantec's net margin collapsed.

Marg.

6/04

9/04

12/04

3/05

6/05

9/05

Gross

84.9%

85.2%

85.0%

84.4%

84.6%

83.9%

Op.

29.9%

30.9%

31.4%

32.3%

33.5%

24.1%

Net

21.1%

21.6%

22.0%

20.8%

22.7%

7.3%


All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

Foolish lookout:
With those charges now out of the way, expect the net margin to rise from that of the second quarter tomorrow -- although on a trailing-12-months basis, the weakness will linger for the next nine months. What should perhaps worry Symantec investors more, however, was the company's December announcement that it is restating its statement of cash flows for the first half of fiscal 2006 -- a restatement that, while it does not affect earnings numbers, will reduce the amount of free cash flow the company confirms generating this year. Let's make sure to keep a sharp eye on cash flows for the next few quarters and see how this plays out.

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Fool contributor Rich Smith owns shares of Symantec.